CVP Solved QAs

1
COST VOLUME PROFIT ANALYSIS AND

RELEVANT COSTS
(MARGINAL COSTING AND DECISION- MAKING)
Cost Volume Profit Analysis

All the techniques that we study in Cost-Accounting, may be divided into three categories:
(i) techniques of cost ascertainment - example are unit costing, operating costing, contract
costing, process costing etc, (ii) techniques of planning and control - examples are standard
costing and budgetary control, and (iii) techniques of decision-making - examples are
marginal cost and differential costing. The point we should clearly understand at this stage
is that marginal costing a technique of decision-making. It helps the management in taking
routine decision.
We begin with the assumption that only two types of costs are there (i) variable costs and
(ii) fixed cost. (Later on we shall be discussing the other types of costs as well). Accordingly:
Sale = VC + FC + Profit
Sale – VC = FC + Profit = Contribution
The simplest possible decision that we take with the help of marginal costing is
determination of Break Even Point (BEP).
BEP can be explained in three different ways:

 BEP is that sales level at which total cost (VC + FC) is equal to sales amount.
 It is that sales level at which there is no profit no loss,
 It is that sales level at which the amount of fixed cost is equal to total contribution
BEP can be calculated either in units or in amount.
Fixed cost
B.E.P.(Units) = --------------------
Contribution per unit
Sales (units) for required Fixed Cost + Required Profit

amount of profit = ----------------------------------------
To calculate the BEP in terms of amount, we take the help of Profit Volume Ratio (PV Ratio).
PV ratio denotes contribution made by one rupee sales (it is generally expressed in
percentage; in that situation, it denotes contribution made by sales of Rs.100).
Contribution
P/V Ratio = ---------------------X 1000
Sales
Two important points about PV Ratio:

(i) PV Ratio denotes contribution made by Re.1 or Rs.100 sales. For example, if PV
ratio is 20%, it means for every Rs.100 sales, contribution is Rs.20 i.e. variable
cost is Rs.80. Another example, suppose PV ratio is 30%; it means for every
Rs.100 sales, contribution is Rs.30 i.e. variable cost is Rs.70.
(ii) For calculation of PV ratio, we may take any amount of sales; the only point to be
kept in mind is that we have to take corresponding contribution.
Fixed Cost
B.E.P.(Amount) = ---------------- X 100
P/V Ratio
Sales (Amount) for required Fixed Cost + Required Profit
amount of profit = ------------------------------------------ X 100
P/V Ratio
Margin of Safety: It is excess of actual sales over BEP. It may be calculated in units or in
amount.
Margin of Safety = Actual sales – B.E.P. sales

Margin of Safety Ratio Margin of Safety
(M. S. Ratio) = ------------------------- x 100
Total Sales
Relationship between Margin of Safety, PV ratio and Profit: Up to Breakeven point,

whatever contribution is there, that is contribution towards profit. After breakeven point
whatever contribution is there, that is contribution towards Profit. In other words we can
say that the contribution made by post-breakeven –sales is, i.e., the contribution made by
Margin of safety is contribution wards profit. On multiplying margin of safety with PV Ratio,
we get contribution made by margin of safety and this contribution is Profit. This
relationship can be stated as:
Margin of Safety x P. V. Ratio

Profit = --------------------------------------------
100
Profit in Relation to Sales:

Margin of safety x PV ratio
Profit = ----------------------------------------------------
100
Multiplying both the sides by ‘100/Sales’, we get:
Profit x 100 Margin of Safety x PV Ratio x 100/sales

---------------- = ------------------------------------------------------
Sales 100
Putting in simple way, we get
Profit M.S. Ratio x PV ratio

-------- x 100 = ----------------------------------
Sales 100
PV Ratio Revisited: We know that for calculation of PV ratio, we may take any amount of
sales; the only point to be kept in mind is that we have to take corresponding contribution.
For the calculation of PV ratio, we may take Margin of safety; we have to take contribution
made by margin of safety. Contribution made by margin of safety is Profit. Hence,
Profit
P. V. Ratio = ----------------------- X 100
Margin of Safety
INTRODUCTORY PROBLEMS
Q.No.1 Madhav & Co. sells five different types of ball pens with identical purchase cost and
selling prices. The co. is trying to find out possibility of opening another store, which will
have the following expenses and revenue:
Per Pen (Rs.)
Selling Price 30.00
Variable Cost 19.50
Salesmen commission 1.50
Total variable cost 21.00
Annual fixed expenses are: (Rs.)

Rent 60,000
Salaries 2,00,000
Advertising 80,000
Other fixed expenses 20,000
Total 3,60,000
Required:
(1) Calculate the annual breakeven point in units and in value. Also determine the profit
or loss if 35000 ball pens are sold.
(2) The sales commission is proposed to be discontinued, but instead a fixed amount of
Rs. 90,000 is to be incurred as fixed salaries. A reduction in selling price of 5% is also
proposed. What will be the breakeven point in units?
(3) It is proposed to pay 50 paisa per ball pen as further commission. The selling price is
also proposed to be increased by 5%. What would be the breakeven point in units?
(4) Refer to the original data. If the store’s manager were to be paid 30 paisa
commission on each ball pen sold in excess of breakeven point, what would be the store’s
net profit if 50000 ball pens were sold? (Note: Consider each part of question separately)
Answer
(1)
FC
3,60,000
BEP ( units) = ---------------------------- =
---------------- = 40,000
9
9
PV ratio = ------------- = 0.30
30
FC
3,60,000
BEP ( amount) = ------------------ =
---------------- = Rs.12L
PV ratio 0.30
Sales Rs.10,50,000
Contribution Rs.3,15,000 (30% of sales)
FC Rs.3,60,000
Loss Rs.45,000
(2)
FC 4,50,000
BEP ( units) = ---------------------------- = ------------------- = 50,000
Contribution per unit 28.50 – 19.50
(3)
FC 3,60,000
BEP ( Units) = -------------------------- = --------------------- = 36,000
Contribution per unit 31.50 – 21.50
(4)
BEP = 40,000 units
Actual sales = 50,000 units
Margin of safety = 10,000 Units
Profit = contribution made by MOS = 10000x 8.70 = Rs.87,000.
Q.No.2
The following figures are available from records of V Enterprises as at 31 st March:
2008 2009
Rs. Lakhs Rs. Lakhs
Sales 150 200
Profit 30 50
Calculate:
(a) The P.V. ratio and total fixed expenses.
(b) The breakeven level of sales
(c) Sales required earning a profit of Rs. 90 Lakhs.
(d) Profit or loss that would arise if the sales were Rs. 280 Lakhs.
Answer
(a)
Contribution 20
PV ratio ----------------- = -------- = 0.40
Sales 50
Total contribution on Rs.150L sales =

Rs.60L
Profit on Rs.150L sales =

Rs.30L
FC =
Rs.30L
(b)
FC 30L
BEP ( amount) = ------------------ = ---------------- = Rs.75L
PV ratio 0.40
(c)
FC + Desired profit 30L+90L
Sales for desired profit = ---------------------------- = --------------- = Rs.300L
PV ratio 0.40
(d)
Sales Rs.280L
Contribution 40% of Rs.280L = Rs.112L
FC Rs.30L
Profit Rs.82L
Q.No.3
A Japanese soft drink co. is planning to establish a subsidiary in India to produce mineral
water. Based on the estimated annual sales of 40,000 bottles of mineral water, cost studies
have produced the following estimates for the Indian subsidiary.
Total annual cost % of Total annual cost which

is variable
Material 2,10,000 100
Labour 1,50,000 80
Factory overheads 92,000 60

Administrative expenses 40,000 35
The Indian production will be sold by manufacturer’s representative who will receive a
commission of 8% of sale price. No portion of Japanese office expenses is to be allocated to
the Indian subsidiary.
(i) Compute the sale price bottle to enable the management to realize an estimated
10% profit on sale proceeds in India.
(ii) Calculate the breakeven point in sales value and also in number of bottles for Indian
subsidiary on the assumption that S.P. is Rs. 14 per bottle.
Answer
(i)
Commission + profit 18% of sales
Total cost (other than commission) Rs.4,92,000 (It is 82% of sales)
Sales 4,92,000/0.82 = Rs,6,00,000
SP Sales/Sales units =Rs.6,00,000/40,000=Rs.15
(ii)
FC = 150000x0.20 + 92000x0.40 +
40000x0.65 = Rs.92800
VC (other than commission) Rs.492000 – 92800 = Rs.3,99,200
VC (other than commission) per unit Rs.399200/40000 = 9.98
Commission per unit 8% of 14 = Rs.1.12
VC per unit 9.98 + 1.12 = 11.10
14 - 11.10
PV ratio -------------------- = 20.714
14
FC
92800
BEP ( amount) = --------------- =
------------------------ = Rs.4,48,006
PV ratio
0.20714
FC
92800
BEP (Units) = ----------------------------- =
-------------------- = 32000
14 – 11.10
Q.No.4
(i) Ascertain profit, when sale is Rs. 200000, F.C. Rs. 40000 & BEP Rs.160000.
(ii) Ascertain sales, when F.C. is Rs. 20000, profit Rs. 10000 and BEP Rs. 40000.
Answer
(i)
Margin of safety Rs.40,000
FC
BEP = -------------------------
PV ratio
40000
160000 = -------------------------
PV ratio
PV ratio = 25%
Profit Margin of safety x PV ratio = 40000x0.25 = Rs.10000
(ii)
FC
BEP = -----------------------
PV ratio
20000
40000 = ---------------------
PV ratio
PV ratio = 50%
Contribution = FC + Profit = Rs.30,000 (it is 50% of sales)
Sales = Rs.60,000
Q.No.5
A single product company sells its product at Rs. 60 per unit. In 2006, the co. operated at a
margin of safety of 40%. The fixed cost amounted to Rs. 360000 and the variable cost ratio
to sales was 80%.
In 2007, it is estimated that variable cost will go up by 10% and the fixed cost will increase
by 5%.
Find the selling price required in 2007 to earn the same P.V. ratio as in 2006.
Assume the same selling price of Rs. 60 per unit in 2007; find the number of units required
to be produced and sold to earn the same profit as in 2006.
Answer
2006
VC 80% of sales = Rs.48 per unit
PV ratio 20%
2007
VC per unit Rs.52.80 per unit
PV ratio 20%
Selling price Rs.52.80/0.80 = Rs.66
2006
BEP FC/PV ratio = Rs.3,60,000/0.20 = 18,00,000
( As MOS is 40%, BEP is 60% of sales)
Sales Rs.30,00,000
Margin of safety Rs.12,00,000
Profit Margin of Safety x PV ratio = 1200000 x 0.20 = Rs.2,40,000
2007
FC Rs.3,78,000
FC + desired profit Rs.3,78,000 + 2.40,000
Sales(units) = -------------------------------= --------------------------------
Contribution per unit 60 – 52.80
= 85,834
TRY YOUSELF Q.No.6

A company had incurred fixed expenses of Rs. 450000 with sales of Rs. 1500000 and
earned a profit of Rs. 300000 during the first half year. In the second half year, it suffered a
loss of Rs. 150000. Calculate:
(i) The profit Volume ratio, breakeven point and margin of safety for the first half year.
(ii) Sale value for the second half year assuming that unit variable cost, selling price and
fixed expense remaining unchanged during the second half year.
(iii) The breakeven point and margin of safety for the whole year.
Answer
(i) I Half – year

450000 +3,00,000
PV ratio = -------------------------------- = 50%
15,00,000
4,50,000
BEP(amount) =----------------------------- = Rs.9,00,000
0.50
Margin of safety Rs.1500,000 – Rs.9,00,000 = Rs.600,000
(ii) II Half - year

Contribution FC – Loss = 4,50,000 -150,000 = 3,00,000
PV ratio (50%)
Sales Rs.3,00,000/0.50 = Rs.6,00,000
(iii) Whole year

Sales 15,00,000 + 6,00,000 = Rs.21,00,000
FC 9,00,000
BEP(amount) 9,00,000
= --------------------------- = Rs.18,00,000
0.50
Margin of safety Rs.21,00,000 – Rs.18,00,000 = Rs.3,00,000
TRY YOURSELF Q.No.7 A company sells its product at Rs. 15 per unit. In a period if it
produces and sells 8000 units it incurs a loss of Rs. 5 per unit. If the volume is raised to
20000 units, it earns a profit of Rs. 4 per unit. Calculate BEP in terms of rupees as well as in
units.
Answer
Sales Profit Loss Cost
8,000x15 8,000 x 5 1,60,000
= 1,20,000 = 40,000 (Sales + Loss)
20,000x15 20,000 x 4 2,20,000
= 3,00,000 = 80,000 (Sales – Profit)
Change in Sales :
Rs.1,80,000
Change in cost = VC
= Rs.60,000
VC is 1/3 of Sales
PV ratio is 2/3 of
sales
SP = 15 Unit VC =
Rs.5 Unit
Contribution Rs.10
Calculation of BEP
Sales (8000x15) Rs.1,20,000
Total cost Rs.1,60,000
VC = 1/3 of sales Rs.40,000
FC Rs.120000
1,20,000
BEP (amount) = --------------------- =
Rs.1,80,000
2/3
1,20,000
BEP (units) = ----------------------- = 12000
units.
10
TRY YOURSELF : Q.No.8

Two competing companies ABC Ltd. and XYZ Ltd. produce and sell the same type of product in
the same market. For the year ended March 2005, their forecasted profit and loss accounts are as
follows: (Rs)
ABC Ltd. XYZ Ltd.
Rs. Rs. Rs. Rs.
Sales 2,50,000 2,50,000
Less: Variable Costs of Sales 2,00,000 1,50,000
Fixed Costs 25,000 2,25,000 75,000 2,25,000
Forecasted Net Profit before tax 25,000 25,000
You are required to compute:-
(1) P/V ratio.
(2) Bread-even sales volume.
You are also required to state which company is likely to earn greater profits in conditions
of (a) Low demand, and (b) high demand.
[Adapted CA FINAL NOV.96]
Answer :
(1)
ABC XYZ
P. V. Ratio:
50,000 100,000
Contribution/sales = -------------- = 0.20 = ---------------- = 0.40
2,50,000 2,50,000
(2)
ABC XYZ
BE sales volume : 25,000 75,000
= ---------- = 125,000 = -------- = 1,87,500
FC/PV ratio 0.20 0.40
(3) In case of low demand, ABC is likely to earn greater profit as its FC is lower. In case of
high demand, XYZ is likely to earn greater profit as its VC/sales is lower.
Q.No.9
Operating leverage (contribution/ profit) of an organization has been increased from 4 last
year to 5 during the current year. Fixed overheads have increased by 5% during the current
year compared to last year. Sales have also increased by 8% over last year. Assess to what
the profit of current year is likely to change over last year. Trace the reasons for such
change.
Answer
Last year : This year
Let contribution = Rs.100 FC = Rs.78.50
4 =100/(100-FC)
5 = Contribution / (Contribution – 78.50)
FC = 75
Contribution = 98.4375
Profit = 25
Profit = 98.4375 – 78.75 = 19.6875
% change (Decline) in profit = [(25 –
19.6875) / 25 ] x 100 = 21.25
Reasons for Decline in Profit:

(i) Increase in FC and
(ii) Decline in PV ratio.
PV ratio declines for either or both of the following two reasons

(i) Increase in Unit VC
(ii) Decrease in SP.
TRY YOURSELF Q. No.10 The following information is given by Z Ltd:

Margin of safety Rs.1,87,500
Total cost Rs.1,93,750
Margin of safety 7500 units
Breakeven sales 2500 units
Calculate profit, PV ratio, Breakeven sales in rupees, and fixed cost. (CA FINAL Nov. 2010)
Answer :
SP = Rs.1,87,500 / 7,500 units = Rs.25
Breakeven sales in Rupees: 25x2,500 = Rs. 62,500
Total sales = 10,000units @ Rs.25 i.e., Rs.2,50,000
Total profit = total sales – total cost = 2,50,000 – 193750 = Rs.56,250
P V Ratio = Profit/Margin of Safety = 56250/187500 = 30%
B E Sales = Fixed Cost/PV Ratio
62500 = Fixed cost /0.30
FC = Rs.18,750
Q.NO.11
A Ltd makes and sells a single product. The trading results for year 2007 ate given below: (Rs.
Thousands)
Sales 3,000
Material 900
Labour 600
Overheads 900
Total cost 2400
For the year 2008, the following are expected:

 Reduction in sale price by 10%
 Increase in quantity sold : 50%
 Inflation of material cost : 8%
 Price inflation in variable overhead by 6%
 Reduction in fixed overheads expenses by 25%
It is also known that :

 In 2006 overhead expenditure totaled Rs.8,00,000
 Total overhead cost inflation for 2007 has been 5% more than 2006
 Production and sales volumes have been 25% higher in 2007 than in 2006
High and low method is used by the company to estimate overhead expenditure.
You are required to:
(i) Prepare a statement showing the estimated trading results for 2008.
(ii) Calculate the Breakeven points for 2007 and 2008.
(iii) Comment on the BEPs and profits for the years 2007 and 2008.
(CA FINAL May 2008)
Answer
Working note :
Let VO in 2006 = X Let FO in 2006 = Y
Year 2006 X + Y = 800 thousands Year 2007 1.05(1.25X + Y) = 900 thousands
Solving the equations, we find : X = Rs.228.57 thousands
2006 2007 2008
VO 228.57 228.57(1.05)(1.25) =300 300(1.06)(1.50) =477
FO 571.43 571.53(1.05) = 600 450
Total 800 900 927
(i) Statement showing estimated trading results in 2008
Rs. thousands
Sales 3000thou.x1.50x0.90 4050
Costs:
Direct Materials 900thou.x1.50x1.08 1458
Direct labour 600thou.x1.50 900
Variable overheads 477
Total VC 2835
Contribution 1215
FC 450
Profit 765
(ii)
Calculation of BEPs for 2007 and 2008
2007 2008
Contribution 1200 1215
Sales 3000 4050
P.V. Ratio 40% 30%
FC 600 450
600 450
BEP -------------------x100 -------------------x100
40 30
= 1500thou. =1500thou.
Profit 600 765
(iii)
In the year 2008, the BEP has remained unchanged as both the FC and PV ratio have
declined by the same %.
In spite of (i) decline in selling price and (ii) increase in variable overheads and material
prices, profit has increased because of decline in overheads and increase in sales quantity.
Q.No.12
The following information of a company is available for the year 2006:
Rs.
Sales (200 units) 40,000
Raw material 20,000
Direct Wages 6,000
Variable and fixed overheads 10,000
Profit 4,000
In the year 2007, wages will increase by 50% and fixed cost will be reduced by Rs.600. If
300 units are sold in 2007, the total fixed and variable overhead will be Rs.11,400. How
many units must be sold in 2007, so that the same amount of profit per unit as in year 2006
may be earned? (CA FINAL May 2007)
Answer
Working note:
Let V.O. in 2006 = X Let FO in 2007 = Y
Year 2006 X + Y = 10000
Year 2007 1.50X + Y - 600 = 11400
X = 4000 Y = 6000
VO in 2007: 6000
FO in 2007: 5400
Calculation of PV ratio for the year 2007
Sales 60,000
Material 30,000
wages 13,500
VO 6,000
Total VC 49,500
Contribution 10,500
Contribution per unit Rs.35
Let number of units sold for same amount of profit per unit = Z
5400 + 20Z
Z = -----------------------------
35
Z = 360 units
Q.No.13
Processed Food Ltd., which had recently launched a new product, after initial estimation of
demand and costs, would like to have a review through fresh projections based on available
information on actual production, costs and revenues. The product is sold in one Kg. home
packs. Performance, pertaining to the previous two quarters, detailed below, can be taken
as representing pattern of costs and operations that can be projected to the future. There
were no inventories at the end of each quarter. Tax Rate: 40 per cent.
First Quarter Second Quarter
Sales
62,000 packs at Rs.160 99,20,000 ------
82,000 packs at Rs.160 ------- 1,31,20,000
Cost of goods sold 77,20,000 89,20,000
Gross profit 22,00,000 42,00,000
Selling and Administration 30.40,000 34,40,000
Profit before Tax -8,40,000 7,60,000
Tax ------ 3,04,000
Profit after Tax -8,40,000 4,56,000
(a) What is the Break-even volume in terms of quarterly sales of home packs?
(b) On an average investment of Rs. 10,00,000 an annual after-tax return of 48 per cent is
expected. What should be the annual volume of sales and the annual sales revenue for
getting this return?
(c) The Marketing Manager of Processed Foods Ltd., expected a 20 per cent increase in sales
volumes over the second quarter, if a reduction of Rs. 10 per pack in price is coupled with
an advertisement outlay of Rs. 6,00,000. Should this proposal be is coupled with an
advertisement outlay of Rs. 6,00,000. Should this proposal be accepted?
(Adapted ICWA, Final, Dec. 1989)
Answer (a)
Sales Cost
Rs.1,31,20,000 Rs.89,20,000 + 34,40,000 = 1,23,60,000
Rs.99,20,000 Rs.77,20,000 + 30,40,000 = 1,07,60,000
Change in sales Rs.32,00,000 Change in cost = VC = Rs.16,00,000
VC = 50% of sales
PV ratio = 50%
SP = Rs.160
VC /unit = Rs.80
Contribution per unit = Rs.80
Calculation of FC per Quarter:
Total cost of 62000 units :
1,07,60,000
VC of 62000 units :62000x80 :
49,60,000
FC :
58,00,000
58,00,000
BEP (Units) = ---------------- = Sale of 72,500 units per quarter
80
(b) Expected return: 48% post tax

100 100
Gross Return = 48 x------ -------------- = 48 x ------------ = 80%
100 – Tax rate 100 – 40
Expected return on Rs. 10L investment = Rs.8,00,000
Annual Fixed cost : Rs.58,00,000 x 4 = Rs.2,32,00,000

2,32,00,000 + 8,00,000
Annual sale units for desired return =--------------------------------=3,00,000 units
80
2,32,00,000+8,00,000
Annual sale amount for desired return= ---------------------------------= Rs.48,00,00,000
0.50
(c) New SP = Rs.150
New Sales quantity per quarter = 82,000 + 20% = 98,400 units
Sales per quarter : 98,400 x 150 = Rs.1,47,60,000
VC : 98400 x 80 = Rs.78,72,000
Statement showing quarterly profit under the proposal
Sales 1,47,60,000
VC 78,72,000
FC 58,00,000
Special advertising 6,00,000
Total cost 1,42,72,000
Profit before tax 4,88,000
Recommendation: The proposal may not be accepted as it results in reduced amount of

pre-tax quarterly profit. (Pre-tax profit without this proposal is Rs.7,60,000 per quarter)
Q.No.14 A company has an opening stock of 6000 units of output. The production planned
for the current period is 24000 units and expected sales for the current period amount to
28000 units. The selling price per unit of output is Rs. 10. V.C. per unit is expected to be Rs.
6 while it was Rs. 5 per unit during previous period. F.C. for current period is Rs. 86000.
BEP? Assume FIFO [CA FINAL Nov. 1987]
Answer
BEP is that minimum sales level at which total fixed cost is equal to total contribution. Hence,
for breakeven, the total contribution should be Rs.86,000.
Sales Contribution
Sale of opening stock 30,000
Sale out of current production 56,000(Balancing figure)
Total Rs.86,000
Contribution made by sale of current production is Rs.4 per unit. Hence 14000 units should
be sold out of current production to obtain contribution of Rs.56,000
Hence BEP = sale of 20,000 units (6000 units out of Opening Stock and 14000 units out of
current production).
TRY YOURSELF Q.No.15
A pharmaceutical company produces formulations having a shelf life of one year. The
company has an opening stock of 30,000 boxes on 1 st January, 2005 and expected to
produce 1,30,000 boxes as was in just ended year of 2004. Expected sale would be
1,50,000 boxes. Costing department has worked out escalation in cost by 25% in case of
variable and 10% in case of fixed. Fixed cost for the year 2004 is Rs.40 per box. New price
announced for 2005 is Rs.100 per box. Variable cost of opening stock is Rs.40 per box. You
are required to compute Breakeven volume for the year 2005. (CA FINAL NOV. 2005)
Answer
Assumption: FIFO
VC per unit (Opening Stock) : Rs.40
VC per unit (current production) : Rs.50
FC 1,30,000 x 40 x 1.10 = Rs.57,20,000
SP = Rs.100
Breakeven point is that sales level at which total contribution is equal to Rs.57,20,000(fixed cost)
Contribution @ Rs60 from sale of 30000 units of opening Rs.18,00,000
stock
Contribution @ Rs50 from the sale of 78400 units out of Rs.39,20,000
current production (Balancing figure)
Total Rs.57,20,000
BEP is sales of 108400 units (including 30000 units of Opening stock)

Q.No.16 A distribution agency receives 10 per cent commission on all sales affected by it.
Its establishment cost is Rs. 18,000 p.a. and other fixed expenses amount to Rs. 16,500 p.a.
The cost of after sale service is 3 per cent of sales which is borne by the agency. Causal
labour is employed at Rs. 5 per day handling the forwarding work. This works out to one
man day labour for every Rs. 5,000 sales. BEP?
Answer
Note: There is no mention of sale units in the question. Hence, we calculate the BEP in terms of
amount. For this purpose we require PV ratio. For PV ratio we can take any amount of sales (we
have to take corresponding amount of contribution). We take the sales of Rs.5000 as the basis of
our calculation as it is given in the question.
Sales Rs.5,000
VC 150 + 5 + 4,500 = 4,655
Contribution 345
PV ratio 345/5000 = 0.069

FC 16,500 + 18,000 = 34,500
34,500
BEP ( sales amount) = -------------------- = Rs.5,00,000
0.069
Q.No.17
X produces a range of products with an average contribution / sales ratio of 30 per cent on
current prices. Currently, fixed costs are Rs. 1,50,000 per year and estimates are being
prepared for the next budget period for which the following forecasts have been selected.
Sale at Current Prices Probability
Rs. 4,00,000 0.2
Rs .7,00,000 0.7
Rs. 9,00,000 0.1
Inflation rate for the Next budget period Probability

