1. Marginal Costing- Assignment V <br />Q.1 A Ltd. manufacturing and sells four types of products. The sales mix in value comprise of:<br />Products Percentage<br />A 133.1/3<br />A 241.2/3<br />A 316.2/3<br />A 4 8.1/3<br />The total budgeted sales are Rs. 6,00,000 per month. The variable costs are: A-1 60% of selling price, A-2 68% of selling price, A-3 80% of selling price and A-4 40% of selling price. Fixed cost Rs. 1,59,000 per month. Find B.E.P.<br />Q.2 A Company produces and sells two items A&B. Its F.C. is Rs.13,77,000 p.a. VC per unit of A Rs. 7.80. VC per unit of B Rs. 8.90. Selling price A Rs. 15, B Rs. 20, 80% of total sales revenue is realized from sale of B. Find B.E.P. What should be sales revenue to result in 9 per cent post-tax profit on sales. Tax rate 55 per cent.<br />Marginal costing v. Differential costing<br />Q.3 X Ltd., makers of a specialized line of toys, receives an order for 2,000 units of toy battle tanks, from a large mail-order house at a price of Rs. 3 per unit.<br />The company sells this type of toy to its other customers at Rs. 5 each but it has surplus capacity and can take the special order without adversely affecting its regular operations for the coming month.<br />The income statement of the company for the preceding month is as follows:<br />Rs.Net Sales—10,000 units @ Rs. 550,000Costs:Rs.Direct Material: Rs. 1.50 per unit15,000Direct Labour: Re. 1 per unit10,000Factory Overhead (fixed)10,000Selling and Administration Expenses (fixed)10,000Total Costs45,000Net Profit5,000<br />Direct material and direct labour costs to be incurred on the special order are estimated to be of the same amount per unit as for the regular business. Special tools costing Rs. 500 would be required to meet the specifications of the mail-order house. You are required to prepare a differential cost analysis for deciding about the acceptance of the order.<br />Q.4 A company is manufacturing three products A, B and C. The data regarding cost, sales and profits are as follows:<br />ProductSales (units)Selling price per unitVariable cost per unitContribution per unitA2,00052Rs. 3B1,00053Rs. 2C1,00053Rs. 2<br />The fixed costs are Rs. 5,000. The Company wants to change the sales mix from the existing proportion of 2: 1 : 1 to 2 : 2 : 1 of A, B and C respectively.<br />You are required to calculate the number of units of each product, which the company should sell to maintain the present profit.<br />Q.5 Two competing food vendors were located side by side at a state fair. Both occupied buildings of the same size, paid the same rent, Rs. 1,250, and charged similar prices for their foods. Vendor A employed three times as many employees as B and had twice as much income as B even though B had more than half the sales of A. <br />Other data are as follows: <br />Vendor AVendor BSales Rs. 8,000Rs. 4,500Cost of goods sold50% of Sales50% of SalesWages Rs. 2,250Rs. 750<br />Explain why vendor A is twice as profitable as Vendor B. <br />Q.6 X Ltd. produces and markets industrial containers and packing cases. Due to competition, the company proposes to reduce the selling price. If the present level of profit is to be maintained, indicate the number of units to be sold if the proposed reduction in selling price is: <br />(a) 5%, (b) 10% and (c) 15 % <br />The following additional information is available: <br />Rs.Rs.Present Sales Turnover (30,000 units)3,00,000Variable Cost (30,000 units)1,80,000Fixed Costs70,0002,50,000Net profit50,000<br />Q.7 Following information relates to cost records of X Ltd., manufacturing spare parts:<br />Direct MaterialsPer unitXRs. 8YRs. 6Direct WagesX24 hours @ 25 paise per hour Y16 hours @ 25 paise per hourVariable Overheads150% of direct wagesFixed Overheads (total)Rs. 750Selling PriceXRs. 25YRs. 20<br /> The directors want to be acquainted with the desirability of adopting any one of the following alternative sales mixes in the budget for the next period.<br />250 units of X and 250 units of Y<br />400 units of Y only<br />400 units of X and 100 units of Y<br />150 units of X and 350 units of Y.<br />State which of the alternative sales mixes you would recommend to the management.