Product and Production Decisions Use of Alternative Productions Facilities Product X can be Produced either by machine A or machine B. A can produce 100 units of X per hour and machine B 150 units per hour. Total machine hours available during the year are 2500. Taking into account the following data, determine the profitable method of manufactures: Per unit of Product X Machine A ‘Machine B Rs. Rs. Marginal Cost 3 6 Selling Price 9 9 Fixed Cost, 2 2: Ans. Annual contribution: Machine A- Rs. 1000000; Machine B- RS, 1125000. Production by Machine is B more profitable] ‘You are an option to choose either an automatic plant or a semi-automatic plant for producing a product. Cost details relating to the two plants are as follows: ‘Automatic Plant Semi-automatic Plant Fixed Cost Rs. 80000, Rs. 60000 Variable Cost (per unit) Rs. 60 Rs. 70 [ Selling Price (per unit) Rs.100 Rs. 100 ‘What is minimum anticipated sales level up to which you williprefer semi-automatic plant and beyond which you prefer automatic plant? [Ans. Cost indifference Point- 2000 units] Rahul Ltd. has been offered a choice to buy machine A or machine B, You are required to compute: (a) Break-even point for each of the machines, (b) Level of sales at which both mathines earn qual profit. Relevant data are given below: Machine A__[ Machine B ‘Annual output (in units) — 10000 10000 Fixed cost Rs. 30000__| "Rs. 16000 Profit at the above level of production Rs. 30000__| Rs. 24000 Market price of the product is expected to be RS. 10 per unit {Ans, (a) BEP : A=S000 units; B- 4000 units; (b) Indifference Level- 7000 units ] Determination of profitable Level Production Ina factory the rated capacity is 30000 units. The following data is supplied Output upto From From 15000 units | 15001-25000 | 25001-30000 units units Rs. Rs. Rs. Fixed cost 15000 16000 19500 Variable cost p.u. 3 3 3.25 Sales revenue px. 4 3.80 3.80 ‘What is the most profitable level of output? [Ans. 25000 units)Qs. Q7. Qs. A company has a capacity of producing 50000 units of a certain product in a month. The sales department reports that the following schedule of selling price is possible: Volume of Sales 30 60 | 70 | 8 ] 90 | 100 (% Capacity) Unit Selling Price (Rs) 2.00 | 1.90 | 1.85 [7.80 [1.70 | 1.60 ‘The variable cost of manufactures between the above levels is Rs. I per unit and the total amount + of fixed cost is Rs. 20000 p.m. at 100% capacity level Prepare a statement showing incremental revenuc and differential cost at each of the above levels of production and sales. At which level the profit will be maximum? (Ans. Profit Rs. 12000 at 80% capacity is maximum] Modem Sewing Machines Co. manufactures hand-operated sewing machines, Prepares. schedule Showing the total differential costs and ineremental revenue from the Tollowidg data. Atwhat volume the company should set its-level of production? output Selling Price | Total semi- | Total Variable | Total Fixed (No. in lakhs) | per Machine fixed cost Cost Cost (Rs. In lakhs) | (Rs.Jn lakhs) | (RSTn lakhs) 0.60 240) 30 836 28.4 1.20 220) 30. 163.6 28.4 1.80, 200) 34, 255.6 28.4 2.40 180. 34 3156 28.4 3.00 160 40. 35516 28.4 3.60 140 40 380.6 28.4 [Ans. 300000 units at Rs. 160 per machine] Utillisation of Full Capacity ‘The flexible budget at 80% capacity of Naratig Limited is as follows: Production in Uniis 30000] Rs. Sales Value 600000 Material Cost 15000 Labour Cost 105000 Overhead Costs © Variable 60000 ‘Semi- Variable 35000 Fixed 100000 ‘An after for additional 3750 units sales is available if iis supplied at Rs. 14 each. Ifthe semi-variable cverheads Increase, ofly by Rs. 1250 for the additional production, will it be advisable to accept the ‘offer? {Ans Net profit on additional units Rs. 28750 Proposal should be accepted] A Company is at present working at 90% of its capacity and producing 13500 units per annum, It is Proposed to increase working upto 100% capacity. The following figure ae available from its budget: ‘AL 90% Capacity At 100% Capacity Rs. Rs, ‘Sales 1500000 1600000 Fixed Expenses 300500 300500 Semi-variable Expenses 97500 100500 Variable Expenses 144000 160000 ‘Output (units) 13500 15000i 9. Q10. Direct labour and material cost are constant under presen condition, Profit margin is 10% on sales. Advise the management for accepting this proposal. [Ans. Differential Cost Rs. 108778; Different Revenue Rs. 100000; Reject the proposal, Material and labour Cost at 90% Rs. 808000 and at 100% Rs. 89778] Starting of a New Product in place of Old ‘A multi-product company given the following data on cost and sales of the three products manufactured by it: Product X Product Y ProductZ ‘Sales Mix (% of sales value) 40, 30. 30, Selling price per unit (Rs) 400 250) 200 Variable cost per unit (Rs) 200 100 120, Fixed cost per unit (Rs) 100 50. 40 Total Sales : Rs. 10000000 ‘The current level of production absorbs the entire fixed cost of the company: The thanagement of the ‘company wants to discontinue *Z” and introduce. *W” to improve profitability. The revised data on production and sales is as follows: Products. x ¥ awe | Sales Mix (% of sales value) 50. 30. 20 Selling price per unit (Rs) 400 250. 