12% 0.3
6% 0.5
2% 0.2
The inflation rate is expected to affect all variable costs and 60 per cent of the fixed costs.
The company anticipates being able to raise selling prices in line with inflation without
losing sales.
(a) Prepare a table of all possible results and calculate the probability of at least breaking
even:
(b) Calculate the probability of making at least a Rs. 70,000 profit.
[CIMA, London, May 1989]
Answer
Possible results and their respective probabilities
Sales FC Contribution Profit/ Probabilities
(30% of Sales) Loss
4,48,000 60000+90000(1.12) 1,34,400 (26400) 0.20x0.30 =0.06
4,24,000 60000+90000(1.06) 1,27,200 (28200) 0.20x0.50 =0.10
4,08,000 60000+90000(1.02) 1,22,400 (29400) 0.20x0.20 =0.04
7,84,000 60000+90000(1.12) 2,35,200 74,400 0.70x0.30 =0.21
7,42,000 60000+90000(1.06) 2,22,600 67,200 0.70x0.50 =0.35
7,14,000 60000+90000(1.02) 2,14,200 62,400 0.70x0.20 =0.14
10,08,000 60000+90000(1.12) 3,02,400 1,41,600 0.10x0.30 =0.03
9,54,000 60000+90000(1.06) 2,86,200 1,30,800 0.10x0.50 =0.05
9,18,000 60000+90000(1.02) 2,75,400 1,23,600 0.10x0.20 =0.02
(a) Probability of at least Breakeven i.e. probability of no loss :

= 0.21 + 0.35 + 0.14 + 0.03 + 0.05 + 0.2 = 0.80
Alternative way: Probability of loss = 0.06 + 0.10 + 0.04 = 0.20
Probability of no loss i.e. Probability of at least Breakeven : 1 - 0.20 = 0.80
(b) Probability of at least 70,000 profit = 0.21+0.03+0.05 +0.02 = 0.31
Q.No.18
1 year II year
Sales Rs. 2,00,000 Decrease in sales price and Decrease in fixed cost.
M/s ratio 25% 40%
P/V ratio 33.50% 30%
Find sales, profit, fixed cost and BEP in II year
Answer
I year
Sales 2,00,000
PV ratio 33.50%
VC 66.50% of sales
VC 2,00,000 x 0.665 = 1,33,000
Assumption: No change in total VC

II year
VC 1,33,000
PV ratio 0.30%
Sales 1,33,000 x 1/(1- 0.30) = 1,90,000
Margin of safety 40% of sales i.e. 76,000
BEP Rs.1,90,000 – Rs.76,000 = Rs.1,14,000
FC = BEP x PV ratio
(FC is contribution made by BEP sales) 1,14,000 x 0.30 = 34,200
Profit = M. of S. x PV ratio
(Profit is contribution made by Margin of safety) 76,000 x 0.30 = 22,800
Q. No. 19
PV ratio of a business is 30 per cent, BEP is 40 per cent of the capacity, Capital turnover is
2.5 and profit is 15 per cent on capital employed. At what level (per cent of the capacity) the
business is operating? (C. Turnover= Sales / C.E.)
Answer
Let sales = Rs. x Contribution = Rs.0.30x
Sales
-------- = 2.50
CE
x
-------- = 2.50
CE
CE = 0.40x
Profit is 15% of CE.
Profit = 0.15 x 0.40x = 0.06x
FC = contribution minus profit = 0.30x – 0.06x = 0.24x
BEP = FC/PV ratio = 0.24x/0.30 = 0.80x
BEP = 0.80x = 40% capacity
x = 50% capacity
The business is running at 50% of its total capacity.
Q. No. 20
If M.S. Ratio is changed from 30 per cent to 60 per cent how will the profitability be
affected, taking 20 per cent PV Ratio?
Teaching Note
Key factor means the limiting factor, i.e., the factor that limits the size of business. In every
business, some key factor is there. Sometimes it is finance; sometimes it is labour or
material, sometimes sales. Profitability means profit in relation to key factor.
It no key factor given in question, we assume sales as key factor. For example, in this
question we shall calculate profitability as profit in relation to sales.
Profitability (Profit in relation to sales) changes in the same ratio, in which there is change
in M.S. Ratio, provided P.V. Ratio remains unchanged.
Answer
Profit
Profitability = --------- x 100 = MS ratio x PV ratio/100
Sales
M. S. Ratio Profitability
30% MS ratio x PV ratio/100 = 30x20/100 = 6%
60% MS ratio x PV ratio/100 = 60x20/100 = 12%
As M.S. ratio increased from 30% to 60%, Profitability increased from 6% to 12%.

At the budgeted activity of 75 per cent of total capacity, a company earns a PV-ratio of 25
per cent and profit of 10 per cent on sales. During the course of the year, they had to reduce
the price by 10 per cent to recession. The company was able to produce and sell equivalent
to 50 per cent of its total capacity. The sales volume at this level was Rs. 13,50,000 at the
reduced price of Rs. 9. Due to reduction in production the actual variable cost went up by 2
per cent of the budget. Find PV ratio and BEP (in value) in changed situation?
[CA (F) (Old Regulations)]
Answer
Budgeted sales = 13,50,000 x 10/9 x 75/50 = Rs.22,50,000
Budgeted Contribution : 0.25 x 22,50,000
Budgeted profit : 0.10 x 22,50,000
Budgeted FC : 0.15 x 22,50,000 = Rs.3,37,500
(Assumption : No change in FC)
Budgeted Actual
SP 10 9
Unit VC 7.50 7.65
PV ratio 0.25 1.35
= ----------- = 0.15
9
BEP in changed Scenario = 3,37500/0.15 = Rs.22,50,000
TRY YOURSELF Q.No.22 Sales of two products are Rs. 1,20,000 and Rs. 1,60,000 with
PV ratios of 25 per cent and 20 per cent respectively. The fixed overheads of the
organization are Rs. 78,000. To avoid loss, which is being incurred at present, it is proposed
to increase sales as capacities are sufficient. Calculate the percentage of increase required
of both lines.
Answer
Total contribution at present (1,20,000).(0.25) + (1,60,000).(0.20)
= Rs.62,000
FC Rs.78000
Loss Rs.16000
To avoid this loss, we should have additional contribution of Rs.16000. Let’s increase the
sales of each of the two products by y% to avoid the loss.
(120000.y/100).(0.25) + (160000.y/100).(0.20) = 16,000
y = 25.80%
Q.No.23 A company has two plants, both producing homogeneous item. From the following
calculate the BEP for the company as a whole:
I II
Fixed Cost Rs. 40,000 Rs.30,000
V.C. per unit Rs.5 Rs.6
Selling Price Rs.10 Rs.10
Capacity 10,000 units 15,000 units
Teaching Note
Before attempting this question, we should understand three points:
(i) In any question of decision-making, we may assume shut down but we should
not assume closing down. Shut down means shut down temporarily. In case of
shut down, production facilities continue to exist but we do not use them. Fixed
costs are continued to be incurred. Closing down means closing down
permanently. In this case production facilities cease to exist, i.e., staff services are
terminated, Plant and Machinery are disposed off, premises being vacated. Fixed
cost are stopped to be incurred in case of closing down.
(ii) If we are given two or more plants owned by a company, we should not think of
merger unless clearly given in the question. For example, we are given in this
question that there are two plants, so we assume that they are working
separately. These are not be merged. Without merger the plants can operate at
different capacity levels, for example one may work at 20 per cent capacity level
and other may work at 40 per cent capacity level, After merger, the merged plant
may operate only at the one capacity level.
(iii) There are three situations, when a firm will have multiple break even points:
(a) if V.C. per unit is not the same for all level of production,
(b) if selling price per unit is not the same for all levels of sales, and, (c) if there
are different amounts of fixed cost for different possible levels of output. In these
situations of multiple B.E. points, we are supposed to calculate breakeven point
at lowest operation level.
Answer
We have to find the BEP for the company as a whole. FC for the company as a whole is
Rs.70000. It means we have production capacities in both the plants; we may produce
either from I plant or from II plant. We shall give priority to I plant as the though the two
plants are producing the same product, unit variable cost is lower in case of I.
For the company as a whole:
FC Rs.70,000
Unit variable cost:
First 10,000 units Rs.5
Next 15,000 units Rs.6
BEP is the minimum sales level at which total contribution is Rs.70,000.
Contribution from first 10000 units @ Rs. 5 /unit = Rs.50,000
Contribution from next 5000 units @ Rs.4/ unit = Rs.20,000
BEP for the company as a whole: 15,000 units (including 10,000 units from the first plant)
TRY YOURSELF Q.No.24: Ever forward Ltd. is manufacturing and selling two
products: Splash and Flash at selling prices of Rs.3 and Rs.4 respectively. The following
sales strategy has been outlined for the year 2012:
1. To meet the competition, the selling price of Splash will be reduced by 20% and that of
Flash by 12.50%
2. Sales planned for the year: Rs.7.20L in case of Splash and Rs.3.50L in case of Flash.
3. Breakeven is planned at 60% of total sales of each product
4. Profit for the year is planned at Rs.69120 and Rs.17500 in case of Splash and Flash
respectively. Present fixed costs amount to Rs. 108000 in case of Splash and Rs.27000 in
case of Flash; these would be reduced.
Find (i) BEPs (Units) for each of the two products (ii) number of units of each of the two
products to be sold during the year.
Find the proposed reduction in fixed cost of each of the two products.
(Adapted CA Final)
Answer :
Sales amt. SP Sales Units BEP Amt. BEP units
Splash 7,20,000 2.40 3,00,000 720000 x0.60 =432000 1,80,000
Flash 3,50,000 3.50 1,00,000 350000x0.60 =210000 60,000
M. of S. Profit PV ratio* BEP(Rs.) FC= BEP X PV ratio

Splash 2,88,000 69120 0.24 4,32,000 432000 x 0.24 = 1,03,680
Flash 1,40,000 17500 0.125 2,10,000 210000 x0.125 = 26,250
* Profit /M of S = PV ratio
Reduction in FC Splash : 108000 -103680 = 4320
Flash : 27000 – 26250 = 750
Q.No.25: A company has developed a new product. The sales volume of the new product
was estimated to be between 15,000 and 20,000 units per month at a price of Rs.20 per
unit. Alternatively, if the selling price is reduced to Rs.18, the sales volume will be between
24,000 and 36,000 units per month. If the production is maintained below 20,000 units per
month, the variable manufacturing cost will be Rs.16.50 per unit and fixed cost Rs.48,500
per month. If the production exceeds 20,000 units per month, the variable manufacturing
cost will be reduced to Rs.15.50 per unit but the fixed cost will increase to Rs.64,500 per
month. The company paid Rs.40,000 as fee for the market survey and in addition incurred a
cost of Rs.60,000 for developing the product.
In the event of taking up this new line of business, it will be necessary to use the building
space, which has been let out for a rental of Rs.5,600 per month.
You are required to analyze the Potential profitability proposal of the company at different
levels of output and make suitable recommendation relating to the price and volume of
output to be set. (CA Final Nov. 2002)
Answer:
Statement showing Total Profit, BE point and Margin of Safety at different levels (month wise
calculations)
Sales Units 15000 20000 24000 36000
Sales 15000 x20 20000x20 24000x18 36000x18
VC 15000 x 16.50 20000x16.50 24000x15.50 36000x15.5
Contribution 15000 x 3.50 20000x3.50 24000x2.50 36000x2.5
FC 48500 +5600 48500+5600 64500+5600 64500+5600
Profit (1600) 15900 (10100) 19900
54100 70100
BEP (units) = ---------------- = ----------------------
15458 --- = 28040
3.50 2.50
Margin of safety (458) 4,542 (4040) 7960
Analysis
(i) BEP is 15458 units.
Sale between 15458 – 20000 will result in profit.
If sale price fixed is Rs.18, BEP is 28040 units.

Sale between 28041 – 36000 will result in profit.
(ii) Out of the two prices, the price of Rs.20 is less risky. If this price is fixed,
maximum loss may be Rs.1600. At the other price of Rs.18, the corresponding
amount is loss of Rs.10100.
(iii) Maximum profit will be there if the price is fixed at Rs.18 and the sale level of
36000 units is achieved.
(iv) At Rs.20 price, the maximum profit is Rs.15900. At other price this profit can be
achieved if the sales level is: (64500+5600+15900)/2.50 i.e. 34400 units. If the
sale level is expected to cross 34400 units, the selling price may be fixed at
reduced level of Rs.18; otherwise it may be kept at Rs.20.
TRY YOURSELF Q.No.26 Carpets Associates have just developed a new carpet design
with the brand ‘Decor’. Sales demand is very difficult to predict but it very much depends
upon selling price. At the selling price of Rs.30 per square meter, the annual demand is
estimated to be between 50,000 and 90,000 square meters. At a price of Rs.40 per sq.
meter, annual sales demand would be between 34,000 and 44,000 sq. meters. As regards
the costs, at a production volumes of 45,000 sq. meters or less per annum, the fixed costs
would be Rs.2,12,000 p.a. and the variable cost would be Rs.32 per square meter. At higher
production levels, the fixed cost would increase to Rs.3,08,000 but the variable cost would
be Rs.24 per square meter.
The production of the new carpet will have to be supervised by a foreman. In order to find
time for the supervision, he has to give up work in another department, for which he is paid
a salary of Rs.1000 per month. The production of ‘Decor’ would be undertaken in the
division of factory which is at present rented out for Rs.10,000 per quarter.
You are required to calculate the margin of safety as a % of expected sales volume at both
maximum and minimum sales volume for the two price levels. What should be the selling
price per square meter? (CA Final)
Answer
Statement showing Total Profit, BE point and Margin of Safety at different levels (Annual
Calculations)
Sales Units 50,000 90,000 34,000 44,000
VC per unit 24 24 32 32
Contribution/unit 6 6 8 8
Total contribution 3,00,000 5,40,000 2,72,000 3,52,000
Total FC 3,60,000 3,60,000 2,64,000 2,64,000
Profit /Loss Loss 60,000 Profit 1,80,000 Profit Rs.8000 Profit Rs.88,000
3,60,000 2,64,000
BEP (units) = -----------------------
--------------------- -- = 33,000 unit
= 60,000 8
6
Margin of safety - 10,000 Units 30,000 units 1000 units 11,000 units
Margin of safety
as a % of (-10000/50000) (30000/90000) (1000/34000) (11,000/44000)
expected sales x100 = -20% x100 = 33.33% x100 = 2.94% x100 = 25%
SP Maximum Loss Maximum Profit

40 No loss Rs.88000
30 60000 Rs.180000
Maximum profit that can be earned (without taking risk) is Rs.88,000. This is possible if the
selling price is Rs.40.
This amount of profit can also be earned at selling price of Rs.30 if the sales quantity is :
(360000 + 88000)/6 i.e. 74667 units.
SP of Rs.30 may be fixed if demand is likely to be 74,667 or more; otherwise it may be fixed
at Rs.40.
MULTIPLE PRODUCTS
Teaching Note: BEP of multiple product firms:

(i) If to be calculated in units, find weighted average contribution per unit. Weights
being ratio between units sold.
(ii) If to be calculated in amount, find weighted average of P.V. Ratio. Weights being
ratio between amounts of sales.
Q.No.27 Hetax manufacturers two products- tape recorders and electronic calculators- and
sells them nationally. The Hewtax management is very pleased with the company’s
performance for the current fiscal year. Projected sales through December 31,2007, indicate
that 70,000 tape recorders and 140,000 electronic calculators will be sold this year. The
projected earnings statement, which appears below shows that Hewtax will exceed its
earnings goal of 9 per cent on sales after taxes.
Hewtax Electronics Projected earnings Statement for the year ended December 31, 2007:
Tape Per unit Electronic Per Unit Total
Recorder Tape Rec. Calculator E. Cal Amount
Amount Amount
(000) Rs. (000) Rs. (000)
Sales Rs. 1050 15.00 Rs. 3150 22.50 Rs. 4,200
Production costs:
Material 280 4.00 630 4.50 910.00
Direct Labour 140 2.00 420 3.00 560.00
Variable overhead 140 2.00 280 2.00 420.00
Fixed overheads 70 1.00 210 1.50 280.00
Total production Costs 630 9.00 1540 11.00 2170.00
Gross Margin Rs.420 Rs. 6.00 Rs. 1610 11.50 2030.00
Fixed Sell. & adm. Over. 1040
Net income before tax 990.00
Income taxes (55%) 544.50
Net Income Rs.445.50
The tape recorder business has been fairly stable for the last few years and the company
does not intend to change the tape recorder price. However, the competition among
manufacturers of electronic calculators has been increasing. Hewtax’s calculators have
been very popular with consumers. In order to sustain that interest in their calculators and
to meet the price reductions expected from competitors, management has decided to
reduce the wholesale price of its calculators from 22.50 to 20.00 per unit effective January
1, 2008. At the same time the company plans to spend an additional Rs. 57,000 on
advertising during fiscal year 2008. As a consequence of these actions, management
estimates that 80 per cent of its total revenue will be derived from calculators sales as
compared to 75 per cent in 2007.
The total fixed production overhead costs will not change in 2008, nor will the variable
overhead cost rates (applied on a direct labour hour base.) However, the cost of materials
and direct labour is expected to change. The cost of solid state electronic components will
be cheaper in 2008. Hewtax estimates that material costs will drop 10 per cent for the tape
recorder and 20 per cent for the calculators in 2008. However, direct labour costs for both
products will increase 10 per cent in the coming year.
Required A. How many tape recorder and electronic calculator units did Hewtax Electronic
have to sell in 2007 to break even?
Required B. What value of sales is required if Hewtax electronics is to earn a profit in 2008
equal to 9 per cent on sales after taxes? [CMA U.S.A]
Answer
2007
TR EC
Unit contribution
(SP - Material – Labour - 15 – 4 – 2 – 2 = 7 22.50 – 4.50 – 3 – 2 = 13
VO)
Units sold 70,000 1,40,000
Ratio between units sold 1 2
Weighted average (7x1) + (13x2)
contribution/unit -----------------------
= Rs.11
3
FC 280 thousands +
1040 thousands
= 1320 thousands
BEP (Units) = FC/ unit contribution 13,20,000/11 =
1,20,000 units
i.e. 40,000 units of
T and 80,000 units
of E.
2008
T E
Unit contribution
(SP - Material – Labour - 15 – 3.60 – 2.20 – 2 = 7.20 20 – 3.60 – 3.30 – 2 = 11.10
VO)
SP 15 20
PV ratio 7.20/15 = 0.48 11.10/20 = 0.555
Ratio between sales 0.20 0.80
amounts
Weighted average PV ratio (0.48x0.20) + (0.555x0.80)
= 0.54
FC 280000 + 1040000
+57000= 1377000
Required return 9% post tax return on
sales; Tax rate is 55%
20% pre-tax return on
sales
13,77,000 +
Sales for required return 0.20(sales)
Sales =
-----------------------------------
-----
0.54
Sales = Rs.40,50,000
i.e. Rs.810000 sales of T
and Rs.32,40,000 sales of E
TRY YOURSELF Q.No.28: ACE retails two products – a standard and deluxe ball pen. The
budgeted income statement is as under:
Standard Deluxe Total
Sales (Units) 1,50,000 50,000 2,00,000
Rs. Rs. Rs.
Sales
@Rs.20 per unit 30,00,000
@Rs.30per unit 15,00,000 45,00,000
VC
@Rs.14 per unit 21,00,000
@Rs.18 per unit 9,00,000 30,00,000
Contribution 9,00,000 6,00,000 15,00,000
FC 12,00,000
Profit 3,00,000
(i) Calculate the Breakeven point in units assuming that the planned sales mix is
maintained.
(ii) Calculate the BEP in units (i) if only standard is sold (ii) if only deluxe is sold.
(iii) Suppose 2,00,000 units are sold but only 20000 units are of deluxe quality.
Calculate the profit. Calculate the BEPs if these relationships persist in the next
accounting period. Compare your answer with the original plan and answer in
requirement (iii). What is your major finding? (CA Final)
Answer:
Standard Deluxe
Contribution per unit 20 - 14 = 6 30 – 18 = 12
Sales quality 1,50,000 50,000
Sales quantity ratio = 3:1
(i) Weighted average contribution per unit :

(6 x 3) + (12 x 1)
= ------------------------------- = 7.50
4
BEP = FC/ contribution per unit = 12,00,000/ 7.50 = 1,60,000 units
(ii) BEP ( only standard sold) = 12,00,000/6 = 2,00,000 units
BEP ( only Deluxe sold) = 12,00,000/12 = 1,00,000 units
(iii)
Calculation of BEP in units
Weighted average contribution per unit :
(6 x 9) + (12 x 1)
= ------------------------------- = 6.60
10
BEP (Units) = FC/ contribution per unit = 12,00,000/ 6.60 = 1,81,818 units (say 181820
units)
Calculation of BEP in amount
Standard Deluxe
PV ratio 6/20 = 0.30 12/30 = 0.40
Amount of sales (180000 x 20) = 36,00,000 (20000 x 30) = 6,00,000
Sales Amount ratio = 6:1
Weighted average contribution PV ratio :

(0.30 x 6) + (0.40 x 1)
= ---------------------------------- = 0.314285714
7
BEP (amount) = FC/ PV ratio = 12,00,000/ 0.314285714
= Rs.38,18,182 ( say Rs.38,18,220)
Profit Statement (new sales mix)

Sale (180000 x 20) + (20000x 20) 42,00,000
VC (180000 x 14) +(20000x 18) 28,80,000
FC 12,00,000
Profit 1,20,000
Statement showing Comparison of original and new mix
Original New
BEP (amount) 36,00,000 38,18,220
BEP (units) 120000 +40000 163638 + 18182
Profit Rs.3,00,000* Rs.1,20,000
*Given in the question.
The major finding is that the new mix has resulted in increased risk (because of increase in
BEP) and reduced profit. Hence, original mix is better than new.
Q.No.29 Anuradha Enterprises manufactures and sells four products, details given below:
Products Monthly Sales (Rs.) Variable cost as % of sales (Rs.)
A 20,000 60
B 25,000 68
C 10,000 80
D 5,000 40
Total 60,000
The fixed cost is Rs.14,700 per month. The management of the company is interested in
knowing the sales volume at which it will start earning profit. Please help them.
(CA FINAL May 1999)
Answer
Calculation of weighted average PV ratio
PV ratio (X) Sales (W) XW
A 40 20thou. 800 thou.
B 32 25thou. 800 thou.
C 20 10thou. 200 thou.
D 60 5thou. 300 thou.
Total 60thou. 2100thous
Weighted average PV ratio = 2100thou/60thou =0.35 = 35%

BEP =14700/0.35 = Rs.42,000
The company will start earning profit if the monthly sales exceed Rs.42,000.
Alternative Answer:
Total Variable cost : 20000x0.60 + 25000x0.68 + 10000x0.80 + 5000x0.40
= Rs.39,000
Sales Rs.60000
PV ratio = 21000/60000 = 35%
BEP =14700/0.35 = Rs.42,000
The company will start earning profit if the monthly sales exceed Rs.42,000.
Q.No.30: Entertain Ltd hires an air-conditioned theatre to stage plays on weekend
evenings. One play is staged per evening. The following are the seating arrangement:
VIP rows : first 3 rows of 30 seats per row priced at Rs.320 per seat.
Middle rows : the next 18 rows of 20 seats per row priced at Rs.220 per seat.
Last Level – 6 rows of 30 seats per row priced at Rs.120 per seat.
For each evening a drama troupe has to be hired at Rs.71000, rent has to be paid for the
theatre at Rs.14000 per evening and air-conditioning cost Rs.7400 per evening. Every time
a play is staged, the drama troop’s friends and guests occupy first row of VIP class free of
charge by virtue of passes granted to these guests. The Troupe ensures 50% of remaining
seats of the VIP class and 50% of the seats of other two classes are sold to outsiders and the
money is passed on to Entertain Ltd. The troupe also finds for every evening a sponsor who
puts up his advertisements banner near the stage and pays Entertain Ltd a sum of Rs.9000
per evening.
Entertain Ltd supplies snacks during the intervals free of charge to all guests in the hall
including the VIP free guests. The snacks cost Rs.20 per person.
Entertain Ltd sells the remaining tickets and observes that for one seat demanded from the
last level, there are 3 seats demanded from the middle level and 1 seat is demanded from
the VIP level. You may assume that in case any level is filled , the visitor buys the next higher
or lower level, subject to availability.
(i) You are required to calculate the number of seats that Entertain has to sell in
order to breakeven and give the category wise total seat occupancy at BEP
(ii) Instead of the given pattern of demand, if Entertain Ltd finds that the demand for
VIP, Middle and Last level is in the ratio of 2:2:5, how many seats each category
will Entertain Ltd have to sell in order to breakeven? (CA Final May 2011)
Answer (i): Analysis of Seats
VIP seats Middle level Last Row
Total No. of seats 90 360 180
Free passes -30 - -
Tickets sold by Troupe -30 -180 -90
Seats available for sale by Entertain Ltd 30 180 90
Contribution per seat (Fees – Snacks cost) 320-20 = 220-20 =200 120-20=
300 100
Total FC:
Troupe charges + air-conditioning + Hire charges + VIP snack cost + Snack cost of tickets
sold by Troupe : 71000 + 7400 + 14000 +600 + 6000 = 99,000
Total Fixed Realizations: Sponsorship fees + tickets sold by Troupe
: 9000 + (30 x 320) + (180 x 220) + (90 x 120) = 69000
Net FC = 30000
Weighted average contribution per seat (ratio of seats 1:3:1)
= [(1x300) + (3x200) + (1x100)] / 5 = 200
Break point = 30000/200 = 150 seats
= 30 VIP seats + 90 Middle level seats + 30 Last row seats
Total number of seats occupied in case of breakeven:
Free passes 30
Tickets sold by Troupe 30 180 90
Tickets sold by Entertain Ltd 30 90 30
Total 90 270 120
Answer (ii):
Ratio of Seats 2:2:5
Weighted average contribution per seat = [(2x300) +(2x200) + (5x100)] / 9 = 1500/9
30000
Break point = ----------------- = 180 seats
1500/9
180 seats in the ratio of 2:2:5, i.e., 40: 40: 100
Allocation of 180 seats for breakeven:
Seats available for sale by Entertain Ltd 30 180 90
40 seats( who opted for VIP seats) 30 10
40 seats ( who opted for Middle level seats ) 40
100 seats ( who opted for last level seats) 10 90
Contribution: (30x300) + (60x200) + (90x100) = Rs.30,000.

