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CVP Problems

1. The department of Marigold Company has a contribution margin of Rs. 150,000 and fixed expenses of Rs. 195,000. Rs. 120,000 of fixed expenses could be eliminated by discontinuing the department. If discontinued, Marigold's net operating income would decrease by Rs. 120,000. Fixed expenses are irrelevant to this decision. 2. Bushen Company produces 3,000 parts per year at a unit cost of Rs. 63. It can buy the part from a supplier for Rs. 60, eliminating 2/3 of its fixed manufacturing costs of Rs. 27 per unit. Buying the parts would increase net operating income by Rs. 54,000 annually. Fixed manufacturing costs are

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155 views4 pages

CVP Problems

1. The department of Marigold Company has a contribution margin of Rs. 150,000 and fixed expenses of Rs. 195,000. Rs. 120,000 of fixed expenses could be eliminated by discontinuing the department. If discontinued, Marigold's net operating income would decrease by Rs. 120,000. Fixed expenses are irrelevant to this decision. 2. Bushen Company produces 3,000 parts per year at a unit cost of Rs. 63. It can buy the part from a supplier for Rs. 60, eliminating 2/3 of its fixed manufacturing costs of Rs. 27 per unit. Buying the parts would increase net operating income by Rs. 54,000 annually. Fixed manufacturing costs are

Uploaded by

Josh Kemp
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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I.

A study has been conducted to determine if one of the departments of Marigold


Company should be discontinued. The contribution margin in the department is
Rs150,000 per year. Fixed expenses charged to the department are Rs195,000 per
year. It is estimated that Rs120,000 of these fixed expenses could be eliminated if
the department is discontinued. These data indicate that if the department is
discontinued, Lucy's overall net operating income would decrease by how much?
Which costs are irrelevant to this decision?
II. Bushen Company produces 3,000 parts per year, which are used in the assembly of
one of its products. The unit product cost of these parts is:
Variable manufacturing cost
Fixed manufacturing cost
Unit product cost

Rs36
27
Rs63

The part can be purchased from an outside supplier at Rs60 per unit. If the part is
purchased from the outside supplier, two thirds of the fixed manufacturing costs can be
eliminated. What would the annual impact on the companys net operating income be as a
result of buying the part from the outside supplier? What costs are irrelevant to this
decision?

III. Kovach Company sells its product for Rs63 per unit. The companys unit product cost
based on the full capacity of 600,000 units is as follows:
Direct materials
Rs 12
Direct labor
15
Manufacturing overhead
18
Unit product cost
Rs 45
A special order offering to buy 60,000 units has been received from a foreign distributor.
The only selling costs that would be incurred on this order would be Rs9 per unit for
shipping. The company has sufficient idle capacity to manufacture the additional units.
Two-thirds of the manufacturing overhead is fixed and would not be affected by this order.
In negotiating a price for the special order, what should the minimum acceptable selling
price per unit be?

iv.

the Reliable Battery Limited furnishes you with the following information:
Particulars

Year 2005
First Half Second Half
Sales Rs
8,10,000 10,26,000
Profit Earned Rs 21,600
64,800
From the above information you are required to compute the following, assuming the
fixed cost remains same in both the periods.
a.
b.
c.
d.

v.

Profit / Volume Ratio?


Fixed Cost?
Amount of profit or loss when the sales are Rs 6,48,000
The amount of sales required to earn a profit of Rs 1,08,000

The Everest Limited manufactures and sells direct to consumers 10,000 jars of
everest snow per month at Rs1.25 per jar. The companys normal production
capacity is 20,000 jars of snow per month. An analysis of cost for 10,000 jars is
given below:

Particulars
Direct Material
Direct Labor
Power
Miscellaneous Supplies
Jars
Fixed expenses of manufacturing, selling and distribution
Total

Amount in Rs
1,000-00
2,475-00
140-00
430-00
600-00
7,955-00
12,600-00

The company has received an offer for the export, under a different brand name for
1,20,000 jars of snow at 10,00 jars per month at a price of Rs 0.75 per jar. Write a short
report on the advisability or otherwise of accepting the offer.

vi. A company needs 20,000 units of a certain part to use in its production cycle. The
following information is available.
Cost to make a part:

Direct Materials
Rs
40/Direct Labor
Rs
16/Variable Factory OHs
Rs
12/Fixed Factory OHs applied Rs
6/_________________________________
Total
Rs 38/_________________________________
Cost to buy the part from J Limited is Rs 36/If the A company buys the part from J limited instead making it, A limited could not use
the released facilities in another manufacturing activity.
Seventy percent of the fixed factory OHs applied will continue regardless of what
decision A makes?
1. In deciding whether to make or buy the part what are the total relevant costs per
unit to make the part?
2. What decision should A limited make?
vii.. (Break-even point of two machines) PQ Ltd. Has been offered a choice to buy one
out of two machines; A and B. You are required to compute:
a)
b)
c)

Break-even point for each of the machines


The level of sales at which both machines would earn equal profit
The range of sales at which one is more profitable than the other

The relevant data is given below:


Machine A
Machine B
Annual output in units
10,000
10,000
Fixed costs
Rs. 30,000
Rs. 16,000
Profit at above level of
Rs. 30,000
Rs. 24,000
production
The market price of the product is expected to be Rs. 10 per unit.
viii.
(BEP of merged plant) A,B and C are three similar plants under the same
management who wants to merge them for better operation.
Capacity operated (%)
Turnover (Rs. Lakh)
Variable costs (Rs. Lakh)
Fixed costs (Rs. Lakh)

Plant A
100
300
200
70

Plant B
70
280
210
50

You have to find out:


a) the capacity of the merged plant for braking even,
b) the profit at 75% capacity of the merged plant, and
c) the turnover from the merged plant to give a profit of Rs. 28 lakh

Plant C
50
150
75
62

10. (Product-mix) Mega Corporation manufactures and sells three products to the
automobile industry. All the products must pass through a machining process, the
capacity of which is limited to 20,000 hours per annum, both by equipment design
and government regulation. The following additional information is available:

Selling price Rs./unit


Variable cost Rs./unit
Machine requirement hrs./unit
Maximum possible sales units

Product X
(Rs.)
1,900
700
3
10,000

Product Y
(Rs.)
2,400
1,200
2
2,000

Product Z
(Rs.)
4,000
2,800
1
1,000

Required : A statement showing the best possible production mix which would
provide the maximum profit for Mega Corporation, together with supporting
work.

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