Decision Making

Question 1 Although the Missouri Company has the capacity to produce 16,000 units per months, current plans call for monthly production and sales of only 10,000 units at $15 each. Costs per unit are as follows: Direct materials-----------------------------------------------Rs.5.00 Direct labor------------------------------------------------------ 3.00 Variable factory overhead------------------------------------- .75 Fixed factory overhead----------------------------------------- 1.50 Variable marketing expenses---------------------------------- .25 Fixed administrative expense---------------------------------- 1.00 Required: (1) Recommendations as to whether the company should accept a special order for 4,000 units @Rs.10 each. (2) The maximum price the Missouri Company should be willing to pay an outside supplier who is interested in manufacturing this product. (3) The unit cost figure the company would use in costing inventory, using the direct costing. (4) The effect on the monthly contribution margin if the sales price were reduced to Rs.14 resulting in a 10% increase in sales volume. Question 2 Howard Company sells two products with the following characteristics: Product A Product B Quantity sold-------------------------------------------------------100,000 units 50,000 units Standard cost per unit Rs. Fixed----------------------------------------------------------10 Variable------------------------------------------------------10 20 Rs. 20 40 60

Sales Price per unit 30 54 Required: (1) The profit per unit and in total for each product, assuming that the firm operates at normal capacity and that the standard cost and the actual cost are the same. (2) A decision as to whether the firm should continue its sales of both products, assuming that the fixed cost (in total) will remain the same. (3) A decision to either drop product B or add Product C, assuming that facilities presently committed to B alternatively could be assigned to C, that the two products are mutually exclusive and that C has the following characteristics:

Quantity sold---------------------------------------------------------------------25,000 units Standard cost per unit: Rs. Fixed------------------------------------------------------------------------------- 40 Variable--------------------------------------------------------------------------20 60 Sales price per unit------------------------------------------------------------------- 50 (4) The opportunity cost associated with Product B and with Product C. Question 3 ABC Manufacturing Company selling its product on a selling price of Rs. 14.30 per unit and makes an average profit Rs. 2.50 per unit. At present company is producing and selling 60,000 units at 60% of its normal capacity. Cost of sales per unit is as follows: Direct Material Direct Wages Factory Overhead Sales Overhead Rs. 3.50 1.25 6.25 (50% fixed) 0.80 (25% variable)

During the current year, Company intends to produce the same number of Units but estimates that its fixed costs would go up by 10% while the rates of direct wages and direct materials will increase by 8% and 6% respectively. However, selling price can not be changed for 60,000 units. Under this situation company received an offer for a further 20% of its normal capacity. Required: What minimum price would you recommend for acceptance of the offer to ensure the Company an overall profit of Rs. 167,300. Question 7 Zoltrix Limited makes one product. Total fixed cost for one production period is Rs.10,000. Current selling price is Rs.70 per unit and variable cost is Rs.30 per unit at present demand of 500 units. The sales manager estimates that each successive increase of Rs.10 in selling price will result in a drop in demand by 50 units and vice versa. It is possible to charge intermediary prices ranging from Rs.50 to Rs.90 with appropriate change in demand as mentioned above. Required: What should be the optimal sales price per unit?

Question 4 The XYZ Company manufactures three products (X,Y,Z) in the same factory. Revenue and cost data for the quarter just ended are given below: Particulars Sales revenue Variable costs Profit contribution Fixed costs Separable and discretionary X(Rs) 60000 40000 20000 Products (complementary) Y(Rs) Z(Rs) Total(Rs) 100000 30000 70000 26000 20000 24000 80000 24000 56000 18000 16000 22000 240000 94000 146000 68000 48000 30000

24000 Allocated on the basis of sales revenue 12000 Profit (loss) (16000) i. ii.

Advice the company whether product line X should be dropped or not. Suppose that if product X dropped, the sales of product Y would decline by 10% and those of the product Z by 20%. Will there be change in your decision you have taken as per step (i)?

Question 72 A company which produces a single product has published accounts showing a loss for the year ending 30 September 2006. A summary of the relevant information is as follows: Sales (50,000 units) Less Material Labour Factory overheads: Variable Fixed Selling and administration overheads: Variable Fixed Net Loss Rs. 000 1,000 250 250 180 100 160 120 60

Following a meeting of the Board to consider alternative courses of action to restore profitability, three directors have put forward their recommendations. Production Director To introduce an incentive scheme for all staff and re-equip the production line with computer controlled machines.

It is estimated that labour cost would be reduced by 20% on the factory production line and 25% amongst other staff. Half of all variable overhead costs are staff costs. The selling price could be rescued by Rs. 2 per item which would increase sales volume by 10%. Marketing Director To cut the price of the product by 20% and undertake a Rs. 50,000 advertising campaign, paying a sales commission to sales staff of 2%. This will have a combined effect of increasing sales by 40%. Company Accountant To raise the price of the product by 15% and invest in computerized selling and administration systems. This will reduce variable selling and administrative overheads by 50% but will increase fixed selling and administrative overheads by Rs. 20,000 due to additional depreciation. Sales volume will fall by 20%. Required: 1. Evaluate all three unrelated recommendations showing the effect that each will have on the budgeted profit. 2. State, with reason, which plan you would recommend