This allocation will result in breakeven as total contribution is equal to net fixed cost.
SEMI-FIXED AND SEMI-VARIABLE COSTS
Q.No.31 The Columbus Hospital operates a general hospital but rents space and beds to
separate entities for specialized areas such as skin, pediatrics, maternity, psychiatric, and so
an on. Columbus charges each separate entity for common services to its patients such as
meals and laundry and for administrative services such as billings, collections, and so.
Space and bed rentals are fixed for the year.
For the entire year ended June 30, 2003, the Skin Department at Columbus Hospital,
Charges each patient an average of Rs. 65 per day, had a capacity of 60 beds, operated 24
hours per day for 365 days, and had revenue of Rs. 11,38,800.
Expenses charges by the hospital to the skin Department for the year ended June 30, 2003
are in Table A.
The only personnel directly employed by the Skin department are supervising nurses,
nurses, and assistants. The hospital has minimum personnel requirements based on total
annual patient days. Hospital requirements of personal are given in Table B.
Table A: Expenses (Skin Department)
Basis of allocation
Patient days Bed Capacity
Dietary 42952
Janitorial 12800
Laundry 28000
Laboratory 47800
Pharmacy 33800
Repairs 5200
General Services 131760
Rent 275320
Billing and Collections 87000
Other expenses 18048 33120
Total 262800 453000
Table B : Expected Level of Operation Data

Annual Patient days Assistants Nurses Supervising Nurses
10,000-14,000 21 11 4
14,001-17,000 22 12 4
17,001-23,725 22 13 4
23,726-25,550 25 14 5
25,551-27,375 26 14 5
27,376-29,200 29 16 6
Annual salaries for each class of employee:

Supervision nurses- Rs. 18,000, Nurses- Rs.13,000, and Assistants – Rs. 5,000
CALCULATE: BEP (in terms of patients’ days) [CMA USA]
Teaching Note:
Variable cost is the amount incurred on which varies proportionately with each revenue
generating unit. (In this question, ‘patient-day’ is revenue generating unit because the Skin
Department collects its revenue on the basis of patient-day, i.e. Rs 65 per patient-day. Last
year, it collected Rs. 11,38,800 at the rate of Rs. 65 per patient-day, last year the skin
department had 11,38,800÷65, i.e. 17,520 patient-days: The cost that depends upon
patient-day is variable cost. From table A we find that cost depending upon patient-days is
Rs. 2,62,800. This is V.C. in this question).
Fixed cost is the cost amount INCURRED on which remain unchanged from zero per cent
capacity utilization to 100 per cent capacity utilization. (With reference to this question
zero per cent capacity utilization means zero patient-day i.e. no patient in the whole year,
100 per cent capacity utilization means all 60 beds occupied by patients for all 365 days of
the year, i.e. 60x365 = 21900 patient – days. Whether skin Department has zero patient –
days, 1000 patient- days, 10,000 patients days, 20000 patient – days or as many as 21900
patient- days, it has to pay Rs. 4,53,000 to the Columbus Hospital. From Table A, we find
that this amount is payable on the basis of bed capacity, i.e., it has to be paid irrespective of
the fact whether the beds are occupied by the patients or not. Hence, F.C. for the skin
Department is Rs. 453,000 p.a.)
There are two aspects of fixed costs (i) INCURRED, (ii) RECOVERED OR ABSORBED.
Recovery of fixed cost or fixed overheads means adding appropriate amount of fixed-
overhead to the cost. Recovery is done on the basis of pre-determined recovery rate.
Recovery rate is determined on the basis of budgeted F.O. and normal capacity. Suppose
budgeted F.O. Rs. 5,00,000, installed capacity 1,20,000 units, normal capacity 1,00,000
units. It means the firm would add Rs. 5.00 to the cost of each unit i.e. it will recover fixed
overheads at the rate of Rs. 5.00 per unit. In other words, recovery will change according to
production but incurring will remain unchanged, i.e, amount incurred on fixed overheads
will not be influenced by production level (up to 100 per cent of installed capacity).
Continuing the above example:

Output Incurred Recovered Under Over Recovery
(units) Rs. Rs. Recovery Rs.
Rs.
0 5,00,000 NIL 5,00,000 -
10,000 5,00,000 50,000 4,50,000 -
50,000 5,00,000 2,50,000 2,50,000 -
90,000 5,00,000 4,50,000 50,000 -
1,00,000 5,00,000 5,00,000 - -
1,10,000 5,00,000 5,50,000 - 50,000
1,20,000 5,00,000 6,00,000 - 1,00,000
(Under-recovery is debited to P& L A/c. over-recovery is credited to P&L A/c)

How much amount would be incurred on fixed overhead if (in the above example) output is
more than 1,20,000 units? Sorry, we cannot answer this question because there is no theory
in cost accounting which explains the behavior of fixed costs beyond 100 per cent of the
installed capacity. (In the examination, F.C. beyond 100 per cent of the installed capacity
will be given in the question, if not given, we have to make some appropriate assumption
after considering the data given in the question.
Semi-variable cost is the cost amount incurred on which varies with each revenue
generating unit (but not proportionately), i.e. there are different rates of variations for
different ranges. For one range there is one rate which is applicable for that entire range,
for the other range there is other rate which is applicable for that entire range and so on.
Example:
Output Wages per unit
First 10,000 Rs. 5.00
Next 10,000 Rs. 5.00
Next 10,000 Rs. 6.00
Over and above Rs. 7.00
For decision-making, this cost is treated as variable cost for the range. This cost is also
known as SLAB-type S.V. cost.
Semi-fixed cost (it is also known at Step-type S.V.Cost): In this case there are
different fixed cost for different ranges. For one range there is one total fixed amount, it
remains fixed for the entire range, for the other range there is another total fixed amount
which remain unchanged for that entire range and so on:
Example:
10000-14000 14001- 17000
Patient-Days Patient – Days
Assistants 21 X 5000 22 X 5000
Nurses 11 X 13000 12 X 1300
Supervisory nurses 4 X 18000 4 X 18000
3,20,000 3,38,000
For the patient- day in the range of 10000-14000 patient-days, staff cost is fixed, i.e. Rs.
3,20,000. Whether there are 10000 patient-days, 11000 patient-days, 12000 patient-days,
13,000 patient-days or even 14000 patient days, staff cost is fixed at Rs. 3,20,000. i.e, staff
cost is fixed within the range. But as soon as we cross the limit of 14000 units, it will jump
to Rs. 3,38,000. It will continue to the same up to the upper limit of this range, i.e., 17000
patient – days. Beyond this level, it will again change. This cost is treated as fixed cost for
the range for decision- making.
Comparison of Semi-variable and Semi-fixed Cost:

In case of Semi-variable costs, there are different fixed rates for different ranges (one rate
for one range, other rate for the other range etc.) In case of semi-fixed costs, there are
different total fixed amounts for different ranges.
Finding BEPs in case of semi-fixed and semi-variable costs
Equal Step-type semi fixed costs All other cases

(i) Assume a lot size that makes the (i) Identify various ranges. A new
semi-fixed cost as variable cost range starts when there is
per lot size change in variable cost per unit
(ii) Find Breakeven point in terms or SP per unit or semi-fixed cost.
of number of lots (batches) (ii) Calculate BEP at the lowest
taking semi-fixed cost as range. If Breakeven point is
variable cost for batch. there at this range, the answer is
(iii) Calculations under step ii gives there/
us range within which the (iii) If not, try next range. And so on.
breakeven point is expected to
lie.
(iv) Find unit based BEP taking
semi-fixed cost as fixed cost.
Answer to Q. No. 31
Total Revenue Rs.11,38,800

Revenue per patient day : Rs.65
No. of patient days Rs.11,38,800/65 = 17520
Total VC (VC is the cost that depends upon Rs.2,62,800
revenue generating units.)
VC/ patient day Rs.262,800/17520 = 15
Contribution / patient day Rs.50
Total FC Rs.4,53,000
Staff cost is semi-fixed cost.
10000 -14000 14001 -17000 17001 - 23725
patient days patient days patient days
Assistants 5000 x 21 5000 x 22 5000 x 22
Nurses 13000x11 13000x12 13000x13
Supervisory nurses 18000x4 18000x4 18000x4
3,20,000 3,38,000 3,51,000
Maximum Possible no of patient days : 365x60 i.e. 21900 patient days. We need not to find
the semi-fixed cost at higher levels.
I Range 10000 – 14000 patient days
Total FC for this range: 4,53,000 + 3,20,000 = 7,73,000
Maximum contribution at the range: 14000 patient days @ Rs.50 i.e. Rs.7,00,000.
Total FC is more than maximum contribution, loss is unavoidable i.e. BE is not possible in
this range.
II Range 14,001 – 17,000 patient days
Total FC for this range: 4,53,000 + 3,18,000 = 7,91,000
Maximum contribution at the range: 17000 patient days @ Rs.50 i.e. Rs.8,50,000. This
amount is more than FC. Hence, BEP is possible in this range.
791000
BEP = -------------- = 15820 patient days.
50
We have got our BEP. We need not to try the other range.
Q.No.32
S.P. Rs.245 per unit. Production cost per unit:

Material 70
Labour (10Hrs. @ Rs. 8) 80
Variable Production overhead 50
Fixed Production overhead 10
TOTAL 210
Installed capacity 20000 units. Normal capacity 10,000 units. Selling overhead (fixed) Rs.
1,00,000. Under an agreement with trade union, labour has to be paid for minimum
1,00,000 hours. For labour in excess of 1,50,000 hours, labour has to be paid at the rate of
Rs. 12 per hour (a) Find BEP, (b) find BEP if fixed selling overhead to Rs. 3,95,000, (c) Find
BEP if fixed selling overhead increase to Rs. 6,00,000.
Answer
Fixed production overhead is Rs.10 per unit. It is recovery rate (also called as absorption rate).
This rate is determined on the basis of normal capacity. Normal capacity is 10000 units. Hence,
Fixed production overhead is Rs.10,00,000.
SP VC per unit Contribution /unit
First 10000 units 245 70+50 = 120 125
Next 5000 units 245 70 + 80 + 50 = 200 45
Next 5000 units 245 70+120+50 = 240 5
(i) FC
Fixed production overhead Rs.1,00,000
Labour Rs.8,00,000
Selling overhead Rs.1,00,000
Total Rs.10,00,000
BEP is that minimum sales level at which contribution is Rs.10,00,000. Contribution is
Rs.125 per unit. Hence, BEP is 8000 units.
(ii) FC
Labour Rs.8,00,000
Total Rs.12,95,000
BEP is that minimum sales level at which contribution is Rs.12,95,000.

Units Contribution/unit Total contribution
10000 125 Rs.12,50,000
1000 45 Rs.45,000 (Balancing figure)
Total units 11000 Rs.12,95,000
BEP is 11,000 units sale.

(iii) FC
Labour Rs.8,00,000
Total Rs.15,00,000
BEP is that minimum sales level at which contribution is Rs.15,00,000

Units Contribution/unit Total contribution
10000 125 Rs.12,50,000
5000 45 Rs.2,25,000
5000 5 Rs.25000 ( balancing figure)
Total units : 20000 Rs.15,00,000
BEP is 20,000 units sale.

Q.No.33: A company makes 1,500 units of a product for which the profitability statement is
given below: (Rs)
Sales 1,20,000
Direct materials 30,000
Direct Labour 36,000
VO 15,000 81,000
Fixed cost 16800
Total cost 2,64,400 97800
Profit 22,200
After the first 500 units of production, the company has to pay a premium of Rs.6 per unit
towards overtime premium. The premium so paid has been included in the direct labour
cost or Rs.36000 given above. Compute the breakeven point.
[CA Final May 2007]
Answer:
Let Labour cost (exclusive of overtime Premium) per unit = Rs. y
1500y + 1000x6 = 36000
y = Rs.20
1-500 units 501-1500 units
SP 80 80
VC per unit 20+20+10 = 20+26+10 = 56
50
Contribution per unit 30 24
Breakeven point is that minimum sales level at which the contribution amounts to Rs.16,800.
Contribution
500 units 500x30 = 15,000
75 75 x24 = 1,800 ( balancing figure)
16,800
BEP = Sale of 575 units

Q.No.34: Navbharat Commerce College, Bombay has six sections of B.Com. and two
sections of M.Com. with 40 and 30 students per section respectively. The college plans one
day pleasure trip around the city for the students once in an academic session during
winter break to visit park, zoo, planetarium and aquarium.
A transport used to provide the required number of buses at a flat rate of Rs.700 per bus for
the aforesaid purpose. In addition, a special permit fee of Rs.50 per bus is required to be
deposited with city Municipal Corporation. Each bus is a 52 seater. Two seats are reserved
for teachers who accompany in each bus. Each teacher is paid daily allowance of Rs.100 for
the day. No other costs in respect of the teachers are relevant to the trip.
The approved caterers of the college supply breakfast, lunch and afternoon tea respectively
at Rs.7, Rs.30 and Rs.3 per student.
No entrance fee is charged at the park. Entrance fee come to Rs.5 per student both for the
zoo and aquarium. As regards planetarium the authorities charge block entrance fee as
under for group of students of educational institutions depending upon the number of
students in group:
No. of students in a Group Block Entrance Fees

Up to 100 Rs.200
101-200 Rs.300
201 and above Rs.450
Cost of prizes to be awarded to the winners in different games being arranged in the park depend
upon the strength of the students I n a trip. Cost of prizes to be distributed:
No. of students in a trip Cost of prizes (Rs.)
Up to 50 900
51-125 1050
126-150 1200
151-200 1300
201-250 1400
251 and above 1500
To meet the above costs the college collects Rs.65 from each student who wish to join the
trip. The college releases subsidy of Rs.10 per student in the trip towards it.
(a) Prepare a tabulated statement showing total costs at the levels of 60, 120, 180, 240
and 300 students indicating each item of cost.
(b)Compute average cost per student at each of the above levels.
(c) Calculate the number of students to break even for the trip as the college suffered
loss during the previous year despite 72% of the students having joined the trip. (CA
Final)
Answer: (a) and (b)

No. of Students → 60 120 180 240 300
Variable costs:
Breakfast 420 840 1,260 1,680 2,100
Lunch 1,800 3,600 5,400 7,200 9,000
Tea 180 360 540 720 900
Entrance fees Zoo etc. 300 600 900 1,200 1,500
Total variable cost (A) 2,700 5,400 8,100 10,800 13,500
Semi-fixed cost:
Charges of buses 1,400 2,100 2,800 3,500 4,200
Special permit fees 100 150 200 250 300
Allowance to teachers 400 600 800 1,000 1,200
Block entrance fees 200 300 300 450 450
Cost of prizes 1,050 1,050 1,300 1,400 1,500
Total semi-fixed cost (B) 3,150 4,200 5,400 6,600 7,650
Total cost (A+B) 5,850 9,600 13,500 17,400 21,150
Average cost per student 97.50 80.00 75.00 72.50 70.50
Answer (c)
Contribution per student: Amount contributed by student + amount contributed by College
minus payment to caterer minus entrance fees to Zoo etc.
= 65 + 10 – 40 – 5 = 30
Calculation of BEP
No. of students 1-50 51-100 101-125 126-150 151-200 201-250 251-300
→
Charges of 700 1400 2100 2100 2800 3500 4200

buses
Special permit 50 100 150 150 200 250 300
fees
Block entrance 200 200 300 300 300 450 450
fees
Teachers 200 400 600 600 800 1000 1200
Allowance
Cost of prizes 900 1050 1,050 1200 1300 1400 1500
Total semi-fixed
cost 2050 3150 4200 4350 5400 6600 7650
Max.
contribution 1500 3000 3750 4500 6000 7500 9000
BEP Not Not Not 4350/30 5400/3 6600/30 7650/30

possibl possibl possible i.e. 145 0 i.e. 220 i.e. 255
e e students i.e. 180 students students
students
BEP = 145 students

In case of semi-fixed costs, there may be different BEPs for different ranges. 72% of
students i.e. 216 students lie in the range of 201-250. For this range the BEP is 220
students. As the number of student was 216 i.e. less than the BEP for the range, the loss was
there.
Q.No.35: Ret Ltd, a retail store buys computers from Comp Ltd and sells them in retail.
Comp Ltd pays Ret. Ltd a commission of 10% on the selling price at which Ret sells to the
outside market. The commission is paid at the end of the month in which Ret. Ltd submits a
bill for the commission. Ret Ltd sells the computers to its customers at its store at Rs.30,000
per piece. Comp Ltd has a policy of not taking back computers once dispatched from its
factory. Comp Ltd sells a minimum of 100 computers to its customers.
Comp Ltd charges prices to Ret Ltd as follows:
(i) Rs.29,000 per unit, for order quantity 100 units to 140 units
(ii) Rs.26,000 per unit, for the entire order, if the quantity is 141 to 200 units.
(iii) Ret Ltd cannot order less than 100 or more than 200 units from Comp Ltd.
Due to recession, Ret Ltd will be forced to offer a free gift, a digital camera costing it
Rs.4,500 per piece, which is compatible with the computer. These cameras are sold by
another company Photo Ltd only in boxes, where each box contains 50 units. Ret Ltd can
order cameras only in boxes and these cameras cannot be sold without computers.
In its own store, Ret can only 110 units of the computer. At another far location, Ret can sell
up to 80 units of computer (along with free camera) provided it is will to spend Rs.5,000
per unit on shipping cost. In this market also, the selling price that each unit will fetch is
Rs.30.000 per unit.
You are required to :
(i) State what is Ret’s best strategy along with the supporting calculations
(ii) Compute the breakeven point in units, considering only the above costs.
(June 2009) (Advanced Management Accounting)(13 marks) (CA Final)
Answer
(i)
Units → 100 110 140 150 190
Contribution 100x4,000 110x4,000 140x4,000 150x7,000 190x7,000

(ignoring
shipping cost)
Shipping cost
-30x5,000 -40x5,000 -80x5,000
Cost of
cameras
-4,50,000 -6,75,000 -6,75,000 -6,75,000 -9,00,000
Profit/(Loss) (50000) (2,35,000) (2,65,000) 1,75,000 30,000
Suggested Sales: 150 Units

(ii) Breakeven is not possible at 100 or 110 or 140.
141-150
141 Units:
Camera cost Rs.6,75,000
Contribution Rs.110 x 7000 + 31x2000 = Rs.8,32,000
Profit Rs.1,57,000
150 units: Profit Rs.1.75,000
Breakeven is not there in this range.
151-190
151 units:
Camera cost Rs.9.00,00 ( it is semi - fixed cost)
Contribution 110x Rs.7000 + 41x Rs.2000 = Rs.8,52,000
Loss Rs.48,000
190 units : Profit Rs.30,000
BE is there in this range.
Contribution for Breakeven:
110 units 110 x Rs.7000
65 units 65 x Rs.2000
Total Rs.9,00,000
BE point : sales of 175 units ( including 65 from far location)
Q.No.36: You have been approached by a friend who is seeking your advice as to whether
he should give up his job as an engineer, with current salary of Rs.14,800 per month and go
into business of his own, assembling and selling a component which he has invented. He
can procure the parts required to manufacture the component from a supplier.
It is difficult to forecast the sales potential of the component but after some research, your
friend has estimated the sales as follows:
1. Between 600 to 900 components per month at a selling price of Rs.250 per
component
2. Between 901 and 1250 components per month at a selling price of Rs.220 per
component for the entire lot
The costs of the parts required would be rs.140 for each completed component. However, if
more than 1000 components are purchased each month, a discount of 5% would be
received from the supplier of parts on all purchases.
Assembly costs would be Rs.60,000 per month up to 750 components. Beyond this level of
activity assembly costs would increase to Rs.70,000 per month.
Your friend has already spent Rs.30000 on development, which he would write-off over the
first five years of the venture.
1. Calculate the breakeven point of the venture for each selling price.
2. Calculate for each of the possible ales levels at which your friend could expect to
benefit by going into the venture of his own. (CA Final)
Answer:
SP Rs.250
Range 600- 750 Range 751-900

60000+14800 70000+14800
BEP =-------------------------- = 680 units BEP =----------------------- = 771 units
250 -140 250 -140
SP Rs.220
Range 901- 1000 Range 1001-1250
70000+14800 70000+14800
BEP =------------------------ = 1060 units BEP =----------------------- = 975 units
220 -140 220 -133
(infeasible) (Infeasible)
There will be benefit by going into the venture in the following cases:
(i) If demand is between 681 – 750
(ii) If demand is between 771 – 900
(iii) If demand is more than 1,000
Q. No. 37 Vivek School has a total of 150 students. The school plans a picnic to places such as
Zoo, planetarium etc. A private bus operator has come forward to lease out the bus(es) for taking
the students. Each bus will have 50 seats for the students (besides 2 seat reserved for the
teachers). The school will employ two teachers for each bus, paying them an allowance of Rs. 50
per teacher. The following are cost estimates:
Cost per Student
Bread fast Lunch Tea Entrance at Zoo
Rs. 5 Rs.10 Rs. 3 Rs. 2
Rent per bus Rs. 650 Special permit fee Rs. 50 per bus (to be paid by the school). Block
entrance fees at planetarium Rs. 250. Prizes to students for games Rs. 250. No costs are
incurred in respect of the accompanying teachers (except the allowance of Rs. 50 per
teacher). Find B.E.P. (in terms of no. of students). The school charges Rs. 45 per student.
[C.A. Inter, Nov. 1988]
Answer
Fixed cost Rs.250 Prizes +Rs.250 Block Rs.500
Entrance
Semi-fixed cost per 50 students Bus 650

Permit 50
Teachers Allowance 100 Rs.800
VC per student Rs.20

Fees per student Rs.45
Batch based Calculations

Let 50 student = 1 batch
Fees per batch : Rs.2250
VC per batch : 50x20 + 800 = 1800
Contribution per batch = Rs.450
BEP ( in terms of batches) = 500/450 = 1.11 batches
This calculation indicates BEP lies in the range of 51-100 students
Per Student based calculations
Fixed cost for the range
Prizes 250
Block entrance 250
Bus 1300
Permit 100
Teachers’ Allowance 200 2100
VC per student 20
Fees per student 45
Contribution per student 25

Fixed cost
2100
BEP ( No of students) =
-------------------------------------- =
--------------------- = 84 students
Contribution/unit
25
Q.No.38 An institution conducts an entrance examination for admission to a course. Each

candidate is charged a fee of Rs. 50. The relevant cost of the entrance examination are: F.C.
Rs. 20,000 V.C. Rs. 30 per candidate. Besides these costs, one more cost is there and that is
supervision cost @ Rs. 200 for every 100 candidate. Find B.E.P.
Answer
Supervision cost is Rs.200 for every 100 students.
Batch based calculations
Let 100 students = 1 batch
Fees per batch Rs.5000
VC per batch Rs.3200
(Rs.30 per candidate for every 100 students + Rs.200 supervision cost for every
100 students))
Contribution per batch Rs.1800
FC Rs.20,000
BEP ( No. of Batches) = 20,000/1800 = 11.11 batches.

