1. Marginal Costing – Assignment IV <br />Q.1 X Ltd. has estimated the unit variable cost of a product to be Rs. 10 and the selling price as Rs. 15 per unit. Budgeted sales for the year are 20,000 units. <br />Estimated fixed costs are as follows: <br /> Fixed Cost per annum (Rs.)Probability50,0000.160,0000.370,0000.380,0000.290,0000.1<br /> What is the probability that the company will equal or exceed its target profit of Rs. 25,000 for the year? <br />Q.2 X manufactures lighters. He sells his products at Rs. 20 each, and makes profit of Rs. 5 on each lighter. He worked 50% of his machinery capacity at 50,000 lighters. The cost of each lighter is as under:<br />Rs.Direct Material6Wages2Works Overhead5 (50% fixed)Sales Expenses2 (25% variable)<br />His anticipation for the next year is that the cost will go up as under:<br />Fixed charges10%Direct Labour20%Material5%<br />There will not be any change in selling price. There is an additional order for 20,000 lighters in the next year. What is the lowest rate he can quote for the additional order so that he can earn the same profit as the current year?<br />Q.3 X Ltd. is currently buying a component from a local supplier at Rs. 15 each. The supply is tending to be irregular. Two proposals are under consideration:<br />a) Install a semi-automatic machine for manufacturing this component, which would involve an annual fixed cost of Rs. 9 lakh and a variable cost of Rs. 6 per manufactured component. <br />b) Install an automatic machine for manufacturing this component. Annual fixed cost Rs. 15 lakh and variable cost Rs. 5 per manufactured component.<br />Determine (i) Annual volume required, in each case, to justify a switch over from outside purchase to own manufacture (ii) Annual volume required to justify selection of the automatic machine instead of semi-automatic (iii) If annual requirement is 5,00,000 components (It is expected to rise at the rate of 20% annually), would you recommend automatic or semi-automatic?<br />Q.4 XY Ltd., Nasik, is currently operating at 80 per cent capacity. The profit and loss account shows the following: <br />(Rs. in lakhs)Sales640Less: Cost of Sales:Direct Materials 200Direct Expenses 80Variable Overheads40Fixed Overheads260580Profit60<br />The Managing Director has been discussing an offer from Middle East of a quantity, which will require 50 per cent capacity of the factory. The price is 10 per cent less than the current price in the local market. Order cannot be split. You are asked by him to find out the most profitable alternative. The factory capacity can be augmented by 10 per cent by adding facilities at an increase of Rs. 40 lakh in fixed cost. <br />Q.5 The following is the summarized Trading Account of a manufacturing concern, which makes two products, X and Y.<br />Summarized Trading Account for the four months to 30 April 2008<br />XRs.YRs.TotalRs.Sales10,0004,00014,000Less:Cost of sales*Direct CostsXYLabour3,0001,000Material1,5001,0004,5002,0006,5005,5002,0007,500Indirect costs* Variable Expenses2,0001,0003,0003,5001,0004,500+ Fixed ExpensesCommon to both X & Y1,2501,2502,500Net profit2,250(-) 2502,000<br />*These costs tend to carry in direct proportion to physical output.<br />+These costs tend to remain constant irrespective of the physical output of X and Y.<br />It has been the practice of the concern to allocate these cost equally between X and Y.<br />The following proposals have been made by the Board of directors for your consideration as financial adviser:<br />Discontinue Product Y<br />As an alternative to (1) reduce the price of Y by 20 per cent (It is estimated that the demand will then increase by 40 per cent).<br />Double the price of X (It is estimated that this will reduce the demand by three-fifths).<br />Make suitable recommendation after evaluating each of the proposals.<br />Q.6 A Ltd. manufactures three different products and the following information has been collected from the books of accounts.<br /> STYSales mix (Amt.)35%35%30%Selling priceRs. 304020Variable cost Rs. 152012Total fixed costRs. 1,80,000Total salesRs. 6,00,000<br />The company has currently under discussion, a proposal to discontinue the manufacture of product Y and replace it with product M, when the following results are anticipated:<br /> STMSales mix (Amt.)50%25%25%Selling priceRs. 304030Variable costRs. 152015Total fixed costsRs. 1,80,000Total salesRs. 6,40,000<br /> Will you advise the company to changeover to production of M? Give reasons for your answer.<br />Shut down or continue<br />Q.7 X Ltd. has the following annual budget for the year ending on June 30, 2008.<br />Production capacity Costs (Rs. lakh)60%80%Direct Material 9.6012.80Direct Labour7.209.60Factory Expenses7.568.04Administrative Expenses3.723.88Selling and Distribution Exp.4.084.32Total32.1638.64Profit 4.8610.72Sales 37.0249.36<br />Owing to adverse trading conditions, the company has been operating during July/ September 2008 at 40% capacity, realizing budgeted selling prices.<br />Owing to acute competition, it has become inevitable to reduce prices by 25% even to maintain the sales at the existing levels. The directors are considering whether or not their factory should be closed down until the trade recession has passed. A market research consultant has advised that in about a year’s time there is every indication that sales will increase to 75% of normal capacity and that the revenue to be produced for a full year at that volume could be expected to be Rs. 40 lakh.<br />If the directors decide to close down the factory for a year it is estimated that:<br />a. The present fixed costs would be reduced to Rs. 6 lakh per annum.<br />b. Closing down costs (redundancy payment, etc.) would amount to Rs. 2 lakh.<br />c. Necessary maintenance of plant would cost Rs. 50,000 per annum; and <br />d. On re-opening the factory, the cost of overhauling the plant, training and engagement of new personnel would amount to Rs. 80,000.<br />Give your recommendations.<br />