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Short Run Decision Situations

1. Optimization of product mix

Particulars Product A Product B


Direct material (Per Unit) Rs.10/- Rs.9/-
Direct Wages (Per Unit) Rs.3/- Rs.2/-
Sales Price (Per Unit) Rs.20/- Rs.15/-
Fixed Expenses Rs.800/-
(Variable expenses are allocated to products as 100% of direct wages)

Sales Mix:
a. 100 units of A and 200 units of B
b. 150 units of A and 150 units of B
c. 200 units of A and 100 units of B

Recommend which sales mix should it go for?

2. Capacity Utilisation (Acceptance or rejection of a foreign order) :

The cost sheet of a product is given as under :


Rs.
Direct material 5.00
Direct wages 3.00
Factory overheads:
Fixed Rs.0.50
Variable Rs.0.50
---------- 1.00

Administrative Expenses 0.75


Selling and distribution overheads :
Fixed Rs.0.25
Variable Rs.0.50
---------- 0.75
------------------
Total 10.50
------------------
The selling price per unit is Rs.12.

The above figures are for an output of 50,000 units, the capacity for the firm is 65,000 units. A foreign
customer is desirous of buying 15,000 units at a price of Rs.10 per unit. Advise the manufacturer whether
the order should be accepted. What will be your advice if the order were from a local merchant.

3. Make or buy decisions:

Expansion Ltd manufacturing automobile accessories and parts. The following are the total costs of
processing 1,00,000 units.

Direct material – Rs.5 lacs, Direct labour– Rs.8 lacs, Variable factory overheads – Rs.6, lacs, Fixed factory
overheads – Rs.5 lacs.

Caselets on Short Run Decisions – Management Accounting 2020 Page 1 of 2


The purchase price of the component is Rs.22/-. The fixed overheads would continue to be incurred even
when the component is bought outside although there would have been reduction to the extent of
Rs.2,00,000/-.
Required:

A) Should the part be made or bought considering that the present facility when released following a
buying decision would remain idle.

B) In case the released capacity can be rented out to another manufacturer for Rs.1,50,000/- having
good demand. What should be the decision?

4. Plant shutdown (Closing down or suspending activities)

The annual flexible budget of a company is as follows :

Production capacity 40% 60% 80% 100%


Cost: Rs. Rs. Rs. Rs.

Direct material 12,000 18,000 24,000 30,000


Direct labour 16,000 24,000 32,000 40,000
Production overheads 11,400 12,600 13,800 15,000
Administration overheads 5,800 6,200 6,600 7,000
Selling and Dist. overheads 6,200 6,800 7,400 8,000
Total 51,400 67,600 83,800 1,00,000

Owing to trade difficulties the company is operating at 50% capacity. Selling prices have had to be
lowered to what the directors maintain is an uneconomic level and they are considering whether or not
their single factory should be closed down unitl the trade recession has passed.

A market research consultant has advised that in about twelve months time there is every indication that
sales will increase to about 75% of normal capacity and that the revenue to be produced from sales in the
second year will amount to Rs. 90,000. The present revenue from sales at 50% capacity would amount to
only Rs. 49,500 for a complete year.

If the directors decide to close down the factory for the year, it is estimated that :

1. The present fixed costs would be reduced to Rs. 11,000 a year.


2. Closing down costs (redundancy payments etc.) would amount to Rs.7,500
3. Necessary maintenance of plant would cost to Rs.1,000 p.a.
4. On re-opening the factory the cost of overhauling plant, training and engagement of new
personnel would amount to Rs.4,000.

Prepare a statement for the directors presenting in such a way as to indicate whether it is desirable
to close the factory.

Caselets on Short Run Decisions – Management Accounting 2020 Page 2 of 2

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