320, Variable cost per unit (Rs) 200 100 180. Total Sales : Rs. 10000000 ‘You are required to determine: (i) Fixed costs of thie company per annum; (ii) profit currently earned and profit likely to be earned after the introduetion of ‘W" {Ans. (i) Rs. 22,00,000 (ii) Rs. 28,00,000 and Rs. 29,75,000) ‘A manufacturer is thinking whether he should drop one item from his product line and replace it with another. Below are given his presenticost and output data Product Price | “Wariable Cost per unit [Percentage of Sales Rs. Rs. Bookshelf 60 40 30% Table 100 60 20% Beds 200 120. 50% Total fixed cost per year Rs. 750000 Sales of last year Rs. 2500000 ‘The changes'under consideration consists in dropping the line of tables and replacing it with a line of cabitiels, If this'drop-and-add change is made the manufacturer forecasts the following cost and output data: Product Price | Variable Cost per unit | Percentage of Sales Rs. Rs. Bookshelf 60 40. 50%) Cabinets: 160 60. 10% Beds 200) 120, 40% Total fixed cost per year Rs. 7,50,000 Sales of this year Rs. 26,00,000 [Ans. Present Profit Rs. 200000; Profit at proposed change Rs. 261833; Proposal should be accepted]Product Mix on the Basis of Limiting Factor QI1. A company manufactures and market three Produet X, Y and Z. All the three products are made from the same set of machines. Production is limited by machine capacity. From data given below, indicate priorities for products X, Y and Z with a view to maximizing profits: Products X (Rs) Y (Rs) Z(Rs) Raw Material cost per unit (Rs) 11.25 16.25 21:25 Direct labour cost per unit (Rs) 2.50 2.50 2.50 Other variable cost per unit (Rs) 1.50 2.25 355! Selling price per unit (Rs) 25.00 30.00 35.00 Standard machine time required p.u. in Y minutes 39 20. 28 [Ans. Y,Z,X: Contribution per machine hour: X- Rs. 15, Y Rs, 27 and ZaRSM6,50) Q12. The following particulars are taken from the records of a company engaged in the manufacturing of two products. A and B from a certain material : Product A’ Per] Product B_ Per unit (Rs) unit (Rs) Sales 2500, 5000 Material cost (RS. 50 per kg.) 500 1250. Direct Labour (Rs. 30 per hour) 750 1500. 1 Variable overhead 250 500 | Total Fixed Overheads: Rs. 1000000. Find the product mix to yield maximum profits if total availability of raw material is 20000 kg. and maximum sales potential of each product is 1000 units. [Ans. A- 1000 units ; B- 400 units Total Gontribution- Rs.1700000 and Profit ~ Rs. 700000] Q13. During a year manufactiiing company has produced and sold three products- viz product A- 20000; B 14000 units and C- 10000 units..The following further information is also available: [ Product (per unit) A B ie Marginal CastiR3) 10 18 16 ‘Time taken (hts.) 25 3 25 List Price (Rs) 20 30, 40 Fixed Cost (Total) Rs. 200000 ‘Théllist price of the products are subject to a uniform trade discount of 10%, Due to shortage of labour, the available Working hours for the next year are estimated to be only 90000 hours. Suggest a suitable sles tix for the next year. (@) When where is enough demand for the all products. (b) When the potential demand is 18000 units of A; 10000 units of B and 12000 units of C. [Ans. (a) 36000 units of C; (b) Sales Mix: C- 12000 units A-18000 units B-5000 units; Net Income- Rs. 220000] Q14. A producer installed a machine which can produce product A as well as product B. Annual maximum ‘machine capacity is 4000 machine hours. Cost details about the : Product A, Selling price Rs. 50Qs. Qt6. ‘Variable cost per unit Rs. 30 Rs. 12 Machine hours required per unit of product 10 hours 2 hours ‘Annual demand for product 300 units 1600 unit ‘Annual fixed cost is Rs. 10000 Calculate optimum product-mix showing annual contribution and profit. Give necessary explanation and show complete working. ‘{Ans. Contribution per machine hour : A- Rs. 2, B- Rs, 4 Total contribution — Rs. 14400; profit Rs. 4400) Madhusudan Ltd. is manufacturing three household products. A,B and C and selling them in a competitive market Details of current demand, selling price and cost structufe are giveii Below: Product A__| Product B ‘Product.C i Expected Demand (units) 10000 12000 20000 Selling price per unit (Rs) 20 16 10 Variable cost per unit (Rs) Direct Material (Rs. 10/kg) 6 4 z Direct Labour (Rs. 15/hr) zi 3 1.50 ‘Variable Overheads 2 1 1 Fixed Overhead per unit (Rs) 5 4 2, The company is frequently affected by acute scaftity of raw mndlerialland high labour tumover. During the next period it is expected to have one of the following situations: (a) Raw material available will be only 12100 kg. (b) Direct labour hours available will be only $000 hrs. Suggest the best production plan in each case andhthe resultant out profit that the company would eam according to your suggestion. [Ans. (a) Contribution per kg:/of raw material: A Rs. 15, B Rs. 20, C- Rs. 27.50; Mix : 5500 A+ 12000 B + 20000 C; Profit Rs, 1175003 (b) Contribution per labour hour ; A- Rs. 45; B- Rs. 40 C- Rs. 55; Mix 10000 A+ 5000 B+ 20000°G; Profit— Rs. 102000] ‘You are given the following data: Per unit Product A Product B Rs. Rs. x Materials 40. 35. Direct Labour @ Rs. Siper hour 20 25, Variable Overheads @ 60% of direct 12 15 labour: Selling Price 180 200) ‘Total Labour hours available are 40000 ‘Which product would you recommend to be manufactured in the factory — (i) if time is the key factor, and (ii) if sales is the key factor. Give reasons in support of you answer. [Ans. (Product A: Contribution per unit is higher; (ii) Product B- P/V Ratio is higher]