This calculation shows that BEP is likely to be in the range of 1100- 1200 students.
Student based calculations
Range 1100 -1200
Fees per student : Rs.50
VC per student : Rs.30
Contribution per students : Rs.20
FC for the range = Rs.20000 + supervision cost Rs.2400 = Rs.22400
22400
BEP = --------------------------- = 1120 students
20
TRY YOURSELF Q.No.39 X Ltd manufactures a semiconductor for which the cost and price
structure is given below:
Rs. per unit
Selling Price 500
Direct material 150
Direct labour 100
Variable overhead 50
Fixed cost Rs.2 Lakhs
The product is manufactured by a machine, whose spare part costing Rs.2,000 needs
replacement after every 100 pieces of output. This is in addition to the above costs. Assume
that no defectives are produced and that the spare part is readily available in the market at
all times at Rs.2,000.
(i) Prepare profitability statement for production levels of 2,000 units and 3,000
units, when fixed cost = Rs.1L
(ii) What is the break-even point for the above data?
Comment on the BEP, if the fixed cost can be reduced to Rs.1,80,000 from the existing level
of 2 Lakhs. (CA Final Nov. 2006) (14 marks)
Answer
(i) Profit Statement for 2000 units and 3000 units levels
2000 units 3000 units
Contribution 200xRs.2000 200xRs.3000

Spare parts -40,000 -60,000
FC -1,00,000 -1,00,000
Profit 2,60,000 4,40,000
(ii) Assumption (a): FC is Rs.2,00,000 ( as given in the main part of the question)
Assumption (b): Production is done the batches of 100 units
Contribution per batch: 500x100 – 300x100 – 2000 = Rs.18000
Break even ( batches) = 2,00,000/18000 = 11.11 batches

Range for break even : 1100-1200 units
Unit based calculations :
FC for this range 2,00,000 + 24,000 =Rs. 2,24,000
Contribution per unit = 500 – 150 – 100-50 = Rs.200
Break even point ( Units) = 2,24,000/200 = 1120
(iii) Assumption :Production is done the batches of 100 units
Contribution per batch: 500x100 – 300x100 – 2000 = Rs.18000
Break even (batches) = 1,80,000/18000 = 10 batches = 1000 units
Verification;
Sales of 1000 units 1000 x 500 5,00,000
VC of 1000 units 1000 x 300 3,00,000
Spare parts for 1000 units 20,000
FC 1,80,000
Total cost for 1000 units 5,00,000
TRY YOURSELF Q.No.40: A bank conducts competitive examination for selection of

probationary officers in January of every year. Each candidate is charged a fee of Rs.75 for
admission to the examination. Data generated from the last 2 years are as under:
2011 2012
Fees collected Rs.3,00,000 Rs.3,75,000
Costs :
Valuation of answer books 1,20,000 1,50,000
Question papers 80,000 1,00,000
Hire of halls 12,000 12,000
Honorarium to Superintendent 10,000 10,000
Invigilators (Rs.100/day for two days for every 50 students 16,000 20,000
General expenses 12,000 12,000
2,50,000 3,04,000
Net income 50,000 71,000
In 2013, 6000 candidates are expected to appear in the examination. The hell rent is
expected to increase by 25% and general expenses by 66.66667%. You are required to
calculate the following for the year 2013:
(i) Budgeted Income (ii) Breakeven number of candidates
(ii) Find the number of students required to sit for the examination to earn a net
revenue of Rs.1,00,000 (CA Final)
Answer:
2011 2012
No. of candidates 3,00,000/75 = 4,000 3,75,000/75 = 5,000
Cost of valuation /candidate 1,20,000/4000 = 30 1,50,000/5000 = 30
Cost of Question Paper 80,000/4000 = 20 1,00,000/5000 = 20
Notes: The costs of valuation and question papers are variable. The cost of invigilators is
semi-fixed cost. Other costs are fixed costs
(i) Budged Income for the year 2013
Revenue 6000x75
Costs :
Valuation 6000x30
Q. papers 6000x20
Hire of hall 15000
Honorarium 10000
Invigilation 24000
G. Expenses 20000
Total 3,69,000
Net Income 81,000
(ii)
VC per batch (cost of valuation, question papers and invigilation) Rs.2700
FC ( Hire, honorarium and general expenses) Rs.45000

45,000
BEP = ------------------ = 42.86 batches = About 2143 candidates
1050
The BEP is likely to be in the range of 2101- 2150 candidates.
Candidate Based calculations

2101 -2150 Candidates
Fixed costs for the range:
Hire of hall 15000
Honorarium 10000
G. Expenses 20000
Invigilation 8,600
Total 53600
VC per candidate : Cost of valuation and question papers = Rs.50

Fees per candidate : Rs.75
Contribution per candidate : Rs.25
Breakeven point = FC/ contribution per candidate = 53600/25 = 2144 candidates
(iii)
VC per batch (cost of valuation, question Rs.2700

papers and invigilation)
FC ( Hire, honorarium and general Rs.45000

expenses)
45,000
+100000
No of batches for desired income =
------------------------- = 138.09 batches
1050
= App. 6905
candidates
No. of candidates lie in the range of 6900-

6950
Candidate Based calculations

6901-6950 Candidates
Fixed costs for the range:
Hire of hall 15000
Honorarium 10000
G. Expenses 20000
Invigilation 27800
Total 72800
VC per candidate : Cost of valuation and question papers = Rs.50

Fees per candidate : Rs.75
Contribution per candidate : Rs.25
Required no. of candidates for Rs.1,00,000 income :
(72,800+1,00,0000)/25 = 6912
COST INDIFFERENCE POINT
Q.No.41 Find Cost break even points between each pair of plants whose cost functions are :
plant A: Rs. 600000+ Rs. 12 X; Plant, B: Rs. 900000 + Rs. 10X; plant C: Rs. 1500000 + Rs. 8 x;
(where x is the number of units sold)? Which PLANT should be purchased? [CA (Final]
Teaching Note
The concept of cost breakeven point is relevant when we have to make a choice out of
alternative methods of production. One method of production may be cheaper for one level
of output, other method may be cheaper for other level of output. Cost breakeven point is
that production level at which total cost of production is the same under both the methods
under consideration. Determination of cost breakeven point is possible when one method
results in higher fixed cost and lower unit variable cost as compared to other. If we have to
produce at a level lower than cost breakeven point, we should go for the Method with lower
fixed cost, if we have to produce more than cost breakeven point, we should go for the
method with lower unit variable cost and if we have to produce equal to cost breakeven
point, we may go for either of two methods.
For preparing the decision-table with the help of cost BEPs, third comparisons are
not required in following four cases, i.e. in these cases, decision should be taken only on the
basis of relevant cost BEPs.
(i) Production less than minimum cost BEP
(ii) Production equal to minimum cost BEP
(iii) Production equal to maximum cost BEP
(iv) Production greater than maximum cost BEP
Answer
Cost BEP between A & B
Let cost BEP = x units
6,00,000 + 12x = 9,00,000 + 10x
x = 1,50,000
Cost BEP between A & B = 1,50,000 units
Cost BEP between A & C
Cost BEP between B & C
9,00,000 + 10x = 15,00,000 +8x
x= 3,00,000
Cost BEP between B & C = 3,00,000 units
Output Plant
Less than 1,50,000 A
1,50,000 A or B
1,50,001 -2,99,999 B
3,00,000 B or C
More than 3,00,000 C
TRY YOURSELF Q.No.42: There are 3 ways of obtaining a particular component (a)
Purchase Rs. 15 per unit, (b) Manufacture by installing a semi-automatic machine. F.C. Rs.
9,00,000 p.a. V.C. Rs 6 per unit, (c) Manufacture by installing an automatic machine. F.C. Rs.
15,00,000 p.a. V.C. Rs. 5 per unit. Which way the component should be obtained?
Answer
Cost BEP between Purchase & Semi-automatic
15x = 9,00,000 + 6x
x = 1,00,000
Cost BEP between Purchase & SA = 1,00,000 units
Cost BEP between Purchase & Automatic
15x = 15,00,000 +5x
X = 1,50,,000
Cost BEP between Purchase and automatic = 1,50,000 units
Cost BEP between SA and Automatic
9,00,000 + 6x = 15,00,000 +5x
x= 6,00,000
Cost BEP between SA & Automatic = 6,00,000 units
Output
Less than 1,00,000 Purchase

1,00,000 Purchase or SA
1,00,001 -5,99,999 SA
6,00,000 SA or Automatic
More than 6,00,000 Automatic
Q.No.43
New Ltd. Plans to completely manufacture a single product Z, whose selling price is Rs.100
per unit and variable manufacturing cost Rs.80 per unit. If the complete production is done
in its own factory, fixed manufacturing cost will be Rs.3,62,000 and fixed administration
and selling overheads will be Rs.30000 for the production period. Alternatively, the product
can be finished outside by sub-contracting the machining operations at Rs.10 per unit but
this will increase the fixed administration cost by Rs.160000 while fully avoiding the
machining cost of Rs.3,62,000.
Based on the above figures and assuming a production capacity of 30,000 units for the
production period, advise with the relevant supporting figures, from a financial perspective,
for what volumes of market demand will
(i) A manufacture be recommended at all
(ii) A fully in-house production will be recommended
(iii) The sub-contracting option will be recommended. (CA FINAL Nov.2011)
Answer
(i)
Manufacturing Sub-contracting
VC per unit Rs.80 VC per unit Rs.90
FC Rs.3,92,000 FC Rs.1,50,000
SP Rs.100 SP Rs.100
3,92,000 1,50,000
BEP = ---------------------- = 19,600 units BEP = ---------------------- = 15,000 units
20 10
The company should go for the product if the minimum demand is 15,000.
(ii) and (iii)
Let indifference (between manufacture and subcontracting) point = X units
Cost function of manufacturing = 80X + 392,000
Cost function of subcontracting = 90X +1,50,000
For indifference point:
80X + 392000 = 90X + 150000
X = 24200 units
If demand is more than 24200 we should opt for manufacturing.
If demand is less than 24200 we should opt for subcontracting.
If the demand is 24200, we shall be indifferent.
CHARTS
Q. No. 44. From the following data draw a BE chart: FC Rs. 10,000 selling price Rs. 10 trade
discount 5 per cent VC Rs. 7 per unit. If sales are 10 per cent above BEP, determine the net
profits (from the chart)
Teaching Note B.E. chart (when units are given). On X-axis, take sales units, on Y-axis take
the amounts of sales and cost. Draw sales line. Draw cost line. Intersection point is BEP.
Before drawing the chart, we should prepare a table showing sales, VC, FC and total cost at
any two levels. (For a good chart, one of these levels may be zero sale level and other may
be sales level above BEP)
Trade discount is not taken cost. It is taken as reduction out of sale.

Units Sale VC FC Profit /Loss
0 0 0 10,000 Loss 10,000
5,000 47,500 35,000 10,000 Profit Rs.2,500

Q. No. 45
The following figures relate to a company: Rs.
Annual sales at 100% effective capacity 1200000

Fixed Overhead 400000
Total variable cots 600000
It is proposed to increase the capacity by the acquisition of 30 per cent additional space and
plant. It was result in increase of fixed overheads by Rs. 1,00,000 per annum. Plot the
forgoing on a single breakeven chart and determine from the chart at what level of sales the
same profit as before will be produced after the extensions have been made.
Teaching Note: B.E. chart (when units are not given). On X-axis, we take sales amount (this
axis will always represent sales amount). On Y-axis, we take the amounts of sales and cost
(To draw sales line, Y-axis represents sales. To draw cost line Y-axis represents cost). Before
drawing the chart, we should prepare a table showing sales, VC, FC and total cost at any two
levels. (For a good chart, one of these levels may be zero sales level and other be level
beyond BEP)
Answer
Original Scenario
Total Sale VC FC Profit /Loss
0 0 4,00,000 Loss 4,00,000

12,00,000 6,00,000 4,00,000 Profit Rs.2,00,000
Revised Scenario
Total Sale VC FC Profit /Loss
0 0 5,00,000 Loss 5,00,000
12,00,000 6,00,000 5,00,000 Profit Rs.1,00,000
Notes: (i) The cost lines shall be parallel to each other as the cost has gone up by
Rs.1,00,000 at all levels. (ii) Profit is the difference between sales and cost. Hence, for profit
we will take that scale which is applicable to sales as well cost. Y axis is applicable to sales
as well cost. Hence this scale will be taken for profit as well.
Even after expansion, the company shall be earnings same amount of profit as before
expansion (i.e. Rs.2,00,000) when its sales will be Rs.14,00,000
PROFIT VOLUME CHARTS
Q. No. 46 Draw profit volume chart.
Sales (Rs.Lakhs) Profit (Rs.Lakhs)
Year-1 160 4
Year-2 175 10
Teaching Note : A P/V chart exhibits profit/ loss at various sales levels. On X-axis, we take
sales. On Y-axis, we take profit / loss.
Sales Contribution
160L FC + 4L
175L FC + 10 L
6L
PV ratio = -------------------- = 0.40
15L
Sales 160L
VC (60% of Sales) 96L
Contribution 64L
Profit 4L
FC 60L
For PV chart, we should prepare a table showing sales and the corresponding profit /loss at
any two levels. (For a good chart, one of these levels may be zero sales level and other may
be the sales level above BEP)
Let’s take sales at zero level and Rs.200L level.
Sales Contribution FC Profit /Loss
0 0 60L Loss 60L
200L 80L 60L Profit 20L

From the following figures relating to manufacturing company, prepare a profit volume-graph.
Total fixed cost is Rs. 25,000.
Product Annual sales(Rs.) Variable Costs (Rs.)
A 40,000 20,000
B 25,000 15,000
C 35,000 30,000
1,00,000 65,000
Teaching Note: While drawing P.V. chart of a multiple-products firm, we should draw one
more line called PROFIT PATH (In addition to P.V. Line). Before drawing profit path, we
calculate P.V. ratios of various products, First we plot the profit/ loss of the product with
highest P.V. ratio, then that of second highest P.V. ratio and so on.
Decision Making (Relevant Costing)
(A) Management Information System Aspect
In case of a decision-making problem, we are supplying relevant accounting information to
the management so that management may take optimum decision. We should avoid the use
of technical terms. Figures should be written in thousands or lakhs or crores as case may,
instead of in units. Two important points of this aspect are as follows.
(i) Presentation: We should present relevant accounting information in proper way so that
management people can understand easily and in the right sense. There are two important
ways of presentation. Under first type of presentation, we identify various alternatives,
prepare statement (s) showing profit under each of the alternatives and recommend the
alternatives and recommend the alternative that reports maximum profit. Under second
type of presentation, we make cost benefit analysis of the proposal about which the
management has to take decision. By cost of proposal we mean: Cost to be incurred for the
proposal and benefit to e lost because of the proposal. We would not consider such costs
which are not to be incurred but which e just to be allocated. Suppose a company pays Rs.
90000 as rent of factory premises. It has nine departments and it allocates Rs. 10000 to
each department. The company is now considering the proposal of staring one more
department. If started, it would be housed in the same premises without any difficulty and
after this rent allocation would be Rs. 9000 per department. In other words, rent cost of Rs.
9000 would be charged or allocated against the profits of new department but as there is
no change in amount incurred, we would not consider this amount as cost of the new
department for decision-making. If suppose under an agreement with landlords, rent
payment will increase from Rs. 90000 to 95000 on account of opening of this new
department, Rs. 5000 would be cost incurred for the new department, we would consider it
for decision-making. Sometimes, cost is incurred indirectly. Suppose a company has a plant
which will have market value of Rs. 100000) after one year. The Company receives a new
order and estimates that if it accepts the order, the value of plant would be only Rs. 90000
(instead of Rs. 100000) after one year. Here Rs. 10000 reduction in the value of plant is cost
incurred indirectly and it is very much considered as ‘cost incurred’ for decision-making.
Benefit lost is also treated as cost incurred. Suppose a company has some vacant space
which it has sublet for Rs. 10000 p.a. It receives an order. If this order is accepted, the
company will require that space and will have to cancel the sublet for one year. This loss of
rent of Rs. 10000 is benefit to be lost for the proposal. It is also treated as cost of the
proposal. By benefit of the proposal, we mean benefit to be gained directly or indirectly and
cost to be avoided because of the proposal.
(ii) Non-Financial Consideration: Management Accountant should bring, non-financial

considerations influencing the decision to the notice of management. These should be given
only in brief.
(B) Fixed Cost Aspect
Fixed costs are relevant for decision-making if there is change in amount incurred on fixed
cost because of the proposal. If there is no change in amount incurred on fixed cost because
of the proposal of the proposal, it is irrelevant for decision-making.
If we go for first type of presentation mentioned above, we consider fixed cost-whether

there is any change in amount incurred or not because without fixed cost we cannot find
under each alternative. If we o for second type of presentation mentioned above (cost-
benefit analysis), we consider only change in fixed cost. If it is being reduced, it is benefit. If
it is being increased, it is cost.
If in the question we are not given nature of any overhead (i.e. whether it is fixed or
variable) we may assume it to be fixed.
Sometimes we are given fixed cost on per unit basis or on the basis of any variable item (for
example on the basis of wages) it is just the recovery rate i.e. fixed cost are being recovered
at such rates, fixed cost are not being incurred or spent on such basis. Recovery rates are
determined on the basis of budgeted overheads and normal capacity. By normal capacity in
case of factory and administration overheads we mean normal production. For selling
overheads, the term normal capacity refers to normal sales.
If in the question, we are not given fixed overhead incurred and we require the same, we
take one of the following two steps (given in order of priority)
(i) Multiply recovery rate with normal capacity to find budgeted Fixed overhead.
Assume Budgeted Fixed Overhead is equal to Actual Fixed Overhead incurred.
(ii) If normal capacity is not given, multiply recovery rate with actual capacity to find
Recovered Fixed Overhead. Assume Recovered Fixed Overhead is equal to actual
fixed overheads incurred.
(C) Opportunity Cost Aspect

Opportunity cost is the cost of opportunity lost. For decision-making, whenever
opportunity cost is available, we should consider it. Opportunity cost is the cost of benefit
to be lost because of the proposal. Let’s try to understand the concept of opportunity cost
with the help of a few examples.
(i) Material costing Rs. 1600 is in store. It is surplus to any requirement and hence
management is thinking of selling it. It can be sold for Rs. 1500. If we have to
purchase, we shall have to pay the current market price of Rs. 1700. An order is
received. This material is just sufficient to execute the order. As management
accountant, you have to prepare a note which will help the management in
deciding whether the order should be accepted or not. What would you consider
as opportunity cost of material? Opportunity cost of the material in this case is
Rs. 1500. As purchase of material is not our option ?(because we do not require
this material for any other purpose, it is already surplus to any other
requirement), market price of Rs. 1700 is irrelevant for us. Cost of Rs. 1600 is
also irrelevant as now this material is worth Rs. 1500 to us.
(ii) M/s X. Sanitary stores have two plumbers Mr. A and Mr. B. they are being paid a
fixed wage of Rs. 5 per hour each for 8 hour a day, i.e. they will get their wages
whether there is any work for them or not. Plumber B is quite popular with the
customers and every customer wants his work to be done by B. Hence, he is
extremely idle (For trade Union reasons, his services cannot e terminated). M/s X
sanitary Stores charges Rs. 9 per hour from customers for plumber’s service. A
customer has approached M/s. X Sanitary stores for a five hours job. What is the
minimum amount which they should charge if the customer insists the work to
be done by B. The answer is Rs. 45. Opportunity cost of services of B is Rs. 9 per
hour. By providing his services for five hours, M/s Sanitary Stores shall be losing
Rs. 45 because B is extremely busy and they should get compensation for this
loss. What is the minimum amount which M/s. Sanitary Stores may charge if the
customer agrees to get the work to be done by Mr. A. The answer is Rs. Nil. If the
work would be done by A, the store won’t be incurring additional cost because
whether work is there or not they have to pay Rs. 5 per hour. The store won’t be
loosing anything when work is done by A because if he won’t do this job, he
would be sitting idle.
EXAMPLE :
A company can make any one of the 3 products X, Y and Z in a year. The relevant information is
given below:
X Y Z
Selling price (Rs/unit) 10 12 12
Variable cost(Rs/unit) 6 9 7
Demand (units) 3000 2000 1000
Production capacity 2000 3000 900

(Units)
Fixed costs Rs.30000
You are required to compute the opportunity cost of each product. (CA FINAL May 2011)
Answer
Opportunity cost = Benefit from best alternative lost
X Y Z
Contribution per unit 4 3 5

Demand (units) 3000 2000 1000
Production capacity (Units) 2000 3000 900
Contribution 8000 6000 4500
Opportunity cost 6,000 8,000 8,000
Introductory Decision Making Problems

Q. No. 48 The following data is extracted from the budget documents of Rao Ltd. which pertains
to the calendar year 2012.
Capacity Utilization 80% 90% 100% Between 101% and 120%
Semi-variable Factory
Expenses 50,000 50,000 60,000 70,000
Fixed Factory Cost 60,000 60,000 60,000 65,000
Office overheads 40,000 40,000 40,000 40,000
Installed capacity of the plant - 10,000 tons per annum which could be expanded up to 20
per cent by incurring additional expenses of Rs. 10,000. Realizable value Nil.
Selling and distribution costs including commission to distributors: 10 per cent of the sales
value.
Up to April 2012, the company has been able to market completely its production fully
locally at a unit realization value of Rs. 80 per ton. Monthly production of 750 tons is
expected to be maintained throughout the year which will satisfy the local market. The
company will be able to maintain its sale price locally. Direct costs account for 60 per cent
of the price of the product.
The company has received an enquiry from abroad for manufacture and supply of 3,000
tons at US $ 6 per tones c.i.f., commission payable to a foreign agent will be 50 cents per
tone and insurance and freight charges are estimated at 50 cents per ton. The export order
will fetch the company an export incentive license for 20 per cent of quantum of exports.
The current market value of the license, which can be transferred freely, is Rs. 60 per ton.
Should the order accepted. One US Dollar = Rs. 30.
Answer
Working Notes:
1. Direct cost per ton = 60% of Price, i.e., 60% of Rs.80, i.e. Rs.48 per ton.
There shall be no change in case of direct cost per ton in case of export.
2. Commission to distributor is not payable in case of export.
3. The quantity of incentive license = 20% of export quantity, i.e., 600 tons
4. Realizable value of additional expense is zero.
5. Commission, insurance and freight for the export order is 50 cents + 50 cents i.e.
100 cents i.e. 1$ i.e. 30 per ton.
Accounting Information for Decision Regarding Acceptance of the Export Order
Two Alternatives:
(A) Status Quo
(B) Accept the Export Order
Statement Showing Annual Profit of Rao Ltd under Each of the Two Alternatives
Rs.’000
A B
Sales 720 1260
Import License - 36
Total Revenue 720 1296
Costs:
Direct cost (Rs.48 per ton) 432 576
Factory expenses ( semi-variable) 50 70
Fixed costs 60 65
Office overheads 40 40
Selling overheads 72 162
Additional cost - 10
Total costs 654 923
Profit 66 373
ALTERTNATIVE ANSWER
Cost Benefit Analysis of the Export Proposal
(Rs.’000)
Cost Benefit
Sales 540
Import license 36
Direct costs 144
Semi-variable costs 20
Fixed expenses 5
Commission, freight and insurance 90
Additional cost 10
269 576
As Benefit is more than the cost, the export order may be accepted.
Q. No.49: The Officers Recreation Club of a large public sector undertaking has a cinema
theatre for the exclusive use of themselves and their families. It is bit difficult to get good
motion pictures for show and so pictures are booked as and when available.
The theatre has been showing the picture ‘Blood Bath’ for the past two weeks. This picture
which is strictly for the adults only has been great hit and the Manager of the theater is
convinced that the attendance will continue to be above normal for another two weeks, if
the show of blood bath is extended. However, another popular movie eagerly looked
forward to by both adults and children alike ‘Appu on Airbus’ is booked for the next two
weeks. Even if ‘Blood bath’ is extended, the theatre has to pay the regular rent for “Appu on
Airbus’ as well.
Normal attendance at the theatre is 2000 patrons per week, approximately one-fourth of
whom are the children under the age of 12. Attendance for Blood bath has been 50%
greater than the normal total. The Manager believes that this would taper off during a
second two weeks, 25% below that of the first two weeks during the third week and 33.1/3
below that of first two weeks during the fourth week. Attendance for the ‘Appu on the
Airbus’ would be expected to be normal throughout its run, regardless of duration.
All runs at the theatre are shown at the regular price of Rs.2 for adults and Rs.1.20 for the
children below 12. The rental charge for the ‘Blood Bath’ is Rs.900 for one week or Rs. 1500
for two weeks. For the Appu on Airbus, it is Rs.750 for one week or Rs.1200 for two weeks.
All the operating costs are fixed Rs.4200 per week, except for the cost of potato wafers and
cakes which average 60% of their selling price. Sales of potato wafers and cakes regularly
average Rs.1.20 per patron, regardless of age.
The manager can arrange to show ‘Blood Bath’ for one week and ‘Appu of the Airbus’ for the
following week or he can extend the show of ‘Blood Bath’ for two weeks; or else he can
show ‘Appu on Airbus’ for two weeks as originally booked.
Show by computation, the most profitable course of action has to pursue.
Answer
Working note:
Normal Attendance: 2000 per week : 1500 Adults and 500 Children.
Attendance in case of ‘Appu on Airbus’ will be normal attendance.
In the last two weeks, the attendance of Blood Bath has been 3000 per week.
In case of Blood Bath :

 in the next week it will taper off by 25% of 3000; the attendance will be 2250.
 In the week after next week it will taper off by 33.1/3% of 3000, the attendance will
be 2000.
Accounting Information for Decision Regarding Showing the Film for Next Two
Weeks
A. Appu on Airbus for two weeks
B. Blood Bath in the first week and Appu on Airbus in the next week
C. Blood Bath for the two weeks
Cost Benefit Analysis of each of three Proposals

I II III
BENEFIT :
(i) Tickets
I week:
Adults 1500 x 2.00 2250 x 2.00 2250 x 2.00
Children 500 x 2.00 ------- --------
II week:
Adults 1500 x 2.00 1500 x 2.00 2000 x 2.00
Children 500 x 2.00 500 x 2.00 --------
(ii) Sale of Wafers 4000 x 1.20 4250 x 1.20 4250 x 1.20
Total (A) 12,000 13200 13600
COST :
Hire charges of Blood Bath ------- 900 1500
Cost of wafers (60% of sale of
wafers) 2880 3060 3060
Total (B) 2880 3960 4560
Net Benefit (A - B) 9120 9240 9040
Recommendation: The Manager may opt for II alternative as the amount of net benefit is
highest in this case.
Note; The hire charges for the Appu on Airbus Rs.1200 and fixed operating cost of Rs.4200
have to be paid irrespective of the Alternative. Hence ignored
Q.No.50
B Ltd. makes industrial power drills, which is made by the use of two components A
(electrical and mechanical components and B (plastic housing).
The following table shows the cost of plastic housing separately from the cost of the
electrical and mechanical components:
A B A and B
Electric and Plastic housing Industrial drill (Rs.)

mechanical (Rs.)
components (Rs.)
Sales 1,00,000 units @ 1,00,00,000

Rs.100
Variable costs:
(I) Direct materials 44,00,000 5,00,000 49,00,000
(II) Direct labour 4,00,000 3,00,000 7,00,000
(III) Variable M. Over. 1,00,000 2,00,000 3,00,000
(IV) Variable A. Over. 1,00,000 1,00,000
(V) Sales commission
@ 10% of sales 10,00,000 10,00,000
Total variable costs 60,00,000 10,00,000 70,00,000
Contributions ------- ------- 30,00,000
Total fixed costs 22,20,000 4,80,000 27,00,000
Operating Income 3,00,000
Answer the following questions independently:
(i) During the year, a prospective customer offered Rs.82, 000 for 1,000 drills. The drills
would be manufactured in addition to the 1,00,000 units sold. B Ltd. would pay the regular
sales commission rate on the 1,000 drills. The Chairman rejected the order because “it was
below our costs”. Calculate operating income if B Ltd. accepts the offer.
(ii) A supplier offers to manufacture the yearly supply of 1,00,000 units plastic housing
components for Rs.13.50 each. Assume that B Ltd. would avoid Rs.3,50,000 of the costs
assigned to plastic housing if it purchases. Calculate operating income if B Ltd. decides to
purchase the plastic housing from the supplier.
(iii) Assuming that B Ltd. could purchase 1,20,000 units (plastic housing components) for
Rs.13.50 each and use the vacated plant capacity for the manufacture of deluxe version of
drill of 20,000 units (and sell them for Rs.130 each in addition to the sales of the 1,00,000
regular units) at a variable cost of Rs.90 each, exclusive of housings and exclusive of the
10% sales commission. All the fixed costs pertaining to the plastic housing would continue,
because these costs are related to the manufacturing facilities primarily used. Calculate
operating income of B Ltd. if it purchases the plastic housings and manufacture the deluxe
version of drills. (C.A. Final Cost Management Nov.2009)
Answer
Working notes:
(i) VC per unit (exclusive of sales commission) = Rs.60
Main Answer (i)

Cost benefit analysis of special order
Cost Benefit
Contribution (without 22,000

considering sales
commission)
Sales commission 8,200
Net benefit = Rs.13,800.