<br />Discontinue of a Product line<br />Q.8 A company manufactures three products A, B and C. there are no common processes and the sale of one product does not affect prices or volume of sale of any other. The company’s budgeted profit/loss for 2008 has been abstracted thus:<br />Total Rs.ARs.BRs.CRs.Sales3,00,00045,0002,25,00030,000Production Cost: Variable1,80,00024,0001,44,00012,000Production Cost: Fixed60,0003,00048,0009,000Factory Cost2,40,00027,0001,92,00021,000Selling & Administration Costs:Variable24,0008,1008,1007,800Fixed6,0002,1001,8002,100Total Cost2,70,00037,2002,01,90030,900Profit30,0007,80023,100(-) 900<br />On the basis of above, the board had almost decided to eliminate product C, on which a loss was budgeted. Meanwhile, they have sought your opinion. As the Company’s Finance Manager, what would you advise? Give reasons for your answer.<br />Exploring new markets<br />Q.9 A company annually manufactures 10,000 units of a product at a cost of Rs. 4 per unit and there is home market for consuming the entire volume of production at the sale price of Rs. 4.25 per unit. In the year 2007, there is a fall in the demand for home market, which can consume 10,000 units only at a sale price of Rs. 3.72 per unit. The analysis of the cost per 10,000 units is:<br />MaterialsRs. 15,000<br />Wages 11,000<br />Fixed overheads 8,000<br />Variable overheads 6,000<br /> The foreign market is explored and it is found that this market can consume 20,000 units of the product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional 10,000 units of the product (over initial 10,000 units) that fixed overheads will increase by 10 per cent. Is it worthwhile to try to capture the foreign market?<br />Change v. Status quo<br />Q.10 The following details have been furnished to you regarding two proposals, which are for consideration before a firm. <br />(a) Improvement in the quality of the product, which will result in an additional sale of 5,000 units at the existing price. However, this improvement in quality will result in increase in the variable cost by 10 paise per unit. <br />(b) Reduction in the selling price of the product by 12 paise per unit. This will push up sales by 5,000 units. <br />In both cases, the fixed expenses will increase by Rs. 1,000.<br />The present sales of the firm are 10,000 units at the rate of Rs. 2.10 per unit. The variable cost is Rs. 1.60 per unit and the total fixed costs are Rs. 3,000.<br />You are required to state whether it will appropriate for the firm to select any of the new proposals or should it continue with the existing scheme. <br />Shut down or continue<br />Q.11 A Ltd. is experiencing recessionary difficulties and as a result its directors are considering whether or not the factory should be closed down till the recession has passed. A flexible budget is complied giving the following details: <br />Production CapacityFixed Costs(Fixed Costs + Variable Costs)Close down Normal40%60%80%100%Rs.Rs.Rs.Rs.Rs.Rs.Factory Overheads 6,0008,00010,00011,00012,00013,000Administration Overheads 4,0006,0006,5007,0007,5008,000Selling and distribution Overheads4,0006,0007,0008,0009,00010,000Miscellaneous1,0001,0001,5002,0002,5003,000Direct Labour——10,00015,00020,00025,000Direct Material——12,00018,00024,00032,000Total15,00021,00047,00061,00075,00091,000<br />The following additional information has been supplied to you: <br />(i) Present sales at 50% capacity are estimated at Rs. 30,000 per annum. <br />(ii) Estimated costs of closing down are Rs. 4,500. In addition maintenance of plant and machinery is expected to amount to Rs. 800 per annum. <br />(iii) Cost of reopening after being closed down are estimated to be Rs. 2,000 for overhauling of machines and getting ready and Rs. 1,400 for training of personnel. <br />(iv) Market research investigation reveal that sales should take an upward swing to around 70% capacity at prices which would produce revenue of Rs. 1,00,000 in approximately twelve months’ time. <br />You are required to advise the directors whether to close down for twelve months or continue operating indefinitely. <br />Q.12 A manufacturer is thinking whether he should drop one item from his product line and replace it with another. Below are given his present cost and output data:<br />ProductPrice per unitRs.Variable Cost of SalesRs.PercentageBook shelves604030%Tables1006020%Beds20012050%Total Fixed Costs per yearRs. 7,50,000Rs. 25,00,000Sales last year<br /> The change under consideration consists in dropping the line of tables in favour of cabinets. If this dropping and change is made the manufacturer forecasts the following cost output data:<br />ProductPrice per unitRs.Variable Cost of SalesRs.PercentageBook shells604050%Cabinets1606010%Beds20012040%Total Fixed Costs per yearRs. 7,50,000Rs. 26,00,000Sales this year<br />Is this proposal to be accepted? Comment.<br />