Decision Making
1. Quality Produc Products ts Ltd., manufac manufactures tures and and markets markets a single single product. product. The following following data data are available: Per unit
Per unit
aterials
!s. 1"
#ealer$s argin
!s. %
&onversion &ost 'variable(
1)
*elling Price
%+
i-ed &osts: !s. + Lakhs Present *ales: /+,+++ units &apacity 0tiliation: "+ percent There is acute competition. 2-tra efforts are necessary to sell. *uggestions have been made for increasing sales: 'a( 3y reducing reducing sales price price by percent percent 'b( 3y increasing dealer$s dealer$s margin margin by ) ) percent over over the e-isting e-isting rate. 4hich of these two suggestions you would recommend if the co mpany desires to maintain the present profit5 6ive reasons. *.7 aheswori 18.% Page 7o. 9.1) ). 3imal Ltd. Ltd. which produces produces three three product product furnishes furnishes you you the following following data for for )++/)++1 )++/)++1+. +.
9
3
&
*elling price per unit '!s(
1++
8
+
Profit;
1+
)+
%+
a-imum *ales Potential '0nits(
%+,+++
),+++
1+,+++
!aw aterial content as = of variable costs '=(
+
+
+
The fi-ed e-penses are estimated at !s. ">+,+++. The company uses a single raw material in all the three products. !aw material is in short supply and the company has a ?uota for the supply supply of raw materia materiall fo the value value of !s. 1,>++,+ 1,>++,+++ ++ for the year year )++/ )++/)+1 )+1+ + for the manufacture of its products to meet its sales demand. @ou are re?uired to 'A( *et a product product mimi- which will will give the the ma-imum ma-imum overall overall profit profit keeping keeping the the short short supply of raw material in view. 'AA( &ompute &ompute that ma-imum ma-imum profit. profit. *.7 aheswori 18.1B Page. 7o 9.)1 B. rom the follow following ing data, data, which which product product would would you recommen recommend d for manufa manufactu cture re in the factory 5
9
3
*tandard anufacturing Time Per 0nit
) hours
B hours
#irect aterials
+
B+
#irect Labour C !s. 1+ per hour
)+
B+
1)
1>
*elling Price
)++
)%+
Total achine Eours available in the factory are "+,+++ *. 7 aheswori 1".8" Page 7o. 9. +% %. 'a( The following particulars are e-tracted from the records of a company. Product 9
Product 3
*ales ' Per 0nit (
!s. 1++
!s. 1)+
&onsumption of aterial
) Fg
B kg
aterial &ost
!s. 1+
!s. 1
#irect 4ages &ost
1
1+
achine Eours used
B
)
i-ed
1+
1
)+
Dverhead 2-penses:
#irect wage per hour is !s. . &omment on the profitability of each product ' both use the same raw material ( when 'i( Total sales potential in units is limitedG 'ii( Total sales potential in value is limitedG 'iii( !aw material is in short supplyG and 'iv( Production capacity ' in terms of machine hours( is the limiting factor. 'b( 9ssuming raw material as the key factor, avaibility of which is 1+,+++ kg. and ma-imum sales potential of each product being B,++ units, find out the product mi- which will yield the ma-imum profit. *. 7 aheswori 1".88 Page 7o. 9 + . 9 company annually manufactures 1+,+++ units of a product at a cost of !s. % per unit and there is home market for consuming the entire volume of production at the sale price of !s. %.) per unit. An the year )++8, there is fall in the demand for home market which consume 1+,+++ unitsonly at the sale of !s. B.8) per unit. The analysis of the cost per 1+,+++ units is follows: aterials
!s. 1,+++
i-ed Dverheads
!s. >,+++
4ages
!s. 11,+++
!s. ",+++
The foreign market is e-plored and it is found that this market can consume )+,+++ units of the product if offered at a sale price of !s. B. per unit. At is also discovered that for additional 1+,+++ units of the product ' over initial 1+,+++ units( the fi-ed overheads will increase by 1+=. As it worth while to try to capture the foreign market5 *. 7 aheswori 18.1% Page 7o. 9.))
