All Sums Costing

7/30/2019 All Sums Costing

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1. PRICING

EVALUATE ALTERNATIVE RESPONSES TO PRICE CHANGES

The accounts of a company are expected to reveal a profit of Rs.14,00,000 after

charging fixed costs of Rs.10,00,000 for the year ended 31st march, 2004. The

selling price of the product is Rs.50 per unit and variable cost per unit is Rs. 20.

Market investigations suggest the following responses to the price changes:

Alternative Selling price reduced by Quantity sold increases by

I 5% 10%

II 7% 20%

III 10% 25%

Evaluate these alternatives and state which of the alternatives on profitability,

consideration, should be adopted for the forthcoming year.

SOLUTION

Statement for evaluating three alternatives on profitability consideration

Particulars alternatives

I

Rs.

II

Rs.

III

Rs.

A.

B.

Selling price per unit (WN 1)

Less : Variable cost per unit

47.50

20.00

46.50

20.00

45.00

20.00

C. Contribution per unit (A-B) 27.50 26.50 25.00

D. Revised quantity of units to

be sold (WN 4)

88,000 96,000 1,00,000

E. Total contribution (C*D) 24,20,000 25,44,000 25,00.000


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Recommendation: An alternative of the above 3 alternatives on profitability

consideration clearly shows that alternative II is the best as it gives maximum

contribution and hence profitability; therefore this alternative should be adopted.

Working notes

1) Selling price per unit

I : Rs.50-5% of 50 = Rs.47.50

II : Rs.50-7% of 50 = Rs.46.50

III : Rs.50-10% of 50 = Rs.45.00

2) Contribution per unit

Contribution=selling price per unit-variable cost per unit

=Rs.50-20

=Rs.30

3) Expected quality of units to be sold:

Profit 14, 00,000

Add: fixed cost 10, 00,000

Total contribution

Quantity of units sold = total contribution/contribution per unit

=24, 00,000/30

=80,000 units

4) Revised quantity of units sold:

Alternative Units to be sold Units

I 80,000 units + 10% of 80,000 units 88,000

II 80,000 units + 20% of 80,000 units 96,000

III 80,000 units + 25% of 80,000 units 1,00,000

24,00,000


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2. KEY FACTOR

From the following data, which product would you recommend to be manufactured

in a factory, time being the key factor.(time)

Per unit of product A B

direct material 24 14

direct labor(Rs 1 per hr) 2 13

Variable overhead( Rs 2 per hr) 4 6

Selling price 100 110

Standard time to produce 2 hrs 3 hrs

SOLUTION: CONTRIBUTION ANALYSIS

Particulars A B

Sales 100 110

Less: variable costs

Direct material 24 14

Direct labour 2 13

Variable overheads 4 30 6 33

Contribution 70 77

Standard time 2 hrs 3 hrs

Contribution per standard hour 70/2 =35 77/3 =25.67

Ranking: Product A is better


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3. PRODUCT MIX

2 PRODUCTS, 3 MIXES

From the following data you are required to present.

1) The marginal cost of product X and Y and the contribution per unit .

2) The total contribution and profits resulting from each of the suggested sales

mixtures.

Particulars Product Per unit Rs.

Direct materials X 10.50

Direct materials Y 8.50

Direct wages X 3.00

Direct wages Y 2.00

Variable expenses 100% of direct wages per product.

Fixed expenses (total) Rs. 800

Sales price X Rs.20.50

Y Rs.14.50

Suggested sales mixes

Alternatives No. of units

X Y

A 100 200

B 150 150

C 200 100


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SOLUTION

1) Marginal cost and contribution

Particulars Product X Product Y

Direct materials 10.50 8.50

Direct wages 3.00 2.00

Variable expenses (100% of

direct wages)

3.00 2.00

Marginal cost per unit 16.50 12.50

Selling price per unit 20.50 14.50

Less : marginal cost 16.50 12.50Contribution per unit 4.00 2.00

2) Contribution & profits of sales mix

Sales Mix (A)

Particulars Rs.

Contribution from 100 units of product X @ Rs.4 400

Contribution from 200 units of product Y @ Rs.2 400

Total contribution

Less : fixed expenses

800

800

Profit nil


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Sales mix (B)

Particulars Rs.

Contribution from 150 units of product X @ Rs.4 600


Total contribution


900

800

Profit 100

Sales Mix (C)

Particulars Rs.Contribution from 200 units of product X @ Rs.4 800


Total contribution


1000

800

Profit 200

3) Advice

Mix C should be adopted because it gives the maximum contribution and profit.


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4. OPTIMUM LEVEL

OPTIMUM CAPACITY LEVEL

Jay and Vijay company is at present operating at 60% capacity producing at the

rate of 10000 units a month- a single product sells for 9.00 a unit.

for the year 2003 the results have been as follows:

Particulars Rs Rs

Sales: 120000 units at 9 per unit

Cost of sales:

Direct material Direct labor Variable overheads Fixed manufacturing overheads

Gross profit

Selling expenses

Fixed Variable

Administrative expenses

FixedProfit

180000

360000

90000

135000

50000

36000

22000

1080000

765000

315000

108000207000

Although the company is operating at a net high profit at a plant capacity of 60%,

it is a fact that if the price unit could be reduced by 20%, the value of the sales

would increase to 180000units per year with an increase in the fixed manufacturing

overheads of 9000 per year. If sales price could be reduced by 331/2 the volume of

sale should increase to full capacity (2000000)units with increase in expenses at

60% levels as follows;

manufacturing overheads 11000 fixed selling expenses 2000 fixed administrative expenses 6000


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you are required to

1.prepare a comparative statement showing net income under the threealternative profit volume relationships and

2. compute the break even sales point in eachSOLUTION:

statement of net income

Particulars Per

unit

Rs 120000

units

Rs 180000

units

Rs 20000

units

Sales

Less: variablecost

Direct material

Direct labor

Variable o/h

Variable selling

Contribution

Less; fixed

expenses

Selling

Manufacturing

Admin. expen.

