Decision Making

1. Quality Products Ltd., manufactures and markets a single product. The following data are
available:
Per unit

Per unit

Materials

Rs. 16

Dealers Margin

Rs. 4

Conversion Cost (variable)

12

Selling Price

40

Fixed Costs: Rs. 50 Lakhs

Present Sales: 90,000 units
Capacity Utilization: 60 percent
There is acute competition. Extra efforts are necessary to sell. Suggestions have been made
for increasing sales:
(a) By reducing sales price by 5 percent
(b) By increasing dealers margin by 25 percent over the existing rate.
Which of these two suggestions you would recommend if the company desires to maintain the
present profit? Give reasons.
S.N Maheswori 17.4 Page No. A.512
2. Bimal Ltd. which produces three product furnishes you the following data for 2009-20010.

Selling price per unit (Rs)

100

75

50

Profit/Volume Ratio (%)

10

20

40

Maximum Sales Potential (Units)

40,000

25,000

10,000

Raw Material content as % of variable costs (%)

50

50

50

The fixed expenses are estimated at Rs. 680,000. The company uses a single raw material in
all the three products. Raw material is in short supply and the company has a quota for the
supply of raw material fo the value of Rs. 1,800,000 for the year 2009-2010 for the
manufacture of its products to meet its sales demand.
You are required to
(I) Set a product mix which will give the maximum overall profit keeping the short supply
of raw material in view.
(II) Compute that maximum profit.
S.N Maheswori 17.13 Page. No A.521
3. From the following data, which product would you recommend for manufacture in the
factory ?

Standard Manufacturing Time Per Unit

2 hours

3 hours

Direct Materials

50

30

Direct Labour @ Rs. 10 per hour

20

30

Variable Overhead @ Rs. 6 per hour

12

18

Selling Price

200

240

Total Machine Hours available in the factory are 60,000

S. N Maheswori 16.76 Page No. A. 504
4. (a) The following particulars are extracted from the records of a company.
Product A

Product B

Sales ( Per Unit )

Rs. 100

Rs. 120

Consumption of Material

2 Kg

3 kg

Material Cost

Rs. 10

Rs. 15

Direct Wages Cost

15

10

Machine Hours used

Fixed

10

Variable

15

20

Overhead Expenses:

Direct wage per hour is Rs. 5. Comment on the profitability of each product ( both use the
same raw material ) when (i) Total sales potential in units is limited; (ii) Total sales potential
in value is limited; (iii) Raw material is in short supply; and (iv) Production capacity ( in
terms of machine hours) is the limiting factor.
(b) Assuming raw material as the key factor, avaibility of which is 10,000 kg. and maximum
sales potential of each product being 3,500 units, find out the product mix which will yield
the maximum profit.
S. N Maheswori 16.77 Page No. A 505
5. 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 fall in the demand for home market which consume
10,000 unitsonly at the sale of Rs. 3.72 per unit. The analysis of the cost per 10,000 units is
follows:
Materials

Rs. 15,000

Fixed Overheads

Rs. 8,000

Wages

Rs. 11,000

Variable Overheads

Rs. 6,000

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) the fixed overheads will
increase by 10%. Is it worth while to try to capture the foreign market?
S. N Maheswori 17.14 Page No. A.522

6. The Novelties Ltd. is not known on making special efforts to push the sales of product B,
one of three main products it deals in, since product B is not considered to be as profitableas
the other two. The selling prices and cost of the three products are:
Products

Selling Price

Direct Material

Direct Labour
_______________________
Dept X

Dept Y

Dept. Z

Rs

Rs

Rs

Rs

Rs

300

50

40

10

10

290

30

10

40

10

320

40

10

10

40

Overhead rate for each department per rupee of direct labour are as follows:
Dept X

Dept Y

Dept Z

Variable Overhead

1.20

0.40

1.00

Fixed Ovehead

1.20

2.00

1.40

Total

2.40

2.40

2.40

What will be your advice about the profitability of product B? Give reasons.
S. N Maheswori 17.21 Page No. A.528
7. A Limited manufactures three different products and the following information has been
colleted from the books of accounts.
Products
S

Sales Mix

35%

35%

30%

Selling Price

Rs.30

40

20

Variable Price

Rs.15

20

12

Total Fixed Price

Rs. 180,000

Total Sales

Rs. 600,000

The company has currently under discussion, a proposal a discontinue the manufature of
product Y and replace it with product M, when the following results are anticipated:
Products
S