". The 7ovelties Ltd. is not known on making special efforts to push the sales of product 3, one of three main products it deals in, since product 3 is not considered to be as profitableas the other two. The selling prices and cost of the three products are: Products
*elling Price
#irect aterial
#irect Labour HHHHHHHHHHHHHHHHHHHHHHH #ept I
#ept @
#ept. J
!s
!s
!s
!s
!s
9
B++
+
%+
1+
1+
3
)/+
B+
1+
%+
1+
&
B)+
%+
1+
1+
%+
Dverhead rate for each department per rupee of direct labour are as follows: #ept I
#ept @
#ept J
1.)+
+.%+
1.++
i-ed Dvehead
1.)+
).++
1.%+
Total
).%+
).%+
).%+
4hat will be your advice about the profitability of product 35 6ive reasons. *. 7 aheswori 18.)1 Page 7o. 9.)> 8. 9 Limited manufactures three different products and the following information has been colleted from the books of accounts. Products *
T
@
*ales i-
B=
B=
B+=
*elling Price
!s.B+
%+
)+
!s.1
)+
1)
Total i-ed Price
!s. 1>+,+++
Total *ales
!s. "++,+++
The company has currently under discussion, a proposal a discontinue the manufature of product @ and replace it with product , when the following results are anticipated: Products *
T
*ales i-
+=
)=
)=
*elling Price
!s. B+
%+
B+
!s. 1
)+
1
Total i-ed Price
!s. 1>+,+++
Total *ales
!s. "%+,+++
4ill you advice the company to change over to production of 5 6ive reasons for your answer. *. 7 aheswori 18.)) Page 7o. 9 )/ >. 9lpha Limited has presented the following budget estimates for the year )++/)+1+ : Product 9
Product 3
",+++
1",+++
!s;0nit
!s;0nit
*elling Price
%+
"%
#irect aterials
1)
))
#irect Labour C !s. 1 per hour
>
1)
%
"
i-ed Dverhead
>
1)
Total &ost
B)
)
Profit
>
1)
*ales ' An units(
9fter finaliation of the above budget estimates, it is observed that onethird of the production capacity is still idle. An 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 3. The selling price of Product 3 will, however, have to be reduced by !s. ) per unit in order to increase the volume of sales.
'ii( Product 3 will be discontinued and the capacity so realied will be diverted to the production of &. The particulars relating to per unit of product & are as under: *elling Price
!s. )
#irect Labour
!s. 1+
#irect aterials
!s. 1
!s.
'iii( The idle capacity will be utilied for meeting an e-port demand for product #. The particulars relating to per unit of product # are as under: *elling Price
!s. 8)
#irect Labour
!s. )+
#irect aterials
!s. %+
!s. 1+
'iv( The idle capacity will be hired out by fi-ing 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 9 and 3 as envisaged in the budget estimated. 9lso evaluate each of the above four proposals separately and prepare statements showing the profitability under each proposal. *. 7 aheswori 18.)8 Page 7o. 9.BB
/. 9 radio manufacturing company find that while it costs !s. ".) each to make componet I )8B Q, the same is available in themarket at !s. .8 each, with an assurance of continued supply. The breakdown of cost is:
aterials
!s. ).8 each
Dther
+.+ each
Labour
!s. 1.8 each
#epreciation and other i-ed cost
1.) each
Total &ost
".) each
a. *hould you make or buy5 b. 4hat would be your decision if the supplier offered the component at !s. %.> each5 *. 7 aheswori 18.)> Page 7o. 9. B 1+. 9uto Parts Ltd. has an annual production of /+,+++ units for a motor component. The component$s cost structure is as given below: aterials
!s. )8+ per unit
Labour ' )= i-ed (
!s. 1>+ per unit
2-penses:
!s. /+ per unit
i-ed
!s. 1B per unit Total
!s. "8 per unit
'a(
The purchase anager has an offer from a supplier who is willing to supply the component at !s. %+. *hould the component be purchased and production stopped5
'b(
9ssume the resources now used for this component$s manufacture are to be used to produce another new product for which the selling price is !s. %>.
An the latter case material price will be !s. )++ per unit. /+,+++ units of this product can be produced, at the same cost basis as above for labour and e-penses. #iscuss whether it would be advisable to divert the resources to manufacture that new product, on the footing that the component presently being produced would, instead of being produced, be purchased from the market. *. 7 aheswori Q. 7 18.)/ Page 7o. 9B"
11. 9 practicing &hartered 9ccountant now spends !s. +./+ per Fm on ta-i fares for his client$s work. Ee is considering two other alternatives, the purchase of a new small car or an old bigger car. Atems
7ew *mall &ar
Dld 3ig &ar
Purchase Price
!s. B,+++
!s. )+,+++
*ale Price, after years
!s. 1/,+++
!s. 1),+++
!epairs and Ansurance per annum
!s. 1,+++
!s. 1,)++
Ta-es and Ansurance per annum
!s. 1,8++
!s. 8++
Petrol &onsumption per litre
1+ Fms
8 Fms
Petrol Price per litre
B.+
B.+
Ee estimates that he does 1+,+++ km annually. 4hich of the three alternatives will be cheapest5 Af his practice e-pands and he has to do 1/,+++ km per annum, what should be his decision5 9t how many km per annum will the cost of the two cars breakeven and why5