Profit/loss

9

7.20

6

1.50

2

0.75

0.35

180000

360000

90000

36000

1050000

666000

270000

540000

135000

54000

1296000

999000

300000

600000

150000

60000

1200000

1110000

50000

135000

22000

414000

207000

50000

144000

22000

297000

216000

25000

146000

28000

90000

226000

207000 81000 136000

Therefore the present activity at 60 % capacity (of 20000) units is better, as it gives

maximum profit of 207000

break even sales = fixed cost x sales

contribution

for 120000 units = 207000x 1080000 =540000414000

for 180000 units = 216000 x 1296000 = 942545297000

for 200000 units = 226000 x 1200000 = 301333390000


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5. COST CONTROL

MECHANIZATION & LABOR INCENTIVES

The present output details of a manufacturing department are as follows;

Average output per week = 48000 units from 160 employees

Sales value of output = 600000

Contribution made by output toward fixed expenses and profit = 240000

The board of directors plan to introduce more mechanization into the department at

a capital cost of 160000. The effect of this will be to reduce the number of

employees to 120, and increasing the output per individual employee by 60% . To

provide the necessary incentive to achieve the increased output, he board intends to

offer a 1 5 increase on the piece of work rate of 1 per unit for every 2 5 increase in

average individual output achieved.

To sell the increased output, it will be necessary to decrease the selling price by 4

%.Calculate the extra weekly contribution resulting from the proposed change and

evaluate for the boards information, the desirability of introducing the change.


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SOLUTION:

Statement of extra weekly contribution

Expected sales unit 57600

Particulars

Sales value: (57600 x 12)

Marginal costs (excluding wages)

(57600 x 6.50)

Wages: (57600 x 1.30)

Total marginal cost:

374400

74880

691200

449280

241920

Marginal contribution

Less: present contribution

241920

240000

1920Increase in contribution (per week)

Evaluation since the mechanization has resulted in the increase of contribution to

the extent of 1920 per week, therefore the proposed change should be accepted.


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6. DISCONTINUE PRODUCT

DISCONTINUE

A pen manufacturer makes an average net profit of Rs. 25.00 per pen on a selling

price of Rs. 143.00 by producing and selling 60,000 pens, or 60% of the potential

capacity. His cost of sales is :

RS.

Direct materials 35.00

Direct wages 15.50

Works overhead (50% fixed) 62.50

Sales overhead (25% veriable) 8.00

During the current year he intends to produce the same number of pens but

anticipates that his fixed charges will go up by 10%while rates of direct labour and

direct material will be increase by 8% and 6% respectively. But he has no option

of increasing the sales price. Under this situation, he obtains an offer for a further

20% of his capacity. What minimum will you recommend for acceptance to ensure

the manufacturer an overall profit of Rs. 16,73,000.


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Solution:

Particulars 60,000 units 80,000 units

Amtrs. Per pen

rs.

Amtrs. Per

pen rs.

Direct materials 21,00,000 35.00 29,68,000 37.10

Direct wages 7,50,000 12.50 10,80,000 13.50

Prime cost 28,50,000 47.50 40,48,000 50.60

Works overhead

Fixed 18,75,000 31.25 20,62,500 25.78

Variable 18,75,000 31.25 25,00,000 31.25

Works cost 66,00,000 110.00 86,10,500 107.63

Selling overhead

Fixed 3,60,000 6.00 3,96,000 4.95

Variable 1,20,000 2.00 1,60,000 2.00

Cost of sales 70,80,000 118.00 91,66,500 114.58

profit 15,00,000 25.00 16,73,000 20.91

Total sales 85,80,000 143.00 1,08,39,500 135.49

Minimum price recommended will be Rs. 135.49 per pen.


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7. SPECIAL ORDER

Export order

the cost sheet of a product is as follows

Particulars Per unit

Direct material

Direct wages

Factory overheads

Fixed

Variable

Administrative expenses

Selling and distribution expenses

Fixed

Variable

Cost of sales

10

5

01

02

00.50

01

21

The selling per unit is 25. The above cost information is for an output of 50000

units, whereas the capacity of the firm is 60000 units. A foreign customer is

desirous of buying 10000 units at a price of 19 per unit. The extra cost of exporting

the product is 0.50 per unit. You are required to advice the manufacturer whether

the order should be accepted?


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SOLUTION:

Particulars 50000 units 60000 units

Rs Per unit Rs Per unit

Sales (50000x25)

(10000x19)

1250000 1250000

190000

Total sales

Variable costs

Direct material

Direct wages

Cost of exports

Factory overheads

Selling and distribution

1250000

500000

250000

100000

50000

25

10

5

2

1

1440000

600000

300000

5000

120000

60000

24

10

5

0.08

2

1

Total variable cost

Contribution

Fixed costs

Factory overhead

Administration

Selling and distribution

900000

350000

50000

75000

25000

18

7

1

1.5

0.5

1085000

355000

50000

75000

25000

18.08

592

0.83

1.25

0.42

Total fixed costs 150000 3 150000 2.50

Profit 200000 4 205000 3.42

If the export order is accepted, profit increases from 200000 to 205000 i.e. By

5000 and therefore it should be accepted by the manufacturer.

All Sums Costing

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