Sales Mix

50%

25%

25%

Selling Price

Rs. 30

40

30

Variable Costs

Rs. 15

20

15

Total Fixed Price

Rs. 180,000

Total Sales

Rs. 640,000

Will you advice the company to change over to production of M? Give reasons for your
answer.
S. N Maheswori 17.22 Page No. A 529
8. Alpha Limited has presented the following budget estimates for the year 2009-2010 :
Product A

Product B

6,000

16,000

Rs/Unit

Rs/Unit

Selling Price

40

64

Direct Materials

12

22

Direct Labour @ Rs. 1 per hour

12

Variable Overheads

Fixed Overhead

12

Total Cost

32

52

Profit

12

Sales ( In units)

After finalization of the above budget estimates, it is observed that one-third of the
production capacity is still idle. In order to improve the performance, the following
proposals are under considerations:
(i) Product will be discontinued and the capacity so released wil be used for product B.
The selling price of Product B will, however, have to be reduced by Rs. 2 per unit in
order to increase the volume of sales.
(ii) Product B will be discontinued and the capacity so realized will be diverted to the
production of C. The particulars relating to per unit of product C are as under:Selling Price

Rs. 52

Direct Labour

Rs. 10

Direct Materials

Rs. 15

Variable Overhead

Rs. 5

(iii) The idle capacity will be utilized for meeting an export demand for product D. The
particulars relating to per unit of product D are as under:Selling Price

Rs. 72

Direct Labour

Rs. 20

Direct Materials

Rs. 40

Variable Overhead

Rs. 10

(iv) The idle capacity will be hired out by fixing a price in such a way that the same rate of
profit per direct labour hour as obtained in the budget estimates is achieved.
Prepare a statement showing the profitability of the products A and B as envisaged in the
budget estimated. Also evaluate each of the above four proposals separately and prepare
statements showing the profitability under each proposal.
S. N Maheswori 17.27 Page No. A.533

9. A radio manufacturing company find that while it costs Rs. 6.25 each to make componet X
273 Q, the same is available in themarket at Rs. 5.75 each, with an assurance of continued
supply. The breakdown of cost is:

Materials

Rs. 2.75 each

Other Variable Costs

0.50 each

Labour

Rs. 1.75 each

Depreciation and other Fixed cost

1.25 each

Total Cost

6.25 each

a. Should you make or buy?

b. What would be your decision if the supplier offered the component at Rs. 4.85 each?
S. N Maheswori 17.28 Page No. A. 535
10. Auto Parts Ltd. has an annual production of 90,000 units for a motor component. The
components cost structure is as given below:
Materials

Rs. 270 per unit

Labour ( 25% Fixed )

Rs. 180 per unit

Expenses:
Variable

Rs. 90 per unit

Fixed

Rs. 135 per unit

Total

Rs. 675 per unit

(a)

The purchase Manager has an offer from a supplier who is willing to supply the
component at Rs. 540. Should the component be purchased and production stopped?

(b)

Assume the resources now used for this components manufacture are to be used to
produce another new product for which the selling price is Rs. 485.

In the latter case material price will be Rs. 200 per unit. 90,000 units of this product can be
produced, at the same cost basis as above for labour and expenses. Discuss whether it
would be advisable to divert the resources to manufacture that new product, on the footing
that the component presently being produced would, instead of being produced, be
purchased from the market.
S. N Maheswori Q. N 17.29 Page No. A536

11. A practicing Chartered Accountant now spends Rs. 0.90 per Km on taxi fares for his clients
work. He is considering two other alternatives, the purchase of a new small car or an old
bigger car.
Items

New Small Car

Old Big Car

Purchase Price

Rs. 35,000

Rs. 20,000

Sale Price, after 5 years

Rs. 19,000

Rs. 12,000

Repairs and Insurance per annum

Rs. 1,000

Rs. 1,200

Taxes and Insurance per annum

Rs. 1,700

Rs. 700

Petrol Consumption per litre

10 Kms

7 Kms

Petrol Price per litre

3.50

3.50

He estimates that he does 10,000 km annually. Which of the three alternatives will be
cheapest? If his practice expands and he has to do 19,000 km per annum, what should be his
decision? At how many km per annum will the cost of the two cars break-even and why?