The order may be accepted
as it will increase the
operating income from
Rs.3,00,000 to Rs.3,13,800
(ii) Cost benefit analysis of supplier’s offer

Cost Benefit
Purchase cost 13,50,000
Cost avoided:
VC 10,00,000
FC 3,50,000
Total 13,50,000 13,50,000
As cost is equal to benefit,

the company shall be
indifferent towards this
offer.
The offer may accepted if
there are some non-
financial benefits.
(iii) Cost benefit analysis of making deluxe version

Cost Benefit
Savings of VC of Plastic 10,00,000

Housing
Purchase cost of 120000 16,20,000
units of Plastic housing
VC of deluxe version 18,00,000

(exclusive of sales
commission)
Sales of deluxe version 26,00,000
Sales commission 2,60,000
Total 36,80,000 36,00,000
The proposal may not be

accepted as it will reduce
the operating income by
Rs.80,000.
Q.No.51
X is a multiple product manufacturer. One product line consists of motors and the company
produces three different models. X is currently considering a proposal from a supplier who
wants to sell the company blades for the motors line. The company currently produces all
the blades it requires. In order to meet customer's needs, X currently produces three
different blades for each motor model (nine different blades).
The supplier would charge Rs.25 per blade, regardless of blade type. For the next year X has
projected the costs of its own blade production as follows (based on projected volume of
10,000 units):
Direct materials Rs.75,000

Direct labour Rs.65,000
Variable overhead Rs.55,000
Fixed overhead:
Factory supervision Rs.35,000
Other fixed cost Rs.65,000
Total production costs Rs.2,95,000
Assume (1) the equipment utilized to produce the blades has no alternative use and no
market value, (2) the space occupied by blade production will remain idle if the company
purchases rather than makes the blades, and (3) factory supervision costs reflect the salary
of a production supervisor who would be dismissed from the firm if blade production
ceased.
(i) Determine the net profit or loss of purchasing (rather than manufacturing), the
blades required for motor production in the next year.
(ii) Determine the level of motor production where X would be indifferent between
buying and producing the blades. If the future volume level were predicted to
decrease, would that influence the decision?
(iii) For this part only, assume that the space presently occupied by blade production
could be leased to another firm for Rs.45,000 per year. How would this affect the
make or buy decision?
(C.A. Final Cost Management June 2009)
Answer
(i)
Cost benefit analysis of proposal regarding purchasing the blades
Cost Benefit
Savings of VC 195000
Savings of supervisor’s 35000

salary
Total 250000 230000
As cost is more than the

benefit, the blades may not
be purchased.
(ii) Let’s produce x units of blades

Cost of purchase : 25x
Cost of make = 35000 + 19.50x
Cost indifference point:
25x = 35000 + 19.50x
x = 6364 units of blades
Purchase is recommended if the production is expected to be below 6364 units, otherwise
manufacturing is recommended.
If the production is expected to decline, purchase is better option.
(iii) Cost benefit analysis of proposal regarding purchasing the blades with leasing the
spare space
Cost Benefit
Rental income 45,000
Savings of supervisor’s 35000

salary 195000
Savings of VC
Total 2,50,000 2,75,000
As benefit is more than the

cost, the blades may be
purchased.
Q.No.52
Maruthi Agencies has received an order from a valuable customer for supplying 3,00,000
pieces of a component at Rs.550 per unit at a uniform rate of 25,000 units a month.
Variable cost per unit amounts to Rs.404.70 per unit of which direct materials is Rs.355 per
unit. Fixed production overheads amount to Rs30L per annum excluding depreciation.
There is a penalty/reward clause of Rs.30 per unit for supplying less/more than 25,000
units. To adhere to the schedule of supply, the company procured a machine worth
Rs.14.20L which will wear out in one year time and will fetch Rs.3.55L. After the supply of
the machine, the supplier offers another advanced machine which will cost Rs.10.65L. it
will also wear out in one year time and will have no scrap value. If the advanced machine is
purchased immediately, the supplier will exchange the earlier machine supplied at the price
of new machine. Fixed cost of maintaining the advanced machine will increase by Rs,14200
per month for the whole year. While the old machine has the capacity of completing the
production in one year, the new machine can complete the job in 10 months. The new
machine will have material wastage of 0.50%. Assume uniform production in both cases.
Using incremental cost/revenue approach, decide whether the company should opt for the
advanced version. (CA FINAL May 2011)
Answer :
Statement showing incremental cost
New machine Old machine Incremental
Scrap Nil +3,55,000 -3,55,000
FC (other than -31,70,400 -30,00,000 -1,70,400

depreciation)
Material -5,32,500 --- -532500
300000x355x0.50/100
Depreciation -10,65,000 -10,65,000 Nil
Total incremental cost 10,57,900
Incremental revenue: 50000 units @ Rs.30 i.e., Rs.15,00,000. As incremental revenue of

new machine is more than its incremental cost, it (new machine) is recommended.
Q.No.53: M. Limited manufactures one standard product, the standard marginal cost of which is
as follows:
Rs.
Direct material 10.00

Direct wages 7.50
Variable production overhead 1.25
Total VC per unit 18.75
The budget for the year includes the followings:

Output (units) 80,000
Fixed overhead:
Production 10,00,000
Administration 6,00,000
Marketing 5,00,000
Contribution 25,00,000
Management, in considering for the coming year, is dissatisfied with the result likely
to arise. A board meeting held recently discussed possible strategies to improve the
situation and the following ideas were proposed.
1. The production director suggested that the selling price of the product should be
reduced by 10 per cent. This he feels cold increase the output and sales by 25 per
cent. It is estimated that fixed production overhead would increase by Rs. 50,000
and fixed marketing overhead by Rs. 25,000.
2. The finance director suggested that the selling price should be increased by 10 per
cent. It is suggested that if the current advertising expenditure of Rs. 100,000 were
to be increased by Rs. 400,000, sales could be increased to 90,000 units. Fixed
product on overhead would increase by Rs. 25,000 and marketing overhead by Rs.
20,000.
3. The managing director seeks a profit of Rs. 600,000. He asks what selling price is
required to achieve this if it estimated that:
- an increase in advertising expenditure of Rs. 360,000 would result in a 10 per cent
increase in sales, and
- fixed production overhead would increase by Rs. 25,000 and marketing overhead by
Rs. 17,000.
4. The marketing director suggested that with an appropriate increase in advertising
expenditure sales could be increased by 20 per cent and a profit on turnover of 15
per cent obtained. It is estimated that in this circumstance fixed production
overhead would increase by Rs. 40,000 and marketing overhead by Rs. 25,000. What
additional expenditure on advertising would be made to achieve these results?
5. The chairman has received an approach from a departmental store to supply on a
long-term contract 20,000 units per annum at a special discount. Existing sales
would not be affected. Fixed production overheads will increase by Rs.50,000. How
much special discount could be given if by accepting the contract the profit of the
company were to be increased to Rs. 6,75,000 per annum?
Compile a forecast profit statement for each of the proposals and comment briefly
on each.
Answer
Statement Showing Profit at Present and Under Each of Five Alternatives
Present Production Finance Managing Marketing Chairman’s
Scene Director’s Director’s Director’s Director’s Proposal
Proposal Proposal Proposal Proposal
Sale units 80,000 1,00,000 90,000 88,000 96,000 1,00,000
Sales Amount 8,000x50 1,00,000x4 90,000x5 88,000 x54 96,000 x 80000x50

5 5 (see note 1) 50 +20000x30
(see note 2)
VC @ 1500000 18,75,000 16,87,500 16,50,000 18,00,000 17,75,000
Rs.18.75/unit
FFO 1000000 10,50,000 10,25,000 10,25,000 10,40,000 10,50,000
FAO 6,00,000 6,00,000 6,00,000 6,00,000 6,00,000 6,00,000
FSO 5,00,000 5,25,000 5,20,000 5,17,000 5,25,000 5,00,000
Additional 4,00,000 3,60,000 1,15,000 --------

Advertising (see note
3)
Profit 4,00,000 4,50,000 7,17,500 6,00,000 7,20,000 6,75,000
Note 1:
SP = (Total cost + profit) / units sold = 47,52,000/88,000 = Rs,54
Note 2 :
Total cost + profit = 1775000 + 1050000+600000+500,000+675000 = 46,00,000
Total sales = total cost + profit = 46,00,000.
Present sales = Rs.40,00,000
Additional sales amount : Rs.6,00,000
Additional sales units = 20000
SP = 6,00,000/20000 = 30
Note 3 :
Additional advertising
= Sales minus Profit minus Total cost (exclusive of adverting)
= 48,00,000 -39,65,000 – 4800000x0.15 = 1,15,000
Answer to second part of Question

Table: Showing Comments on Each of Five Proposals
Proposal Proposal’s Profit rank General Comments
Profit V/S among
Present Profit Proposals
Prod. D Higher V Prod. Director’s estimate about sales

may be backed by market survey.
Fin. D Higher II Increasing sales prices without

improvement of quality and without
increase in unavoidable cost is against
Man D Higher IV social responsibility concept.
Mark D Higher I No change in sales price and nominal

increase in advertisement are positive
features.
Chairman Higher III Long-term commitment may not be

made if it would be possible to sell at
regular price in near future.
Q.No.54
X Ltd., having an installed capacity of 1,00,000 units of product is currently operating at 70
per cent utilization. At current levels of input prices, the unit costs (after taking credit for
applicable export incentives) work out as follows:
Capacity utilization (Per Cent) Unit Costs (Rs)
70 97
80 92
90 87
100 82
The company has received three foreign offers from different sources as under:
Source A 5,000 units at Rs. 55 per unit.
Source B 10,000 units at Rs. 52 per unit.
Source C 10,000 units at Rs. 51 per unit.
Advice the company as to whether any or all the export orders should be accepted or not.
(CA FINAL NOV. 2007)
Answer
Output Total cost
70000 70,000 x 97 = 67,90,000
80000 80000x 92 = 73,60,000
90000 90000 x 87 = 78,30,000
100000 1,00,000 x 82 = 82,00,000
Output Cost
70000 Total cost 67,90,000

Next 10000 Additional cost = 73,60,000 minus 67,90,000 = Rs.5,70,000 i.e. Rs.57 per unit
There are 8 Alternatives:

(i) Accept none : No information available
(ii) Accept A
(iii) Accept B
(iv) Accept C
(v) Accept A & B
(vi) Accept A & C
(vii) Accept B & C
(viii) Accept All three
Cost Benefit Analysis of Each of Seven Proposals

A B C A&B A&C B&C A,B&C
Sales 5000x5 10000x5 10000x5 5000x5 5000x5 10000x5 5000x55

5 2 1 5 5 2 10000x5
10000x5 10000x5 10000x5 2
2 1 1 10000x5
1
Total 275000 5,20,000 5,10,000 7,95,000 7,85,000 10,30,00 13,05,000
sales 0
Cost 5000x5 10000x5 10000x5 10000x5 10000x5 10000x5 10000x5
7 7 7 7 7 7 7
5000 x 5000x47 10000x4 10000x4
47 7 7
5000 x 37
Total cost 285000 5,70,000 5,70,000 805000 805000 10,40,00 1225000
0
Net
benefit -10000 -50000 -60000 -10000 -20000 -10000 +80000
Recommendation: All the three orders may be accepted as only this alternative results in
positive net benefit.
TRY YOURSELF Q.No.55 A firm furnishes the following information:

Capacity in units Unit cost (Rs.) Unit price (Rs.)
2000 40 100
3000 35 95
4000 34 94
5000 32 ---
6000 31 ---
At present the firm is operating at 4000 units. It has received an order for 2000 units from
an export market at Rs.28 per unit.
Should the order be accepted? (CA Final May 2000)
Answer
Cost of 4000 units 4,000x34 1,36,000
Cost of 6000 units 6,000x31 1,86,000
Incremental cost 50,000
Incremental revenue 2000x28 56,000
Incremental profit Rs.6,000
The order may be accepted.
Q.No.56 X Ltd has two factories, one at Lucknow and another at Pune producing 7200 tons
and 10800 tons of a product against the maximum capacity of 9000 and 11880 tons
respectively at Lucknow and Pune.
10% of the raw material introduced is lost in the production process. The maximum
quantities of raw material available locally are 6000 and 13000 tons at Rs.720 and Rs.729
per ton at Lucknow and Pune respectively. For the additional needs a supplier of Bhopal is
ready to supply raw material at factory site at Rs.792 per ton.
Other variable costs of the production process are Rs.22.32L and Rs.32.94L and fixed costs
are Rs.18L and Rs.24.84L respectively for Lucknow and Pune factory. The output is sold at a
selling price of Rs.1450 and Rs.1460 per ton by Lucknow and Pune factory respectively.
You are required to compute the cost per ton and net profit earned in respect of each
factory. Can you suggest any other alternative production plan for both the factories
without any change in the present total output of 18000 tons whereby the company may
earn optimum profit?
Answer Working note : Material consumption

Lucknow factory Pune factory
Total material consumed 7200 x 100/90 = 8000 10800x100/90 = 12000
Local material 6000 12000
Bhopal material 2000 Nil
Statement cost per ton and net profit earned in respective of each factory
Lucknow Pune
Sales Quantity 7200 tons 10800 tons
Sales amount (A) 7200x1450 = 104,40,000 10800x1460 = 1,57,68,000
Material (Local) 6000x720 = 43,20,000 12000x729 = 87,48,000
Material (Bhopal) 2000x792 = 15,84,000 --------
Other VC 22,32,000 32,94,000
Fixed cost 18,00,000 24,84,000
Total cost (B) 99,36,000 1,45,26,000
Cost per ton 1380 1345
Profit (A- B) 5,04,000 12,42,000
Statement showing contribution per ton

SP Material cost Other VC Contribution
Production at
Locknow (Local 720/0.90 2232000/7200 340
material) 1450 = 800 = 310
Production at
Locknow (Bhopal 792/0.90 = 260
material) 1450 880 310
Production at Pune
(Local material) 729/0.90 = 3294000/10800 = 345
1460 810 305
Production at Pune
(Bhopal material) 275
1460 880 305
Statement Showing Suggested Production

Pune ( Local material) 13000 x 0.90 = 11700 tons
Lucknow (Local material) 6000 x 0.90 = 5400 tons
Pune ( Bhopal Material)

(Spare capacity at Pune) = 180 tons
Lucknow (Bhopal material)
(balancing figure of total out of both
factories) = 720 tons
Total capacity of both factories 18,000 tons
DISCONTINUANCE OF PRODUCT
Q.No.57 Elec. Ltd., is engaged in the manufacturing of four products in its factory. The
production and sales volume is much lower than the normal volume and so there is a substantial
unfavorable variance in the recovery of overheads. The sales and cost data for a year are as
under:
Products
(Rs. In
lakhs)
A B C D Total
Sales 400 500 200 100 1200
Direct materials 64 70 32 7 173
Direct wages 88 105 60 18 271
Factory overheads 128 172 120 24 444
Selling & Admn. Over. 80 100 40 20 240
Total Costs 360 447 252 69 1128
Profit/Loss 40 53 -52 31 72
Unabsorbed Overheads 48
Net profit 24
50 per cent of the factory overheads is variable at normal operating volume and the
variable selling and administration overheads account for 5 per cent of sales.
Of the total sales of product ‘C’ half of the volume is used in the market for
application in which products ‘D’ can be substituted. Thus is product ‘C’ is not available the
sales of products ‘D’ can be increased by Rs. 100 lakhs without any change in the fixed
selling expenses.
Of the total sale of product ‘C’ about 25 per cent is sold in conjunction with product
‘A’. The customers will not be able to substitute product ‘D’ and so the sales of product ‘A’
will be reduced by 12.5 per cent of the present level of product ‘C’ is withdrawn.
In the event of total discontinuance of product ‘C’ the fixed factory and selling and
administration overheads will be reduced by Rs. 20Lakhs. Alternatively if the production
and sales of product ‘C’ is maintained to the extent of 25 per cent of the present level as
service to product ‘A’ there will be a reduction in the fixed costs to the extent of Rs.
10Lakhs.
Prepare statements to show the financial implications of:

i) Continuance of product ‘C’
ii) Total discontinuance of product ‘C’
iii) Continuance of product ‘C’ only as service to customers using product ‘A’
whose business will otherwise be lost.
Make your recommendations on the course of action to be taken by the company with such
comments as you may like to offer. [CA Final, May 1985]
Teaching Note
(a) If both fixed and variable overheads are absorbed on the basis of a single recovery rate,
the amount of recovered overhead contains fixed and variable overheads in the same
ratio in which these are provided in the budget.
(b) Under/over recovered overhead refers to the difference between amounts of overhead
incurred and the amount is less than amount of overhead recovered or absorbed. (If the
recovery and if the amount of overhead recovered is more than amount of overhead
spent, it is over-recovery). When under recovery or over-recovery is there only because
of change in production (i.e., actual production less than or more than normal capacity),
the amount of under/ over recovered overhead is only on account of fixed overheads.
The reason is that the spending of variable overheads changes with change in the
production. Hence there is no difference between amount spent and recovered. In case
of fixed overheads, spending does not change with change in production, recovery
changes with change in production. Hence there is under / over recovery.
Example: Budgeted F.O. Rs. 100,000 Budgeted V.O. 200000, Budgeted output 10000 units.
Recovery rate Rs. 30 per unit (Fixed Rs. 10 + variable Rs. 20). Actual production is 9000
units. Actual spending is on the basis of budget.
Spent Recovered Under-recovery
Fixed 100000 90000 10000
Variable 180000 180000 ---
280000 270000 10000
It is clear from the example that amount of recovered overhead, i.e., Rs.2,70,000 contain
fixed and variable overheads in the same ratio in which these were provided in the budget.
It is also clear that under-recovery amount is only on account of fixed overheads because it
is only account of change production.
Answer to Q. No. 57
Working note:
Fixed factory overheads recovered = 444x0.50 222Lakhs
Fixed selling and administrative overheads recovered 180Lakhs
Total overheads recovered 402Lakhs
Under recovery 48Lakhs
Fixed overheads incurred 450Lakhs
Statement showing profit under Proposal 1 (Continue C) (Rs. Lakhs)

A B C D Total
Sales 400 500 200 100 1200
Materials 64 70 32 7 173
Wages 88 105 60 18 271
V. Production 64 86 60 12 222
overheads
V Selling 20 25 10 5 60
overheads
Total VC 236 286 162 42 726
Contribution 164 214 38 58 474
FC
Profit
Statement showing profit under Proposal 2 (Discontinue C) (Rs. Lakhs)

A B D Total
Sales 350 500 200 1050
Materials 56 70 14 140
Wages 77 105 36 218
V. Production 56 86 24 166
overheads
V Selling 17.50 25 10 52.50
overheads
Total VC 206.50 286 84 576.50
Contribution 143.50 214 116 473.50
FC
Profit
Statement showing profit under Proposal 3 (Continue C as service to A) (Rs. Lakhs)

A B C D Total
Sales 400 500 50 200 1150
Materials 64 70 8 14 156
Wages 88 105 15 36 244
V. Production 64 86 15 24 189
overheads
V Selling 20 25 2,50 10 57.50
overheads
Total VC 236 286 40.50 84 646.50
Contribution 164 214 9.50 116 503.50

FC
Profit
Recommendation : The company may continue to produce C as service to product A as

this alternative is expected to give the maximum amount of profit.
Q.NO 58 E. Ltd is engaged in the manufacture of three products in its factory. The following
budget estimates are prepared for 2009-10:
Products
A B C
Sales units 10,000 25,000 20,000
Selling price p. u. (Rs) 40 75 85
Direct materials p. u. (Rs.) 10 14 18
Direct wages p.u.@ Rs.2 per hour 8 12 10
Variable overheads p. u. 8 9 10
Fixed overhead p.u. (Rs.) 16 18 20
Profit/Loss p.u. -2 22 27
After finalization of the above manufacturing schedule, it is observed that presently only
80% capacity being utilized by these three products. The production activities are made at
the same platform and it may be interchangeable among products according to
requirement. In order to improve the profitability of the company, the following three
proposals are being put for consideration:
(a) Discontinue Product A and the capacity released may be used for either product B or
product C. The fixed cost of product A is avoidable. Expected changes in material
cost and selling price subject to utilization of product A’s capacity are as under:
 Product B: Material cost increased by 10% and selling price reduced by 2%
 Product C: Material cost increased by 5% and selling price reduced by 5%
(b) Discontinue A and divert the capacity so released and idle capacity to produce a new
product D for meeting exports demand whose per unit data is as follows:
Rs
Selling price 60
Direct materials 28
Direct wages @ Rs.3 per hour 12
Variable overheads 6
Fixed cost ( total) 1,05,500
(c) Products A,B and C are continuously run and the idle capacity may be hired out
fixing a price in such a way that the same rate of profit per direct labour hour is
obtained in the original budget estimates.
Required:
(i) Prepare a statement of profitability of Products A, B and C in existing
situation.
(ii) Evaluate then above proposals independently and calculate the overall
profitability of the company under each proposal.
(iii) What proposal should be accepted, if the company wants to maximize its
profits? (CA FINAL May 2010)
Answer:
 Working note for I Proposal (Discontinue A. Produce B or C or both)
Assumption: Both changes in the selling price and material cost are on per unit basis and
for the entire production.
Discontinuance of A will release the capacity of 40,000 hours (10000 units of A @ 4 hours
per unit)
Contribution per hour by each of the two products B and C in case of proposal I
Particulars B (Rs.) C (Rs.)
Selling price 73.50 80.75

Direct material 15.40 18.90
Direct wages 12.00 10.00
Variable overheads 9.00 10.00
Total VC 36.40 38.90
Contribution 37.10 41.85
Hours per unit 6 5
Contribution per hour 6.18 8.37
As contribution per hour is higher in case of C, its 8000 units may be produced.
 Working note for II Proposal (Discontinue A. Produce D)
Total hours used : 10,000x4 +25,000x6 + 20,000x5 = 2,90,000
Spare capacity: 72,500 hours
Total capacity of for: Spare capacity 72500 hours + capacity leased by

discontinuance of A i.e. 40,000 hours = 1,12,500
 Working note for III Proposal ( Hire out spare capacity)

Total profit = -2x10,000 +25000x22 +20000x27 = Rs.10,70,000
Total hours = 2,90,000
Profit per hour = 10,70,000/290,000 = 3.69
Main Answer:
(i) Statement showing profit under existing situation
A B C Total
VC per unit 26 35 38
SP per unit 40 75 85
Contribution per unit 14 40 47
No. of units 10,000 25,000 20,000
Total contribution 1,40,000 10,00,000 9,40,000 20,80,000
Fixed cost 1,60,000 4,50,000 4,00,000 10,10,000
Profit -20,000 5,50,000 5,40,000 10,70,000
(ii) Statement showing profit under I Proposal

Contribution from B on 25000 units @ Rs.40.00
Contribution from C on 28,000 units @ Rs.41.85
Total 20,99,300 21,71,800
FC (B) 4,50,000
(C) 4,00,000
Total 8,50,000 8,50,000
Profit 13,21,800
Statement showing profit under II proposal

Contribution from B on 25000 units @ Rs.40.00
Contribution from C on 20,000 units @ Rs.47
Contribution from D on 28,125units @Rs.14 23,33,750
FC (B) 4,50,000
(C) 4,00,000
(D) 1,05,500 9,55,500
Total 12,15,500
Profit 13,78,250
Statement showing profit under III proposal

Existing profit 10,70,000
Hire receipts 72500 hours@3.69 2,67,525
Total profit 13,37,525
(iii) Comparative profit statement
Existing situation I Proposal II Proposal III Proposal
10,70,000 13,21,800 13,78,250 13,37,525
II proposal may be implemented as it results in highest amount of profit.
SHUT DOWN POINT

Q.No.59 When Alps Ltd. Operates at normal capacity it manufactures 2,00,000 units of product
per year. The unit cost of manufacturing at normal capacity as follows:
Direct Materials 7.80 During the next three months,
only 10,000 units can be
produced and sold.
Management plans to shut
down the plant, estimating
Direct labour 2.10
that the fixed manufacturing
overhead can be reduced to
Rs. 74,000 for the quarter.
Variable Overhead 2.50 When the plant is operating,

fixed overhead costs are
incurred at a uniform rate
throughout the year.
Fixed Overhead 4.00 Additional costs of plant shut
down for the three months
are estimated at Rs. 14,000.
Product cost (Unit) 16.40
Selling price 21.00
Variable Selling &

Administration. Exp./Unit 0.60
Should be plant be shut down for 3 months. What is shut down point (in units?) (CA Final
Nov. 2009)
Teaching Note
In case of shut down, an organization has to suffer loss. Shut-down point is that sales level
at which the amount of loss (while continuing the business) is equal to amount of loss in
case of shut down. For example, if a business is shut down, there would be loss of Rs.
88000. By shut down point we mean that sales level (sale is possible only if business is
continued) at which loss would be Rs. 88000.
Saving in fixed Cost (Because of Shut down)

Shut down point = --------------------------------------
Cont. per unit
A company may continue (i.e. may not shut down) if sales are likely to exceed the shut
down point. A company may shut down if sales are likely to be below shut down point. If
sales are likely to be shut down point, whether it continues or shut down, the amount of
loss is the same.
Answer
Accounting information for decision regarding Shut down Proposal for three months
Two Alternatives:
A : Status Quo i.e. continue to operate
B : Shut down for three months
Statement showing the operating result for the quarter under each of two alternatives
A B
Sales 2,10,000 Nil
VC 1,30,000 Nil
FC 2,00,000 74,000
Special FC ------- 14,000
Loss 1,20,000 88,000

Recommendation: Shutdown alternative results in decreased amount of loss. Hence, on
financial considerations, it is advisable to shut down for three months.
However, the management may take the final decision after giving due consideration to the
following points:
(i) Possibility of adverse impact on goodwill
(ii) Possibility of loosing regular customers permanently
(iii) Possibility of turnover of skilled labour
(iv) Possibility of non-start of the Plant and machinery.
Saving in fixed Cost (on account of Shut down)
Shut down point = --------------------------------------
Cont. per unit
2,00,000 – 74000 -14000

= ------------------------------------
8
= 14000 units
Alternative Solution
Cost Benefit Analysis of shut down proposal for three months

Cost Benefit
Foregone contribution 80,000
Savings in FC 1,12,000
Total 80,000 1,12,000
Recommendation: As the benefit of shut down is more than the its cost on financial
considerations, it is advisable to shut down for three months.
However, the management may take the final decision after giving due consideration to the
following points:
(i) Possibility of adverse impact on goodwill
(ii) Possibility of loosing regular customers permanently
(iii) Possibility of turnover of skilled labour
(iv) Possibility of non-start of the Plant and machinery.
Saving in fixed Cost (Because of Shut down)
Shut down point = --------------------------------------
Cont. per unit
2,00,000 – 74000 -14000

= ------------------------------------
8
= 14000 units
TRY YOURSELF Q.No.60 In 20x1, the turnover of a company, which operates at a

margin of safety of 25% amounted to Rs.900000 and its profit volume ratio was 33 1/3 %.
During 19x2, the estimated that although the volume of sales as in 20x1 would be
maintained, the sales value would go down due to decrease in selling price. There will be no
change in variable costs. The company proposes to reduce as fixed costs. These changes will
alter the profit volume ratio and margin of safety to 30% and 40% respectively in 20x2.
Even if the company closed down its operations in 20x2, it would incur a minimum fixed
cost of Rs.50000.
Required :
(i) Present a comparative statement indicating the sales, variable costs, fixed costs
and profit for 20x1 and 20x2.
(ii) At what minimum sales will be company be better off by locking up the business
in 20x2? (CA FINAL May,2001)
Answer
Comparative statement indicating the sales, variable costs, fixed costs and profit for 19x1 and
19x2.
20x1 20x2
Sales 9,00,000 8,57,143
Contribution 3,00,000 2,57,143
VC 6,00,000 6,00,000
Profit as % of sales 25x33 1/3 %/100 = 8.3333 12%
Profit 75000 1,02,857

FC 2,25,000 1,54,286
Shut down point = savings in FC/P V ratio = 104286/0.30 = Rs.347620.

