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Answer 1
less
less
less
Product X
295
75
80
Product Y
390
120
100
Product Z
340
90
110
40
100
70
100
60
80
(Assumption: 50% of the total amount of Material is imported i.e the cost of imported and
domestic raw materials would be same.)
Cost of Imported
Raw material per
kg(Rs.)
Imported Raw
material
requiremnt(kg)
CONTRIBUTION
Contribution
per kg(Rs.)
60
45
7.5
12
100
100
80
13.33
8.33
8.89
It is clear that the firm enjoys greater contribution margin per kg use of Imported Raw material in
case of product X than product Y & Z.
Contribution
per labour
hour(Rs.)
100/20
25
20
110/20
5.5
14.55
It is clear that the firm enjoys greater contribution margin per labour hour in case of product X
than product Y & Z.Thus,the answer would not change when Capacity is the key/limiting factor.
If the market demand for the products is 1000, 1,200 and 1250 units per annum respectively and
maximum 20,000 kgs of imported raw material is available per annum, the profit can be
maximized by:
Product X
1000
Product Y
1200
Product Z
1250
Total Materials
Required(Rs.)
75000
144000
112500
Imported Mat(50%)
(Rs.)
Imported
Mat(50%)(KGS)
Contribution per
kg(Rs.)-Imported
raw materials
37500
72000
56250
7500
14400
11250
13.33
8.33
8.89
Market Demand
Since Product X enjoys better contribution per kg of imported raw materials followed by Product
Z and then Product Y, for Profit Maximization:
7500 kgs of imported Raw Materials should be allotted to Product X,
11250 kgs of imported Raw Materials should be allotted to Product Z &
1250 kgs of imported Raw Materials should be allotted to Product Y.
20000 Kgs Total
Thus,the final production and supply should be :
Product X 1000 units.
Product Y 1250*(1200/14400) = 104 units
Product Z 1250 units.
Answer 2
Current Poisition of the two plants of XYZ Industries Ltd.- Thakurpur and Raspunj are as below:
Production (kgs.)
Variable cost
Fixed cost
Sales
Profit
Thakurpukur
1,00,000
2,98,000
1,53,500
7,00,000
2,48,500
Raspunja
75,000
2,81,250
91,000
5,25,000
1,52,750
Hence, Total profit of XYZ Ltd with the existing conditions is= 2,48,500+1,52,750
= Rs. 4,01,250.00
In current situation for Thakurpur, SPU= Rs.7.00, VCU=Rs.2.98
For Raspunja plant, SPU=Rs.7.00 & VCU=Rs. 3.75
Production (Kgs.)
Variable Cost
Fixed Cost
Alternative I:
Thakurpukur
125000
=(2.98*125000)+(0.50*2500
0) = 385000
=153500+10000 =163500
Raspunja
50000
=3.75*50000
=187500
91000
Sales
Profit
875000
326500
=50000*7 = 350000
71500
Production (Kgs.)
Variable Cost
Fixed Cost
Sales
Profit
Alternative II:
Thakurpukur
150000
=(2.98*150000)+(0.50*5000
0)
=472000
=153500+10000 =163500
1050000
414500
Raspunja
25000
=3.75*25000
=93750
91000
=25000*7 = 175000
-9750
Total Profit in Alternative II = 414500+(-9750) = Rs 404750.00 /If management we had to choose from the 2 alternatives, Alternative I is clearly the better
option, even though total profit of Alternative I is less than that of Alternative II, because there is
a negative profit in Raspunja (alternative II). Therefore, choosing Alternative II would result in
loss of skilled labor at Raspunja inducing further loss.
Also, staying on the existing position could also be considered as the current position is giving
better profits, when compared to Alternative I.
Answer 3
At cost indifference points,
Level of volumes at which the total costs (hence profits) are same under all cost structure
alternatives.
Indifference Point = Differential Fixed cost/Differential variable cost per unit.
Cost indifference between Fast & Fast Plus,
= (60000-25000)/(1600-800)
=35000/800
= 43.75 nos. (per 1000 copies)
From the above computations, it is clear that at activity level below the indifference point the
alternative (copier) with lower fixed cost and higher variable costs should be used.In case the
activity level exceeds the indifference point, a copier with lower variable cost per unit (or higher
contribution per unit) and higher fixed cost, is more profitable to operate .At the activity level
equal to the indifference point both machines are on equal footing. Hence, from the above we
conclude as follows:
From 0 to 43.75 Nos. (Multiple of 1000 copies) use copier FAST
From 43.75 to 160 Nos. (Multiple of 1000 copies) use copier FAST PLUS
Above 160 Nos. (Multiple of 1000 copies) use copier ULTRA FAST
If the expected volume of operation next year is 100,000 pages they should buy the FAST PLUS
COPIER.
If the expected volume of operation is going to rise beyond 150000 pages in a couple of years it
is clear that the ULTRA FAST copier would be more economical.
We would also need to know the life of the copier machines for better analysis.
Answer 4
In make or Buy decisions,
The fixed cost involved in Cost to Make is considered as SUNK COST and hence not included in
calculation of Cost to Make, assuming this cost will incur, whether we choose to make the
product or buy it.
Hence ,calculation of Cost to Buy(CTB) & Cost to Make(CTM) :
Cost to Make(CTM)