If sale is blow Rs.347620, the business may be shut down for 1 year; otherwise it may
continue.
Q. No. 61
The selling price per unit of a product is Rs.14. In the coming month, the demand will be
5000 units. Fixed expenses at 50% capacity (5000 units) will be Rs.30,000. The company is
considering the shutdown. In this case the fixed costs amounting to Rs.20000 would be
avoided. Additional FC in case of reopening will be Rs.2000. What should be the VC per unit
so that shut down is recommended? (CA FINAL Nov. 2010 CM)
Answer
Let VC per unit = Rs. x per unit
Benefit of shut down = Savings of net FC Rs.18,000
Benefit of continuation = [contribution per unit of Rs.14 minus Rs. x].5000
Indifference point:
[contribution per unit of Rs.14 minus Rs. x].5000 = 18000
x = Rs.10.40
Shut down is recommended if unit VC exceeds Rs.10.40.
TRY YOURSELF Q.No.62 G Ltd produces and sells 95,000 units of X in one year at its
80% capacity. The selling price is Rs.8 per unit. The variable cost is 75% of selling price.
The fixed cost is Rs.350,000 a year. The company is continuously incurring losses and the
management plans to shut down the plant. The fixed cost is expected to be reduced to
Rs.1,30,000. Additional costs of plant shut down are expected to be Rs.15,000. Should the
plant be shut down? What is the capacity level of production of shut down point? (CA
FINAL NOV. 2010)
Answer
Savings in FC on account of shutdown
Shutdown point = ---------------------------------------------------------
350000 – 1,30,000 – 15,000
= --------------------------------------------- = 1,02,500 units
2
95000 units represents 80% capacity.

102500 units represents 96.3158% capacity. The plant may be shut down if capacity level
of production is below 96.3158% capacity.
At present the company is working at 80% capacity. Shut down is recommended.

Q.No.63 TQM Limited makes engines for motor cars for its parent company and for two
other motor car manufacturers.
On 31st December, the company has sufficient work order for January and one further
order for 21,000 engines. Due to recession in the economy, no further order is expected
until May when it is hoped economic prospect for the motor car industry will have
improved. Recently factory has been working at only 75% of full capacity and the order for
21,000 engines represents about one month production at this level of activity.
The board of directors are currently considering following two options:

(i) Complete the order in February and close the factory in March and April.
OR (ii) Operate at 25 per cent of full capacity for each of three months of February, March
and April.
The costs per month at different levels are as follows:

At 75% (Rs.) At 25% (Rs.) Idle (Rs.)
Direct material 5,25,000 1,75,000 ---
Direct Labour 5,23,600 1,73,250 ---
Factory overheads:
Indirect material 8,400 4,900 4,900
Indirect labour 1,01,500 59,500 ---
Indirect expenses:
Repairs 28,000 28,000 ----
Other expenses 52,500 34,300 26,600
Office overheads:
Staff salaries 1,48,400 98,000 67,550
Other overheads 28,000 19,950 11.200
Other information is as follows:
- Material cost and labour cost will not be incurred where there is no production.
- On the reopening of the factory, onetime cost of training and engagement of

new personnel would be Rs.65,800 and overhauling cost of plant would be
Rs.14,000.
- Parent company can purchase engines from open market at reasonable price.
Required:
(i) To express your opinion, along with calculations, as to whether the plant should
be shut down during the month of March and April or operate 25% of full
capacity for three months.
(ii) To list and comment on cost and non-costs factors which might to relevant to the
discussion.
(C.A. Final Cost Management June 2009)
Answer:
Accounting information for decision regarding the special order
Two alternatives:
(A) Complete the order in February; shut down the factory for March and April
(B) Complete the order in three months
Statement showing total cost under each of the two alternatives

A B
Material 5,25,000 5,25,000
Labour 5,23,600 5,19,750
Factory overheads:
Indirect material 8,400 14700
Indirect material (idle capacity) 9,800 -------
Indirect labour 1,01,500 1,78,500
Indirect expenses:
Repairs 28,000 84,000
Other expenses 52,500 1,02,900
Other expenses (idle) 53,200 -----
Office overheads:
Staff salaries 1,48,400 294000
Staff salary (idle) 1,35,100 -------
Other overheads 28,000 59,850
Other overheads(idle) 22,400 ---------
Reopening cost 79,800 ---

Total 17,15,700 17,78,700
The order may be completed in one month and the factory may be shut down for 2 months
as this alternative results in lower amount of cost.
(ii) the management may consider the following points before taking the final decision:
(a) Quality and regularity of external purchase by the parent company
(b) Adverse impact on goodwill in case of shut down
(c) Moving away of workers in case of shut down.
Q. No.64: Alfa Engineering Works Ltd had the following annual budget for the year ended
30th June, 2009:
Production capacity 60% 80%
Costs ( Rs. Lakhs)
D. Materials 9.60 12.80
D. Labour 7.20 9.60
Factory expenses 7,56 8.04
Administrative expenses 3.72 3.88
Sell. & distribution Exps. 4.08 4.32
Total costs 32.16 38.64
Profit 4.86 10.72

Sales 37.02 49.36
Owing to adverse trading conditions, the company has been operating during
July/September, 2009 at 40% capacity, realizing the budgeted selling prices.
Owing to acute competition, it has become inevitable to reduce the prices by 25% even to
maintain the sales at the existing level. The directors are considering whether or not their
factory should be closed down until the trade recession is passed. A market research
consultant has advised that in about a year’s time there is every indication that sales will
increase to normal capacity and that the revenues to be produced for a full year at that
volume could be expected to be Rs.40 Crores.
If the directors decide to close down the factory for a year it is estimated that:
(a) The present fixed costs would be reduced to Rs.6L.
(b) Closing down costs (redundancy payments etc) would amount to Rs.2L.
(c) Necessary maintenance of plant would cost Rs.50,000 p.a., and
(d) On re-opening the factory, the cost of overhauling the plant etc would amount to
Rs.80,000.
Opine.
Answer
Working note (i) Calculation of VC at 40% capacity
Total cost at 60% Total cost at 80% VC at 20% capacity VC at 40% capacity
capacity (A) capacity(B) (B-A)
32.16L 38.64 6.48 12.96
Working note (ii) Calculation of FC

Total Cost at 60% capacity VC at 60% capacity FC
32.16 19.44 12.72
Working note (iii)

Annual sales at 40% capacity at prices reduced by 25% : 37.02 x 40/60 x 0.75
= Rs.18.51L
Accounting information for decision regarding Shut down Proposal for 1 year
(1st October 2009 – 30th Sept. 2010)
Two Alternatives:
A : Status Quo i.e. continue to operate
B : Shut down for one year
Statement showing the operating results for the ONE YEAR under each of two alternatives
A B
Sales 18.51L -
VC 12.96L -
FC 12.72 6L
Closing down costs - 2L
Maintenance - 0.50L
Re-opening costs - 0.80L
Loss 7.17L 9.30L
Recommendation: Shutdown alternative results in increased amount of loss. Hence, on

financial considerations, it is advisable not to shut down.
CLOSING DOWN
Q.No.65 A company owns a large number of hardware stores located throughout the country. In
one provincial town, there are 2 stores; the accounts of one show a modest profit, but the other
reports a loss as shown by the accounts for the year 2011.
Rs. Rs.
Sales 4,00,000
Op. Stock 65,000
Purchases 3,32,000
3,97,000
Closing Stock 69,000 3,28,000
Gross Profit 72,000
Assistant’s salary 55,000
Drivers wages 3,000
Manager’s salary 8,000
Staff Bonus 4,000
Rent 13,000
Heating & Lighting 2,000
Postage 1,300
Wrapping Material 2,000
National Advertising 4,000
Motor running expenses 1,600
Dep. on motor van 1,600
Regional office charge 3,000 98,500
Loss 26,500
Additional Information
1. There are two motor vans and two drivers for the delivery of goods to customers of
the two stores and the costs of this service are apportioned between the stores on
the basis of turnover.
2. One manager is responsible for the both the stores and his salary Rs. 16,000 is
apportioned equally.
3. The staff bonus is calculated for each store as a percentage on its turnover.
4. The charge for national advertising is allotted to the stores by the H.O. should the
store be closed down. (Mention your assumptions).
5. As the vehicles shall be covering lesser distance, closure of the store will reduce the
motor-running expenses by Rs.1000.
Answer:
Assumptions:
(i) Closure of the store will result in no savings on account of manager’s salary,
national advertising and regional office expenses.
(ii) Even after closure of the store, both the vehicles will be required. No savings on
account of Drivers’ wages and Depreciation. ( It is assumed that Depreciation is
charged on period basis and not on the basis of distance travelled)
Cost Benefit Analysis of Proposal regarding Closing Down one Store

Cost Benefit
Foregone contribution 72,000
Savings :
(i) Salary of Assistants 55,000
(ii) Staff Bonus 4,000
(iii) Rent 13,000
(iv) Heating and lighting 2,000
(v) Postage 1,300
(vi) Warping material 2,000
(vii) Motor running expenses 1000
Total 72,000 78,300
Recommendation: As the benefit is more than the cost, the store may be closed down. Our
recommendation will be further strengthened if the closure of this store is likely to result in
increase in the sales of the other store in the provincial town
Our recommendation will be reversed if the store is likely to be a profitable venture in near
future.
ONE INPUT AS KEY FACTOR
Two situations:
(a) When only common fixed costs are there, i.e. there is no such fixed cost which is
associated or concerned with any particulars department / division/ product/
activity. In this situation, decision may be taken either on the basis of contribution
per unit of key factor or on the basis of profit per unit of key factor. If decision is to
be taken on the basis of profit per unit of key factor, fixed cost should be allocated on
the basis of key factor units.
(b) When there is fixed cost concerning some department / division / product / activity
etc. In this situation decision may be taken on the basis of net contribution per unit
of key factor or on the basis of profit per unit of key factor. By net contribution here
we mean (sale) minus (V.C) and F.C. concerning the department division / product /
activity). If decision is taken on the basis of profit per unit of key factor, common
fixed should be allocated on the basis of key factor units.
Q. No. 66
A farmer owns a farm having an area of 300 acres on which he grows apple, apricots
cherries and plums. Of the total, 200 acres of land are unsuitable for growing apples or
plums and are suitable only for apricots and cherries. On the remaining 100 acres of land
any of the four fruits can be grown.
The marketing policy requires that in each season all the four types of fruits must be
produced and the quantity of anyone type should not be less than 12,000 boxes.
It is also essential that the area devoted to anyone should be in terms of complete
acre and not in fraction of an acre.
There are no physical or marketing limitations and there is an adequate supply of all
types of labour.
The details regarding the selling price, production and cost are given below.
Apples Apricots Cherries Plums
Selling price per box (in rupees) 10 10 20 30
Seasons yield, in boxes per acre 500 150 100 200
Weight per box (kgs) 30 30 40 20

Cost (Rs.)
Material per acre 180 70 60 100
Labour per box 3 3 3 6

Fixed overheads per season Rs. 1,05,000. How the area should be allotted to each item in
order to maximize the profit?
Answer
Working Note 1
Statement showing Minimum allocations
Fruits Land (Acres)
Apples 12000/500 = 24 acres
Apricots 12000/150 = 80 acres

Cherries 12000/100 = 120 acres
Plums 12000/200 = 60 acres
Total 284 acres
The remaining 16 acres of land may be allocated either on the basis of contribution per acre
or on the basis of profit per acre. (If the allocation is being made o n the basis of profit per
acre, the fixed costs should be allocated on the basis of key factor i.e. acres of land). Both the
approaches give the same result.
FC per acre = 105000/300 Rs.350/acre
Statement Showing profit per acre

Sales VC/acre Cont./acr Ranking FC per Profit Ranking
per acre e acre per acre
Apples 500 x 10 180+1500 3320 II 350 2970 II
Apricots 150 x 10 70 + 450 980 IV 350 630 IV
Cherries 20 x 100 60 + 300 1640 III 350 1290 III
Plums 30 x 200 100+1200 4700 I 350 4350 I
Main Answer:
Statement showing allocation of 300 acres of land for each of four products
Apples Apricots Cherries Plums
Land with
restricted use: 80 120
Minimum
requirement
Land with Free

use: 24 60
(i)Minimum 16
requirement
(ii) On
contribution*
per acre basis
Total 24 80 120 76
*Alternatively
on profit per
acre basis (Both
the ways give
the same result)
Q. No. 67
A company produces four products A, B, C and D which are marketed in cartons. Of the total
of 20 machines installed. 8 are suitable for manufacturing all the four products and the
remaining are not suitable for the manufacture of products A and D.
Each machine is in production for 300 days per year and each is used on a given product in
terms of full days and no infraction of days. The company however has no problem in
obtaining adequate suppliers of labour and raw materials.
The marketing policy is that all four products should be sold and the minimum annual
production should be 3000 cartons for each product. Fixed cost budgeted amount to Rs. 50
Lakhs. Production cost and price data are as under:
A B C D
Production/day/machine
(cartons) 14 4 3 6
Selling price/ carton Rs 810 790 845 1290
Cost: Process 1
Direct Material / day/ machine 140 52 45 84
Direct Labour / day/ machine 224 148 90 132
Process II
Direct Material / carton 30 30 30 30
Direct Labour / carton 240 216 300 360
V. Overhead / carton 390 390 300 720
Calculate the optimum of the company if the machines were worked on most profitable
basis.
With a view to meet the increasing demand for A and D, the company is considering
converting some of the 12 machines into all purpose machines. The cost of conversion is Rs.
2,10,000 per machine. The expenditure is to be amortized over a period of 3 years. The
company desires, 12.50 per cent return on the expenditure. Market demand for A and D can
be increased up to 37,500 cartons and 5400 cartons respectively. Calculate for the first year
the optimum profit of the company after conversion of the required number of machine
into all purpose machines.
Answer
Working Notes
Minimum No. of machine Days
A 3000/14 215
B 3000/4 750
C 3000/3 1000
D 3000/6 500
Total machine days
Contribution per Machine Day

A B C D
Sales/machine day 810x14 790x4 845x3 1290x6
I- Material 140 52 45 84
Labour 224 148 90 132
II- Mat 30x14 30x4 30x3 30x6
Lab. 240x14 216x4 300x3 360x6
VO 390x14 390x4 300x3 720x6
Total VC/machine day 9604 2744 2025 6876
Cont. Per mach. Day 1736 416 510 864
Statement showing allocation of 6000 machine days

A B C D
Restricted use days:

(i) Minimum Allocation --- 750 1000 ---
(ii) contribution per day basis
allocation --- 1850 ---
Free use days:
(i) Minimum Allocation 215 500
(ii) contribution per day basis
allocation 1685
Total 1900 750 2850 500
Evaluation of Proposal of converting some of the machines to all purpose machines

Maximum Demand Production per day Machine days required
A : 37500 14 2678
D: 5400 6 900
Total
Machine days allocated at present
Maximum No. of machine days required to produce
unfulfilled demand of And D
Maximum No. of machines to be converted
Five alternatives:
I . Convert None
II. Convert One Machine
III Convert Two machines
IV Convert Three machines
V Convert Four Machines
Statement Showing Annual Profit under each of five Alternatives
I II III IV V
Contribution 1900x173 2200x1736 2500x1736 2678x1736 2678x1736

6
750x416 750x416 750x416 750x416 750x416

2850x510 2550x510 2250x510 1950x510 1672x510
500x864 500x864 500x864 622x864 900x864
Total
contribution 54,95,900 58,63,700 62,31,500 64,92,916 65,91,328
Costs :
(i)FC 50,00,000 50,00,000 50,00,000 50,00,000 50,00,000
(ii)Dep. ------- 70,000 1,40,000 2,10,000 2,80,000
(iii)Required
Return 210000 420000 630000 840000
x0.125 x0.125 x0.125 x0.125
Total
Profit 4,95,900 7,67,450 10,39,000 12,04,166 12,06,328
Recommended: Conversion of four machines is recommended on account of maximum

amount of annual profit.
TRY YOURSELF Q.No.68 An agro-products producer company is planning its

production for next year. The following information is relating to the current year:
Products / Crops A1 A2 B1 B2
Area occupied (acres) 250 200 300 250
Yield per acre(ton) 50 40 45 60
Selling price per ton(Rs.) 200 250 300 270
Variable cost per acre(Rs.)

Seeds 300 250 450 400
Pesticides 150 200 300 250
Fertilizers 125 75 100 125
Cultivations 125 75 100 125
Direct wages 4,000 4,500 5,000 5,700
Fixed overhead per annum Rs. 53,76,000.
The land that is being used for the production of B1 and B2 can be used for either crop, but
not for A1 and A2. The land that is being used for A1 and A2 can be used for either crop,
but not for B1 and B2. In order to provide adequate market service, the company must
produce each year at least 2,000 tons each of A1 and A2 and 1,800 tons each of B1 and B2.

(i) Prepare a statement of the profit for the current year.
(ii) Profit for the production mix by fulfilling market commitment.
(iii) Assuming that the land could be cultivated to produce any of the four products
and there was no market commitment, calculate: Profit amount of most
profitable crop and breakeven point of most profitable crop in terms of acres and
sales value.
(C.A. Final Cost Management Nov.2009)
Answer
Working note:
Statement showing calculation of contribution per acre
A1 A2 B1 B2
Revenue per acre 10,000 10,000 13,500 16,200
VC per acre 4,700 5100 5950 6600
Contribution per acre 5,300 4900 7550 9600
(i) Statement of the profit for the current year

A1 A2 B1 B2 Total
Contribution per acre 5,300 4,900 7,550 9,600
No. of Acres 250 200 300 250
Total contribution 13,25,000 9,80,000 22,65,000 24,00,000 69,70,000
FC 53,76,000
profit 15,94,000
(ii) Statement showing allocation for most profitable mix

A1 A2 B1 B2
Minimum 40 50 40 30
allocation
Additional 360 --- --- 480

allocation on
the basis of
contribution
per acre
Total 400 50 40 510
Contribution 5300 4900 7550 9600

/acre
Total 21,20,000 2,45,000 3,02,000 4896000

contribution
Profit = total
contribution –
FC = 75,63,000
– 53,76,000 =
21,87,000
(iii) In this case, the company should use the total area for B2.
Contribution = 9600 x 1000 = 96,00,000
FC = 53,76,000
Profit = 42,24,000
BEP (No of acres) = FC/contribution per acre = 5376000/9600 = 560
BEP (Sales value) = 560 x 270x60 = Rs.90,72,000
Q. No. 69 Vinak Ltd., operating at 75 per cent level of activity, produces and sells two products
‘A’ and ‘B’. The cost sheets of these two products are as under:
Product ‘A’ Product ‘B’
Units produced and sold 600 400
Rs. Rs.
Direct material 2.00 4.00
Direct Labour 4.00 4.00

Factory Overheads (40% fixed) 5.00 3.00
Selling and administration
Overhead (60% fixed) 8.00 5.00
Total cost per unit 19.00 16.00
Selling price per unit 23.00 19.00
Factory overheads are absorbed on the basis of machine hour which is the limiting (key)
factor. The machine hour rate is Rs.2 per hour.
The company receives an offer from Canada for the purchase of product ‘A’ at a price
for Rs. 17.50 per unit.
Alternatively the company has another offer from the Middle East for the purchase of
product ‘B’ at a price of Rs.15.50.
In both the cases, a special packing charge of fifty paisa per unit has to be borne by
the company. The company can accept either of the two export orders and in either case the
company can supply such quantities as may be possible to produce by utilizing the balance
of 25 per cent of its capacity.
You are required to prepare: (1) a statement showing the economics of the two
export proposals giving your recommendations as to which proposal should be accepted,
and (2) a statement showing the overall profit of the company after incorporating the
export proposal recommended by you.
Answer:
Teaching note: Machine hour rate is a method of absorbing the factory overheads. It is
used for absorbing the both variable as well fixed factory overheads.
Working Note 1:
Machine hour rate is Rs.2 per hour.
A B
Factory overhead per unit Rs.5 Rs.3
Hours per unit 2.50 1.50
Total hours worked 600 x 2.50 = 1500 400 x 1.50 = 600
Total hours worked for both

the products: 2100.
It is 75% of capacity, Hence
spare capacity is 700 hours
Working Note
Existing VC/ Unit A B
Material 2.00 4.00
Labour 4.00 4.00
VFO 3.00 1.80
VSAO 3.20 2.00
12.20 11.80
(1) Statement Showing Economics of the two export Proposals

Canada Offer for A ME offer for B
Sales price 17.50 15.50
VC 12.20 11.80
Special packing 0.50 0.50
Contribution per unit 4.80 3.20

Contribution per hour 1.92 2.13
Contribution per hour is higher in case of the Middle East Offer for B. Hence, this offer may
be accepted for 700/1.50 i.e. 466 units of B.
(2)
Working note:
A B Total
Fixed Factory 5 x 0.40 x 600 3 x 0.40 x 400

overheads absorbed =1200 = 480 1680
Fixed selling and 8x 0.60 x 600 5x 0.60 x 400

administration = 2880 = 1200 4080
overhead absorbed
Total fixed overhead 5760

absorbed
Assumption : Total
fixed overhead
absorbed = total
fixed overhead
incurred
Statement showing overall profit of the company
(incorporating the Middle East order)
A B
Total
India India Middle east
Sales (I) 600x23.00 400x19.00 = 466x15.50

=13,800.00 7,600.00 =7223.00 28,623.00
VC 600x12.20 400x11.80 466x11.80

= 7,320.00 = 4,720.00 = 5,498.80 17,538.80
Packing cost ---- ----- 466 x0.50 233.00

Total VC (II) 7,320.00 4,720.00 5731.80 17,771.80
Contribution (I 6,480.00 2,880.00 1,491.20 18851.20

– II)
FC
Profit
Q. No. 70 As the first management accountant employed by manufacturer of power tools
you have been asked to supply financial results by product line to help in marketing
decision-making.
The following accounts was produced for the year ended 30 th September, 1981
Rs. 000 Rs. 000
Sales 1,200
Cost of goods sold:
1,050
Materials 500
Wages 300
Production Expenses 150
Marketing cost 100
Net profit 150
A statistical analysis of the figures shows the following variable element in the costs:
%
Materials 90
Wages 80
Production Expenses 60
Marketing Costs 70
Below is given as percentage, the apportionment of the sales and the variable elements of
the costs among the five products manufactured.
A B C D E Total
Sales 30 15 7 28 20 100
Materials 40 20 10 20 10 100
Wages 15 25 10 25 25 100
Production costs 30 10 10 30 20 100

Marketing costs 10 30 20 30 10 100
From the information given you are required to:

(a) Prepare a statement for the year showing contribution by products:
(b) Calculate the following.
(i) The breakeven sales level;
(ii) The order of sales preference for additional order to maximize contribution
as a percentage of sales;
(iii) A revised mix of the Rs. 1,200,000 sales to maximize contribution assuming
that existing sales by products can only be varied up to 10 per cent either up
or down.
(iv) The percentage commission which could be offered to an overseas agent on
an order to Rs. 30,000 worth each of product A, C and E obtain a 20 per cent
contribution on the total value of the order.
Answer:
(a) Statement Showing contribution of each product
A B C D E Total
Sales 360 180 84 336 240 1200
Variable cost:
Material 180 90 45 90 45 450
Wages 36 60 24 60 60 240
Production Exp. 27 9 9 27 18 90
Marketing Cost 7 21 14 21 7 70
Total VC 250 180 92 198 130 850
Contribution 110 - (-)8 138 110 350
(b)(i)
A B C D E Total
Sales 360 180 84 336 240 1200
Contributi 110 - (-)8 138 110 350

on
P. V. Ratio 30.55 0 -9.52 41.07 45.81 29.17

(%)
FC =
Contributi
on minus
Profit =
350thou. –
150thou.
=200thou.
200
thousands
Break
even Point
=
-------------
-- =
Rs.685.71t
housands
0.2917
(b)(ii) Order of sales preference for the additional orders to maximize the
contribution as % of sales
1st Preference E
2nd Preference D
3rd and last Preference A
(b)(iii)
Teaching Note: When sales amount is the key factor, decision is to be taken on the basis of
PV ratio.
Statement Showing Revised Sales mix of Rs.1200thou. ( Rs. thousands)

A B C D E Total
Original Sales 360.00 180.00 84.00 336.00 240.00 1200.00
Change in sales :
1st step ----- -18.00 -8.40 + 2.40 +24.00 Nil
2nd step -31,20 +31.20 Nil
Revised sales 328.80 162.00 75.60 369.60 264.00 1200.00
(b) (iv) Computation of Commission as a % of sales to the overseas agent

Product Calculation of contribution Amount
A 30000 x 0.3055 9165
C 30000 x (-)0.0952 -2856
E 30000 x 0.4581 13743
Total contribution 20052
Desired contribution : -18000
90000 x 0.20 = 18000
Excess commission as % of 2052
sales
Commission as % of sales =
(2052/90000)x100 = 2.28%
Q. No. 71
On a turnover of Rs. 20 crores in 2004, a large manufacturing company earned a profit of 10 per
cent before interest and depreciation which were fixed. The product mix of the company was as
under.
Product Mix (% to total sales) PV ratio % Raw material as
% on sales value
P 10 30 40
Q 30 20 35
R 20 40 50
S 40 10 60
Interest and depreciation amounted to Rs. 150 lakhs and Rs. 77 lakhs respectively.
Due to fluctuation in prices in the international Market, the company anticipates
that the cost of raw materials which are imported will increase by 10 per cent during 2005.
The company has been able to secure a license for the import of raw material of a value of
Rs. 1,023 lakhs at 2005 prices. In order to counteract the increase in cost of raw materials
the company is contemplating to revise its product mix. The market survey report recently
prepared indicates that the sales potential of each of the product ‘P’ ‘Q’ and ‘R’ can be
increased up to 30 per cent of total sales value of 2004. There is no inventory of finished
goods or work-in-process in both the years. State optimal product mix for 2005 and find the
profit.
Answer
Working Note
Profit Statement 2004 (Rs. Crores)
Sales Cont. (Sales x P.V. Ratio)
P 2.00 2X30
Q 6.00 6X30
R 4.00 4X40
S 8.00 8X10
Total 20.00 4.20
F.C. (Other than Int. & Dep. 2.20 (Bal figure)

Net profit (Before Int. & Dep.) 2.00
Sales potential of each of P, Q and R can be increased up to 30% of total sales value of 2004 i.e.
up to 30% of Rs.20 Crores i.e. up to Rs. 6 Cores.
Maximum Possible sales
P Rs.6 Crores
Q Rs.6 Crores
R Rs.6 Crores
S Rs.8 Crores
As the raw material is key factor, the decision regarding the sales mix should be taken on
the basis of contribution per rupee of material.
Calculation of contribution per rupee of raw material : 2005

P Q R S
Sales 100 100 100 100
Material (10% more than last year) 44.00 38.50 55.00 66.00
Other VC ( same as last year) 30.00 45.00 10.00 30.00
Contribution 26.00 16.50 35.00 4.00
Contribution per rupee of material 0.59 0.43 0.64 0.06
Statement Showing the Suggested Sales Mix ( Rs.Crores)

Sales Material
R 6.00 6x0.55 = 3.30
P 6.00 6x0.44 = 2.64
Q 6.00 6x0.385 = 2.31
S 3.00 1.98 ( Balancing figure)
10.23
Profit Statement for 2005 (Rs.Crores)

Contribution
P 6x0.26 1.56
Q 6x0.165
0.99
R 6x0.35
S 3x0.04 2.10
0.12
Total contribution 4.77
FC (Other than interest and dep.) -2.20
Interest and dep. -2.77
Profit 0.30
Q.No.72 : A company manufacturers two products. Each product passes through two
departments A and B before it becomes a finished product. The data for a year are as under:
Products Aristocrat Deluxe

(i) Maximum sales potential in units 7400 10,000
(ii) Product unit data
Selling price Rs.90 Rs.80
Machine hours/unit:
Department A 0.50 0.30
Department B 0.40 0.45
(iii) Maximum capacity of Department A is 3400 hours and of Department B is 3840
hours
(iv) Maximum quantity of direct materials available is 17,000 Kg. Each product
requires 2 kg of direct materials. The purchase price of direct material is Rs.5 per
kg.
(v) Variable costs are budgeted at Rs.50 per hour for department A and Rs.60 per
hour for Department B.
In view of the aforesaid production capacity constraints, the company has decided to
produce only one of the two products during the year under review.
Required:
(i) Which of the two products should be produced and sold in the year under review
to maximize the profit? State the number of units of the product and the
resultant contribution.
(ii) The surplus capacity available in Department A or Department B after
manufacture of either product is proposed to be hired out to earn a contribution
of Rs.40 per hour in case of Department A and Rs.60 hour in case of Department
B. Prepare a statement to show whether Aristocrat or Deluxe should now be
produced to maximize the total contribution. Calculate such total contribution.
(iii) The company has been advised to produce 4250 units of each product
and also to hire out the surplus capacity of Department A and / or product B. you
are required to examine the feasibility of this proposal and to prepare a budget
analysis showing the total contribution for the year. [(CA Final May 2004]
Answer:
(i) Maximum Production Potential
Demand Raw Material Department Department Feasible

A B production
Aristocrat 7,400 8,500 6,800 9,600 6,800
Deluxe 10,000 8,500 13,333 8,533 8,500
Contribution per unit: (Rs.)

Aristocrat Deluxe
SP 90 80
VC :
Material 10 10
VC : Department A 50x0.50 50x0.30
VC : Department B 60x0.40 60x0.45
Total 59 52
Statement showing contribution from each of the two products

Aristocrat Deluxe
Maximum contribution 31x 6800 = 2,10,800 28x8500 = 2,38,000
Recommendation ;
Production of Deluxe is
recommended.
(ii)
Surplus capacity (deluxe is produced)
Total capacity Capacity used Spare capacity
Department A 3400 2550 850
Department B 3840 3825 15
Surplus capacity (Aristocrat is produced)

Department A 3400 3400 nil
Department B 3840 2720 1020
Statement Showing total contribution under each of the two alternatives (incorporating
the income from surplus capacity)
Aristocrat Deluxe
Contribution from product 6800 x 31 = 2,10,800 8500x28 = 2,38,000
Income from spare capacity:
A Nil 850 x 40 = 34000
B 1120x60 = 67200 15 x 60 = 900
Total Rs.2,78,000 Rs.2,72,900
Recommendation: The aristocrat may be produced and the spare capacity may he hired
out.
(iii) Surplus capacity (Both products are produced)

Department A 3400 4250x0.50 + 4250x0.30 Nil
Department B 3840 4250x0.40 + 4250x0.45 227.50hours
Statement Showing total contribution under the alternative of producing both the products
(incorporating the income from surplus capacity)
Contribution from products:
Aristocrat 4250x31
Deluxe 4250x28
Income from spare capacity: B 227.50x60
Total 2,64,400
Q. No. 73
On a farm of 200 acres, a farmer plans to use 100 acres for raising crop, 20 acres of growing
fodder and the balance of 80 acres for gazing milk cattle. For raising the crop the seed will
cost Rs. 50 per acre and the fertilizers Rs. 70 per acre. The yield will be 30 tonne per acre
which would be sold at Rs. 50 per tonne. The fodder will cost Rs. 20 per acre for seed and
Rs.50 per acre for fertilizers. The fodder produced will be fed to the cows.
On the 80 acres, 40 milking cows will be kept. In addition to the folder, other feedings stuff will
cost Rs. 20,000 in all for the year. It is expected that each cow would produce one calf which will
be sold at Rs. 100 each together with an annual milk yield sold at Rs. 1200. The resale value of
cows would be diminishing at the rate of Rs. 100 per annum. Other farm costs (which are
unlikely to change, however, the farm is worked) are per annum.
Farm Workers’ Wages Rs.36,000
Rates and Taxes Rs.24,000
General Garages Rs.30,000
A suggestion is made that fodder should be purchased instead of grown. If this is done, it is
estimated that fodder will cost Rs. 250 per cow per annum. Prepare figures to indicate to
the farmer whether the fodder should be purchased or grown.
Answer
Statement Showing Net Contribution per acre from three uses of land
Fodder Grazing Crop
No. of Acres 20 80 100
Value of output 10,000 48000 1,50,000

Value of calves 4,000
Total (I) 10,000 52000 150000
Costs
Seeds
Fertilizers 400 ---- 5000
Fodder
Other feeds 1000 ---- 7000
Depreciation
Total (II) ---- 10000 ----
---- 20000 ----
---- 4000 ----

1400 34000 12000
Net contribution 8600 18000 138000
Net contribution per acre 430 225 1380
Fodder may be purchased provided 20 acres of land (currently used for growing the crop)
may be used for growing crop.
MULTIPLR KEY FACTORS

Q. No. 74 Question A company manufactures two products X and Y. The company’s fixed cost is
RS.5L per annum, the selling price of X is Rs.288 and that of Y is Rs.432. The standard cost data
are:
Product X Product Y
Rs. Rs.
Material 40 80
Direct wages Rs.8 per hour:

Department 1 48 72
Department 2 24 48
Department 3 72 -
Department 4 - 96
Variable overheads 32 28
The company operates 8 hours a day for 300 days in a year. Number of workers, in each
department, are as follows:
Department 1 2 3 4
No. of workers 45 24 27 36
Required:
(a) If only one product is to be manufactured, which of products would give maximum
profit and what is the amount of profit?
(b)How many units should be manufactured and what is the resultant profit if number
of employees cannot be changed [ CA FINAL May 2006]
Answer
Working note (i)
Calculation of hours per unit required
Product X Product Y
Department 1 6 9
Department 2 3 6
Department 3 9 -
Department 4 - 12
Calculation of contribution per hour:

X Y
Selling price 288 432
VC per unit 216 324
(a) Calculation of maximum No. of units that can be produced:

Product X Product Y
Department 1 45x8x300/6 = 18000 45x8x300/9 = 12000
Department 2 24x8x300/3 = 19200 24x8x300/6 = 9600
Department 3 27x8x300/9 =7200 -
Department 4 - 36x8x300/12 = 7200
If only one product is to be produced, the company can produce either 7200 units of
X or 7200 units of Y.
Calculation of contribution
X 7200 x 72 = 5,18,400
Y 7200 x 108 = 7,77,600
If only one of the two products is to be manufactured, Y is recommended.

(b) The company can earn maximum profit by either of the two ways:
(A) Produce 7200 units of X & utilize the remaining capacity to produce Y
(B) Produce 7200 units of Y & utilize the remaining capacity to produce X
Alternative A:
Departments Available Hours required for Remaining Units of Y those
hours 7200 units of X Hours can be produced
1 108000 43200 64800 64800/9 =7200
2 57600 21600 36000 36000/6 =6000
3 64800 64800 Nil
4 86400 Nil 86400 86400/12=7200
Under Alternative A, the company may produce 7200 units of X and 6000 units of Y.
Alternative :B
Departments Available Hours required for Remaining Units of X those
hours 7200 units of y Hours can be produced
1 108000 64,800 43200 7200
2 57600 43200 14400 4800
3 64800 - 64800 7200
4 86400 86400 ---
Under Alternative B, the company may produce 7200 units of Y and 4800 units of X
Statement showing total contribution under each to the two alternatives
Contribution
A B
7200 units of X 5,18,400
6000 units of Y 6,48,000
7200 units of Y 7,77,600
4800 units of X 3,45,600

Total 11,66,400 11,23,200
Teaching note: this part of the question can also be attempted by Linear Programming.
(PURCHASE V/S MANUFACTURE)

Q.No.75 A company manufacturing a highly successful line of cosmetics intents to diversify
the product line to achieve fuller utilization of its plant capacity. As a result of considerable
research made, the company has been able to develop a new product called ‘EMO’.
EMO is packed in tubes of 50 gram and is sold to whole-sellers in cartons of 24 tubes at
Rs.240 per carton. Since the company uses its spare capacity for the manufacture of EMO,
no additional fixed expenses will be incurred. However, the cost accountant has allocated a
share of Rs.4,50,000 per month as fixed expenses to be absorbed by EMO as a fair share of
the company’s present fixed costs to the new product for costing purpose.
The company estimates the production and sale of EMO at tubes 3,00,000 tubes per month and
on this basis the following cost estimates have been developed:
Rs. per carton
Direct Material 108
Direct wages 72
Overheads 54
Total cost 234
The company at present has a capacity for the manufacture of 3,00,000 empty tubes and
the cost of empty tubes if purchased from the outside will result in the saving of 20% in the
material and 10% in the direct wages and variable overhead costs of EMO. The price at
which the outside firm is willing to supply the empty tubes is Rs.1.35 per empty tube. If the
company desires to manufacture empty tubes in excess of 3,00,000 tubes, a new machine
invoking an additional fixed overheads of Rs.30,000 per month have to be installed.
Required :
(i) State by showing your workings whether the company should make or buy the
empty tubes at each of the three volumes of production of EMO namely 3,00,000;
350000 and 450000 tubes.
(ii) At what volume of sales will it be economical for the company to install the
additional equipment for the manufacture of empty tubes?
(iii) Evaluate the profitability on the sale of EMO at the each of the the aforesaid
three levels of output based on your decision and showing the cost of empty
tubes as a separate element of cost.
Answer
Working note:
Calculations Amount
Fixed overheads Rs.4,50,000
Fixed overheads/unit (B) 4,50,000/3,00,000 Rs.1.50
Total Overheads/unit (A) 54/24 Rs.2.25
Vari. Overhead /unit A minus B = 2.25 -1.50 Re.0.75
VC/Unit of EMO Material 108/24 4.50

Labour 72/24 +3.00
VO 0.75 +0.75 = 8.25
VC per empty tube Material 4.50 x 0.20 0.90
Labour 3.00 x 0.10 +0.30
VO 0.75 x 0.10 +0.075 = 1.275
(i) VC per unit of empty tube is less than its purchase price. Hence, 3,00,000 empty
tubes may be made in all cases.
Cost Benefit Analysis of buying additional units

Buying Buying
additional additional
50000 units 150000 units
Cost Benefit Cost Benefit
Savings of FC 30,000 30,000
Increased VC
(1.35 – 1.275) per unit 3750 11250
Recommendation: As the benefit of buying is more than its cost, the units over and above
50000 may be purchased.
(ii)
Fixed cost Rs.30,000
Savings of cost per unit by 1.35 – 1.275 = 0.075
manufacturing
30,000
BEP = -------------- = 4,00,000 units
0.075
Additional fixed cost may be incurred only if the requirement of tubes exceed 7,00,000.
(iii)
Profitability Statement
Per unit 300000 units 350000 units 450000 units
Rs. Rs. Rs. Rs.
Sales (A) 10 30,00,000 35,00,000 45,00,000
Costs:
(i) Material 3.600 10,80,000 12,60,000 16,20,000
(ii) Labour 2.700 8,10,000 9,45,000 12,15,000
(iii) VO 0.675 2,02,500 2,36,250 3,03,750
(iv) VC of empty tubes 1,275 3,82,500 3,82,500 3,82,500
(v) Purchase of
additional tubes 1.35 ------ 67,500 2,02,500
Total Relevant cost (B) 24,75,000 28,91,250 37,23,750
Profit 5,25,000 6,08,750 7,76,250
Q. No. 76 A company makes four products P,Q,R and S. the direct costs of production are
estimated at:
P Q R S
Rs. Rs. Rs. Rs.
Material 36 38 42 24
Labour:
Assembly @ Rs. 4 per hr. 8 12 16 16
Machinsit @ Rs. 6 per hr. 12 24 18 36

Production units Total F.C.
Up to 50,000 Rs. 4,00,000
50001-75000 Rs. 5,00,000
75001-1,00,000 Rs. 6,00,000
Demand for next period are likely to be P 18000 units @ Rs. 68; Q 30,000 units @ Rs. 90; R
27,000 units @ Rs. 91 and S 15,000 units @ Rs. 94. Total machine hours available 2,10,000
hour per annum.
A local firm has offered to manufacture any of the products on a subcontract basis at the
following prices:
P Q R S
Rs. 63 Rs. 80 Rs. 72 Rs.82
Make recommendations for maximum the profit.
Answer:
Teaching note: The key point is that sales price is less than purchase price. Hence, no
customer is to be refused. In this situation, the decision is taken on the basis of saving per
hour on account of manufacturing.
P Q R S
Sub-contract price 63 80 72 82
VC/Unit 56 74 76 76
Savings per unit on account of

manufacturing 7 6 -4 6
Machine Hours Per unit 2 4 3 6
Savings per hour on account of

manufacturing 3.50 1.50 negative 1
Statement Showing allocation of 2,10,000 Machine hours

Units Hours
P 18000 36000
Q 30000 120000
S 9000 54000
(Balancing figure)
Total 57000 2,10,000
In this question, there are different fixed costs for different levels of outputs. Minimum fixed
cost is Rs.4,00,000 for 50,000 units.
If we reduce the production by 7,000 units of S,

- there will be saving of Rs.1,00,000 in case of fixed costs, and
- we have to forego the savings on account of manufacturing @ Rs.6/unit totaling to
Rs.42,000.
Hence, we may revise our recommendation as follows:

Manufacture Sub-contracting
P 18,000 -------
Q 30,000 -------
R ----- 27,000
S 2,000 13,000
Total 50,000 -------
Q. No. 77 K Ltd manufactures and sells a range of sports goods. Management is considering a
proposal for an advertising campaign which would cost the company Rs.3,00,000. The marketing
department has put forward the following two alternative sales budgets for the following year:
Products (‘000
units)
A B C D
Budget I - Without Advertising 216 336 312 180
Budget II – With Advertising 240 373 342 198

Selling prices and variable production costs are budgeted as follows:
Products (Rs.
per unit )
A B C D
Selling prices 11.94 14.34 27.54 23.94
Variable Production costs:

Direct material 5.04 6.60 15.24 12.48
Direct Labour 2.04 2.04 3.36 3.18
Variable production Overheads 0.72 0.72 1.20 1.08
Other data:
(1) The variable overheads are absorbed on a machine hour basis at the rate of Rs.1.20
per machine hour.
(2) Fixed overheads total Rs.30,84,000 p.a.
(3) Production capacity during the budgeted period is 8,15,000 machine hours.
(4) Products A and C could be bought in the market at Rs.10,68 per unit and Rs.24 per
unit respectively.
Determine whether investment in advertising complain would be worthwhile and how
production facilities can best be utilized.
Answer
Working note 1:
A B C D
VO per unit 0.72 0.72 1.20 1.08
VO per hour 1.20 1.20 1.20 1.20
Time per unit 0.60 Hour 0.60 Hour 1.0 Hour 0.90 Hour
Working note 2:
A B C D
Sales Price 11.94 14.34 27.54 23.94
VC 7.80 9.36 19.80 16.74

Contribution /unit (A) 4.14 4.98 7.74 7.20
Time/unit (B) 0.60 Hour 0.60 Hour 1.0 Hour 0.90 Hour
Contribution /hour (A/B) Rs.6.90 Rs.8.30 Rs.7.74 Rs.8.00
Rank IV I III II
WITHOUT ADVERTISING
Products Units Hour /unit Hours
B 3,36,000 0.60 201600
D 1,80,000 0.90 162000
C 3,12,000 1.00 312000
A 2,16,000 0.60 129600
Total hours
Available hours
Market Prices of A and C are more than their respective VC per unit. These products need
not to be purchased. All the four products may be produced.
Profit Statement
Contribution:
A 216000x4.14
B 336000x4.98
C 312000x7.74
D 180000x7.20
Total 62,78,400
FC 30,84,000
Profit 31,94,400
WITH ADVERTISING
Products Units Hour /unit Hours
B 3,73,000 0.60 2,23,800
D 1,98,000 0.90 1,78,200
C 3,42,000 1.00 3,42,000
A 2,40,000 0.60 1,44,000
Total hours
Available hours
Shortfall
This shortfall may be met by purchasing A and /or C.
Saving per hour on account of manufacturing

A C
Market Price 10.68 24.00
VC / Unit 7.80 19.80
Saving per unit on account of manufacturing 2.88 4.20
Hour per unit 0.60 1.00
Saving per hour on account of manufacturing 4.80 4.20
A may be made. C may be purchased. To meet the shortfall of 73000 hours, 73000 units of C
may be purchased.
Profit Statement
Contribution:
A 240000x4.14
B 373000x4.98
C (made) 2,69,00x7.74
C (purchased) 73,000x3.54
D 198000x7.20
Total 66,17,220
FC 33,84,000
Profit 32,33,220
Recommendation: As the advertising results in increased amount of profit, it is

recommended,
Q. No. 78
A company manufactures three components. These components pass through two departments P
and Q. The machine hour capacity of each department is limited to 6000 hours a month. The data
are as under:
Components → A B C
Maximum demand (Units) 900 900 1350
Rs. Rs. Rs.
Direct material/unit 45 56 14
Direct labour/unit 36 38 24
V.O./unit 18 20 12
F.O./unit :
Department P @ Rs.8 per hour 16 16 12
Department Q @ Rs.10 per hour 30 30 10
Total 145 160 72
Components A and C can be purchased from the market @ Rs.129 and Rs.70 each unit
respectively.
You are required to prepare a statement to show which of the components in what quantity
should be purchased to minimize the cost. (CA FINAL Nov. 2002)
Answer
Requirement of Hours to meet the Demand
Department P Department Q
A 1,800 2,700
B 1,800 2,700
C 2,025 1350
Total 5650 6750
The company is short of hours of Department Q i.e. the key factor is capacity of Department
Q.
Statement showing Savings per hour on account of manufacturing
A C
Purchase Price Rs.129 Rs.70
VC per unit Rs.99 Rs.50
Saving (on account of manufacturing) per unit Rs.30 Rs.20
Hours of Department Q (per unit) 3 1
Saving (on account of manufacturing) per hour of Q Rs.10 Rs.20
A may be purchased. To meet the demand, we are short of 750 hours of Q. Each unit of A
requires 3 hours of Q. Hence, 250 units of A may be purchased.
A B C
Purchase 250 units Nil Nil
Manufacture 650 units 900 units 1350 units
Total demand 900 units 900 units 1350 units
Q. No. 79
A company manufactures two products EXE and WYE which pass through two of its
departments exclusively for them. A market research study conducted by the company reveals
that the company can sell either 38500 units of EXE or 31500 units of WYE in a year. The
manufacturing cost and selling price details are as under:
EXE (Rs.) WYE (Rs.)
Costs (per unit)

(i)Department 1
Direct material 58 100
Direct Labour 5 hours 50 75
(ii)Department 2
Direct material 21 26
Direct Labour 7.50 hours 90 120
Department 1 Department 2
V.O. per Direct labour hour (Rs.) 2.40 3.60
Fixed overheads (Rs.) 5,00,000 10,00,000
Budgeted direct labour hours 1,75,000 2,80,000
Since the quantity which can be sold exceeded the production capacity, the company has
been considering the use of subcontracting facility. Accordingly, when the tenders were
floated, two contractors responded as under:
Contractor DS offers to produce up to a maximum of 17500 units of EXE or 14,000 units of
WYE in a year for the type of work done by the Department 1 of the company. The price
charged by DS is RS.138 per unit of EXE and Rs.212 of WYE. These prices included the cost
of the raw material used in this department.
Contractor DW offers to produce up to a maximum of 11200 units of EXE or 7,000 units of
WYE in a year for the type of work done by the Department 2 of the company. The price
charged by DW is RS.150 per unit of EXE and Rs.192 of WYE. These prices included the cost
of the raw material used in this department.
Required :
 If the company does not want to use the subcontractor facility, which of the two
products and in what quantity should be produced and sold to earn maximum profit.
Calculate the resultant maximum profit.
 If the company wants to produce and sell either 38500 units of EXE or 31500 units
of WYE by using subcontracting facility, state which of the two products should be
produced to maximise profit. Calculate the resultant maximum profit. May 2003
Answer
Working note(i)
Contribution per unit (internal production)
Rs.
EXE WYE
Variable cost:
(i) Department 1
Material 58 100
Labour 50 75
VO 12 18
Total 120 193
(ii) Department 2
Material 21 26
Labour 90 120
VO 27 36
Total 138 182
(iii) Total 258 375
Contribution 117 165
(a) Maximum possible internal production:

Product EXE Product WYE
Department 1 175000/5 = 35000 units 175000/7.5 =23333 units
Department 2 280000/7.50 =37,333 units 280000/10 =28000
Statement showing total profit from making only one product

EXE WYE
Contribution on 35000 units @ RS.117 40,95,000
Contribution on 23333 units @ RS.165 38,49,945
Total contribution
Total fixed cost 15,00,000 15,00,000
Profit 25,95,000 23,49,945
The company should go for producing 35000 units of EXE.
(b) There are two alternatives for maximising the profit;
I Alternative: produce 35000 complete units of EXE. Remaining 3500 units of EXE may be
produced as follows:
Contractor Own department
Department I type work 3500 DS Nil ( No spare capacity in
department I)
Department II type work 1167 DW 2333 (Department II)
II Alternative: produce 23333 complete units of WYE. Remaining 8167 units of WYE may be
produced as follows:
Contractor Own department
Department I type work 8167 DS Nil ( No spare capacity in
department I)
Department II type work 3500 DW 4667 (Department II)
Statement showing total profit under each of two alternatives

I Alternative II Alternative
Sales (A) 1,44,37,500 1,70,10,000
(i)Variable cost of complete internal production 90,30,000 87,49,875
(ii)Variable cost of remaining units(I alternative):
DS : 3500X138
DW : 1167x150
Department 2 : 2333x138 9,80,004
(iii)Variable cost of remaining units(II alternative):
DS : 8167X212
DW : 3500x192
Department 2 : 4667x182 32,52,790
FC 15,00,000 15,00,000
TOTAL COST 1,15,10,004 1,35,02,673
PROFIT 29,27,496 35,07,327
Q. No. 80 XYZ Limited is currently manufacturing 5000 units of the product XY100 annually
using the full capacity of its machine. The selling price and cost details are given below:
Rs.
Selling price per unit 900
Costs per unit:
Direct materials Rs.200
Variable machine operating cost (Rs.100 per machine hour) Rs.150
Manufacturing overheads Rs.180
Marketing and administration costs Rs.200
Total Rs.730 730
Operating income per unit of XY100 170
The company can sell additional 3000 units of XY100; if it can outsource these units. ABC, a
supplier of quality goods, has agreed to supply up to 6000 units of XY100 per year at a price
of Rs.650 per unit delivered at XYZ’s factory.
XYZ can alternatively use its production facility to produce 12000 units of XY200; these
units can be sold @ Rs.600 per unit. The estimated total costs per unit to manufacture and
sell 12000 units of XY200 are as follows:
Rs.
Selling price per unit 600
Costs per unit:
Direct materials Rs.200
Variable machine operating cost (Rs.100 per machine hour) Rs.50
Manufacturing overheads Rs.60
Marketing and administration costs Rs.110
Total Rs.420 420
Operating income per unit of XY200 180
Other information pertaining to operations of XYZ is as follows:

(i) XYZ use machine hours as the basis for assigning fixed manufacturing overheads.
Total fixed manufacturing overhead for the current year is Rs.3,00,000. These
costs will not change by product-mix decision.
(ii) Variable marketing and administrative cost per unit are as follows:
Manufactured XY100 Rs.80
Manufactured XY200 Rs.60
Purchased XY100 Rs.40
Fixed marketing and administrative costs for the current year is Rs.6,00,000.
These costs will not be affected by product-mix decision.
Required : calculate the quantity of each product that XYZ should manufacture and/or
purchase to maximize operating income. (CA Final May 2002)
Answer
Working notes
XY100 XY200
Manufacturing overhead/unit 180 60
Fixed Manu. Overhead per unit 3,00,000/5000 = 60 3,00,000/12000 =25
V. Manufacturing O. per unit 120 35
Key factor : 7500 Machine hours:

Main Answer
Statement showing contribution per hour for each of XY100 and XY200
XY100 XY200
SP 900 600
VC per unit:
Material 200 200
Labour 150 50
V. Manufacturing O. 120 35
V. Marketing and Adm. O 80 60
Total 550 345
Contribution per hour 233.33 510
Statement showing Allocation of 7500 hours

Hours allocated Balance hours
XY200 ( 12000 units) 6000 1500
XY100 (1000 Units) 1500 Nil
Final recommendation
Manufacture Purchase
XY100 1000 6000
(Purchase price Rs.650.
Selling price Rs.900)
XY200 12,000 Nil
Q. No. 81 P Ltd manufactures plastic cans of standard size. The variable cost per can is Rs.4
and selling price is Rs.10. the company has eight identical machines. Any individual
machine can purchase 30 cans per hour. The factory works for 7.50 hours per day and 300
days in a year. The has received an order for 4,20,000 cans. The yearly fixed cost of the
company is Rs.20L. P Ltd. has received an order from another customer for supplying
60,000 toys @ Rs.60 per toy; Variable cost per toy is Rs.50. While the order would be
acceptable for the total quantity only, on acceptance, a special moulding will have to be
purchased for manufacturing the toys at a cost of Rs.2,25,000. The time study reveals for 15
toys can be manufactured per hour for any of the machines.
Advise the company, with reasons in the following situations:
(i) Whether to accept the order for toys in addition to the order for cans or not.
(ii) If the order for cans increases to 5,40,000, whether to accept the order for toys
or not
(iii) While a sub-contractor is willing to supply the toys, either whole or part of the
order, @ Rs.57.50, what would be minimum excess capacity needed to justify the
manufacturing of any portion of the toys order, instead of subcontracting.
(iv) The company has an understanding that the order for the cans can be increased
during the year, on negotiations, to 4,50,000 cans during the year. The company
accepts the toys order and subcontracts only 15,000 toys. At the end of the year,
it is revealed that the order for the cans could be raised to 4,80,000, if it was
properly negotiated. How much loss has been suffered by the company due to
improper prediction of demand and negotiation? (CA Final Nov. 2001)
Answer
Working notes (i) Calculation of contribution per minute
Cans Toys
SP 10 60
VC per unit 4 50
Minutes per unit 2 4
Contribution per minute 3 2.50
The toys are less profitable. There are two reasons (i) contribution per unit is lower (ii)
there is additional cost of Rs.2,25,000 for making toys.
Main answer (i)
Hours available 300x7.50x8 18,000
Hours for cans 420000/30 14,000
Hours required for toys 60,000/15 4,000
This statement shows that there is capacity to produce the required number of toys.
Cost Benefit
Revenue 36,00,000
VC 30,00,000
FC 2,25,000
Total 32,25,000 36,00,000
As the benefit is more the cost, the toys order maybe accepted.
(ii) Producing the cans is our first priority. The order will utilize the total capacity of 18,000
hours. Hence, the toys order may not be accepted.
(iii) Let the indifference point ( between manufacture and purchase of toys) = X units
of toys
2,25,000 + 50X = 57.50X
X = 30,000 toys
Manufacturing of toys is recommended only if the demand is more than 30,000. In
otherwise situation, the toys may be purchased.
(iv) Under properly negotiated plan, 480000 cans ( requiring 16000 hours) and
30000 toys ( requiring 2000 hours) would have been produced and 30000 toys
would have been purchased
Statement showing profit under each of the two Plans

Negotiated Plan Properly
negotiated Plan
Contribution: Contribution:
Cans 4,50,000x6 Cans 4,80,000x6
Toys(made) 45,000x10 Toys(made) 30,000x10
Toys (Purchased) 15,000x2.50 Toys (Purchased) 30,000x2.50
Total 31,87,500 Total 32,55,000
FC 22,25,000 FC 22,25,000
Profit 9,62,500 Profit 10,30,000
Loss due to improper demand estimation : Rs.67,500.
Q. No. 82 Lee Electronic manufactures four types of electronic products. A,B,C and D. All these
products have been in great demand in the market. The following figures are given to you:
A B C D
Material cost (Rs./unit) 64 72 45 56
Machining Cost (Rs./u @ Rs.8 per hour 48 32 64 24
Other variable costs (Rs/U) 32 36 44 20
Selling Price (Rs./u) 162 156 173 118
Market demand (units) 52,000 48,500 26,500 30,000
Fixed overhead at different levels of operation are:
Level of operation ( In production Hours) Total fixed cost (Rs.)

Up to 150000 10,00,000
1,50,000 - 3,00,000 10,50,000
3,00,000 - 4,50,000 11,00,000
4,50,000 – 6,00,000 11,50,000
At present, the available production capacity in the company is 4,98,000 machine hours.
This capacity is not enough to meet the entire market demand and hence the production
manager wants to increase the capacity. The company wants to retain the customers by
meeting their demands through alternative ways. One alternative is to sub-contract a part
of its production. The sub-contract offer received as under:
A B C D
Sub-contract Price (Rs./unit) 146 126 155 108
The company seeks your advice in terms of products and quantities to be produced and/or
sub-contract, so as to achieve the maximum possible profit. You are also required to
compute the profit expected from your suggestion.
(November 2009 CA Final 18 marks)
Answer
The key point is that sales price is less than purchase price. Hence, no customer is to be
refused. In this situation, the decision is taken on the basis of saving per hour on account of
manufacturing.
A B C D
Sub-contract price 146 126 155 108
VC/Unit 144 140 153 100
Savings per unit on account of 2 -14 2 8
manufacturing
Machine Hours Per unit 6 4 8 3
Savings per hour on account of
manufacturing 0.33 NEGATIVE 0.25 2.67
There are four levels of operations:

(a) Work up to 1,50,000 hours
(b) Work 1,50,000 – 3,00,000 hours
(c) Work 3,00,000 – 4,50,000 hours
(b) Work 4,50,000 – 4,98000 hours
Work up to 150000 hours
Statement Showing allocation of 1,50,000 Machine hours

Units Hours
D 30000 90000
A 10000 60000
(balancing figure)
Fixed cost of Rs.10,00,000 has be incurred. This provides us an opportunity of working for
150000 hours. The best use is producing 30,000 units of D and 10000 units of A.
Next 150000 hours
Units Hours
A 25000 150000
Savings on a/c of
manufacturing = 25000x2 =
Rs.50000
Additional fixed cost
= Rs.50000
No Financial gain for
operating at this level.
Next 150000 hours
Units Hours
A 17000 102000
C 6000 48000
(balancing figure)
Savings on a/c of
manufacturing = 17000x2 +
6000x2= Rs 46000
= Rs.50000
Loss on operating at this
level. This level may not be
worked
Next 48000 hours
Units Hours
C 6000 48000
Savings on a/c of
manufacturing = 6000x2 =
Rs.12000
= Rs.50000
Loss on operating at this
level. This level may not be
worked
Hence, we may revise our recommendation as follows:

Manufacture Sub-contracting
A 10,000 42,000
B --- 48,500
C --- 26,500
D 30,000 Nil
Profit statement
Calculations Amount
Sales
A 52000x162
B 48500x156
C 26500x173
D 30000x118 2,41,14,500
VC of manufacturing:
A 10000x144
D 30000x100 44,40,000
Cost of sub-contracting:
A 42000x146
B 48500x126
C 26500x155 1,63,50,500
FC
Total cost
Profit
Q. No. 83: A furniture company sells one type of furniture set. This set contains following items;
one table, two armchairs and four armless chairs. These items can either be manufactured or
purchased and the relevant data are as follows:
Table (Rs) Armchair(Rs) Armless Chair(Rs)
Material cost per unit 20 10 11
Labour hours per unit 10 5 1
Purchase price per unit 50 20 15
At present selling price is Rs.150 per set and annual demand is for 8000 sets. Only 50000
labour hours are available. Labour cost is Rs.1.10 per h our and VO Re.0.40 per hour. FC is
Rs.35000 per annum. Which items and how many, should be manufactured to maximize
profit. What maximum profit can be earned? What, if demand is infinite?
Answer: VC per set:

Table (Rs) Armchair(Rs) Armless Chair(Rs)
Material cost per 20 10 11
unit
Labour & VO 10 x 1.50 5 x 1.50 1 x 1.50
VC per unit 35 17.50 12.50
VC per set = 35x1 +
17.50x2 + 12.50x4
=120
Purchase Price per
set : 50x1 + 20x2 +
15x4 =150
SP of the set is equal to purchase price of the set. In this case, all the demand should be met.
No customer should be refused. Sale should be 8000 sets. The only point is that to earn
profit, one or more of the component should be made by the company.
Savings per hour on account of manufacturing:

Calculations Saving per hour
50 – 35
Table ------------- 1.50
10
20 – 17.50
Armchair -------------- 0.50
5
15-12.50
Armless chair --------- 2.50
1
The company may produce 32,000 armless chairs (requiring 32000 hours) and 1800 tables
(requiring 18000 hours). It may purchase 6200 tables and 16000 armchairs. The company
may sell 8000 sets.
Profit Statement
Amount (Rs.)
Sale 8000 x 150 12,00,000
Purchase:
Tables 6,200 x 50
Armchairs 16,000 x 20 6,30,000
Materials :
Tables 1,800 x 20
Armless 32,000 x 11 3,88,000
Labour & VO 50000 x1.50 75,000
FO 35,000
Total cost 11.28,000
Profit 72,000
If Demand is infinite:
The best use of the company’s labour is manufacturing the armless chairs. It may
manufacture 50000 armless chairs. It may sell 12500 sets by purchasing 12500 tables and
25,000 armchairs.
Profit Statement
Amount (Rs.)
Sale 12,500 x 150 18,75,000
Purchase:
Tables 12,500 x 50
Armchairs 25,000 x 20 11,25,000
Materials :
Armless 50,000 x 11 5,50,000
Labour & VO 50000 x1.50 75,000
FO 35,000
Total cost 17,85,000
Profit 90,000
OPPORTUNITY COST
Q.No.84 Fleet Limited produces a chemical product which is processed through two
departments, P1 and P2. The company has the capacity to process an input of 5,000 tons in the
coming year. Normal waste in department P1 is 5 per cent of input and in department P2 10 per
cent of input to that department. Waste from department P1 is sold at £10 per ton and P2 waste at
£12 per ton, the sales value being credited against the costs of the department. Budgeted
departmental costs for the coming year are:
Dept. P1 Dept. P2
£ £
Direct labour 50,000 45,000
Overhead 42,000 38,000
The company has three possible sources of supply for its raw materials : Supplier A offers
to supply up to 3,000 tons at a price of £10 per ton; Supplier B will supply the 5,000 tons
required at £12 ton with a retrospective discount of 10 per cent if the company buys the
whole of its requirement from them; and
Supplier C can supply up to 4,000 tons at a price of £ 10.30 per ton.

In each case Fleet Limited must collect material from the supplier. Variable transport costs would
be:
Supplier A £0.60 per ton
Supplier B £0.40 per ton
Supplier C £ 0.50 per ton
Fixed transport costs would be £10,000 per annum which ever supplier is used.
The finished output from department P2 can be sold to three possible customers.
CUSTOMER X will purchase up to 2,000 tons at a price of £65 per ton.
CUSTOMER Y will purchase up to 4,000 tons at £65 per ton but requires a trade discount of
10 percent.
CUSTOMER Z will purchase the whole of the output but will only pay L £57.50 per ton. This
customer will collect from factory of Fleet Limited. He won’t accept lesser quantity.
Delivery cost to customer X and Y are:
Variable costs:
Customer X £0.70 per ton
Y £0.60 per ton
Fixed costs: £ 9,000 for the year (These fixed costs would be avoided if all
the output are sold to Z.
Make recommendations on the choice of suppliers and customers if profit is to be

maximized.
Answer:
Working note:
Net output = 5000 -250 -475 = 4275
Relevant cost for choice of Suppliers:
A B1 B2 C
Maximum 3000 Less than 5000 5000 4000
quantity
Price 10.00 12.00 10.80 10.30
Transport cost 0.60 0.40 0.40 0.50
Total cost 10.60 12.40 11.20 10.80
Purchase 3000
tons from A and
2000 tons from
C
Sales alternatives
2000 tons to X and 275 tons to X and 4275 tons to Z
2275 tons to Y 4000 tons to Y
Sales 2000x65.00 275x65.00 4275x57.70
2275x58.50 4000x58.50
2,63,087.50 2,51,875 = 245812.50
Delivery costs 2000x00.70 275x00.70
2275x00.60 4000x00.60
9000 9000 ----
11765 11592.50
Net realizations 2,51,322.50 2,40,282.50 2,45,812.50
Recommendations: Sale of 2000 tons to X and 2275 tons to Y is recommended.
Q. No. 85 XYZ Ltd. Has to date spent Rs. 75,000 on a research projects that when completed
in a further year the results of the research can be sold for Rs. 1,00,000 In trying to decide
whether to proceed , the business identifies the additional expenses necessary to complete
to research:
Material Rs. 30,000 . This material (already in store and paid for) is very toxic and
will have to disposed off in sealed containers at a cost of Rs. 2,500.
Labour Rs. 20,000. The research projects used highly skilled labour taken from
the production department of the company. If they were working or
normal production, the company could earn Rs. 25,000 additional
contribution to profit in the next year after paying the skilled labour.
Research Rs. 30,000. The research unit will close down after the project has been
staff completed the voluntary retirement pay has already been agreed at Rs.
12,500.
General Rs. 20.000. The research unit is apportioned a share of the total fixed
Overheads costs of the business.
The management Accountant of the company has presented the following analysis and
recommended against continuation, since the analysis shows that the company would lose
Rs. 25,000 more by continuing the project than by abandoning now.
The Managing Director seeks your opinion as the group management Accountant about the
analysis presented by the Management Accountant.
Abandon Now Complete
Rs. Rs. Rs.
Sales 1,00,000
Costs to date 75,000 75,000
Additional Costs.
Materials 30,000
Labour 20,000
Research Staff 30,000
Overheads 20,000
Loss in contribution 25,000 2,00,000
Net Loss 75,000 1,00,000
(CA FINAL May 2007)
Answer:
Cost Benefit Analysis of Proposal Regarding Discontinuance of the Project

Cost (Rs.) Benefit(Rs.)
Foregone sale 1,00,000
Cost of material disposal 2,500
Opportunity Benefit of labour 45,000
Savings in research cost 30,000
Total 1,02,500 75,000
Recommendation: As the cost of discontinuation is more than its benefit, discontinuation

is not recommended. The company may continue with the project.
Q. No. 86
Novel Accessories have been manufacturing alloy figurattes to be fitted on car bonnets One of
the figurettes resembles a tiny model of Ashokan Pillar with the Lion capital. As the car fitted
with these have been mistaken by the public as belonging to the Government dignitaries, on a
complaint, the police authorities have banned the use of this on car bonnets. The company is now
left with an inventory of 8,000 units of this figurette and manufacturing costs per unit were as
follows:
Rs.
Material 1.20
Labour 0.80
Fixed Overheads 0.50
2.50
Prior to being banned, the selling price was Rs. 3 per unit. The casts for the figurette cost
Rs. 1,000 when originally acquired. The alternative curses of action.
(i) Sell the units as scrap metal for Rs. 6,500.
(ii) Rework them by putting a base which would allow them to be sold as Drawing
Room curious at a price of Rs. 3.20 each. Such work would require Rs. 2 per unit
of additional labour and a fixed overhead charge of Re. 1 each would be entailed
in terms of the company’s absorption costing system. No further materials would
be required.
(iii) Melt them down and use the mental as substitute in a strong selling line where
the mental currently used costs 50 per cent more than the mental used in the
figurettes. This process would incur a materials loss of three-eighths of the
original mental.
You are required to examine each of these alternatives and arrive at the decision
which would result in the greatest benefit to the company. [CA FINAL Nov.
1983)
Answer
Accounting Information for decision regarding disposing off of the figurettes
Thee Alternatives:
I. Sell at Rs.6500
II. Rework
III. Meltdown
Cost Benefit analysis of each of Three Proposals

A B
Cost Benefit Cost Benefit Cost Benefit
Sale/Value --- 6,500 --- 8000x3.20 -- 5000x1.80
= 25600 = 9000
Cost --- --- 16,000 ----- ----- ---
Net benefit Rs.6,500 Rs.9,600
The rework option is recommended as the amount of its net benefit is maximum.
Q. No. 87
Mardel Limited is a vertically integrated company engaged in the extraction, treatment and
distribution of Mardel.
Supply sources
It draws its supplies of raw mardel from three sources.
Source A
It is located 250 miles from the company’s treatment plant and has a maximum output of
6,000 tonnes per annum. Its variable cost is £ 6.75 per tonne. Fixed cost £1500. The
sources is wholly owned by the company.
Source B
This is owned equally by the company and a sole trader, X in partnership. It is located 250
miles from the company’s treatment plant and has a maximum output of 18,000 tonners
per annum. It fixed costs of £ 5,000 per annum are shared equally by the partners and its
variable extraction costs are £ 6 per tonne. The partnership agreement requires each
partner to extract a minimum of 5,000 tonnes per annum. The sole trade X had indicate that
he does not wish to extract more than his minimum this year, so the remaining 8,000 is
available to Mardel if it so wishes. For every tonne of this 8000. Mardel’s costs would be
one-half of the variable cost plus £ 4.50 payment to X.
Source C
This is wholly owned by the company, is located 500 miles from the treatment and has
maximum output of 30,000 tonnes per annum. Variable costs are £ 4.25 per tonne and fixed
costs £ 6,000 per annum.
Transport and Plant

Mardel Limited owns a fleet of carriers that can carry 17.5 million tonne-miles per annum
of raw mardel. The fixed costs of the fleet are £ 70,000 per annum and the variable costs £
0.005 per tonne mile. There is an active market for chartering in or chartering out of these
carriers at £0.011 per tonne-mile.
Mardel Limited’s plant has capacity of 40,000 tonnes per annum of raw mardel and there is
no physical loss in the conversion of raw to treated mardel. Variable costs are £ 0.25 per
tonne, fixed costs are £40,000 per annum.
Customers
Mardel Limited’s customers are of two types:
- Contract customers with long-term commitments at fixed prices.
- Spot customers who indicate their willingness to purchase specific quantities at
specific prices over the year.
There are two contract customers:
CC1 takes 4,000 tonnes per annum. The prices is £12.50 per tonne.
CC2 takes 4,000 tonnes per annum. The price is £11.75 per tonne.
There are nine potential spot customers for the coming year:
Customer Quantity ‘000 tonnes Price per tone (£)

SC1 4 12.50
SC2 6 9.25
SC3 4 8.50
SC4 2 11.15
SC5 5 11.50
SC6 2 12.45
7 3 15.00
SC8 6 12.50
SC9 3 12.50
Recommend for the coming year what extraction, treatment, selling and transportation
action Mardel Limited should take if it is to maximize its profit.
Answer:
Note: Opportunity cost of Transportation is £0.11 per tonne mile as there is active market
for charter in and out.
Statement showing Relevant cost per ton of Raw material from different sources
A B1 B2 C
Quantity 6000 5000 8000 30000
variable cost 6.75 6.00 3+4.50 4.25
per tonne
Transport cost 250x0.011 250x0.011 250x0.011 500x0.011
per tonne = 2.75 = 2.75 = 2.75 = 5.50
Total relevant 9.50 8.75 10.25 9.75
cost per tone
Rank II I IV III
Maximum total requirement: 40000

 5000 tonnes has to be taken out from B as it is a contractual obligation.
 6000 toness may be taken from A, and
 remaining (remaining maximum requirement 29000) may be taken from C.
Analysis of Customers Orders

Customer Quantity Source of Raw Analysis
demanded material
Contract customers 8000 B : 5000 Accept irrespective
A : 3000 of cost
SC7 3000 A : 3000 Cost : 9.75 (see note
1)
Price offered 15.00
May be accepted
SC1, SC8 & SC9 13,000 C Cost : 10.00 (see note
2)
Price offered 12.50
May be accepted
SC6 2000 C Cost : 10.00 (see note
2)
Price offered 12.45
May be accepted
2)
Price offered 11.50
May be accepted
2)
Price offered 11.15
May be accepted
Total orders
accepted : 33,000
tonnes
SC2 and SC3 10,000 C Cost : 10.00 (see note
2)
Price offered : less
than 10
May not be accepted.
Note 1 : Raw
material cost
Rs.9.50
: Processing
cost (variable)
Re.0.25
: Total Relevant
cost Rs.9.75
Note 2 : Raw
material cost
Rs.9.75
: Processing
cost (variable)
Re.0.25
: Total Relevant
cost Rs.10.00
Statement Showing recommendation regarding Extraction, Treatment, Transportation and Selling

Actions
Extraction
A 6000 tonnes
B 5000 tonnes
C
Total 22000 tonnes
33000 tonnes
Treatment 33,000 tonnes
Transportation
Total capacity : 1,75,00,000 tonne miles
Capacity used:
A -250x6000
B -250x5000
C -500x22000
Capacity chartered out 37,50,000 tonne-miles
Selling action
CC1 4000
CC2 4000
SC1 4000
SC4 2000
SC5 5000
SC6 2000
SC7 3000
SC8 6000
SC9 3000
TOTAL 33000
Q. No. 88: Tiptop Textiles manufactures a wide range of fashion fabrics. The company is
considering whether to add a further product the “Superb” to the range. A market survey
recently undertaken at a cost of Rs.5000 suggests that demand for the “Superb” will last
only for one year, during which 50000 units could be sold at Rs.18 per unit. Production and
sale of “Superb” would take place evenly throughout the year. The following information is
available regarding the cost of manufacturing “Superb”.
Raw materials: Each “Superb” would require 3 types of raw materials Posh, Flash and
Splash. Quantities required, current stock levels and cost of each raw material are shown
below. Posh is used regularly by the company and stocks are replaced as they are used. The
current stock of Flash is the result of overbuying for an earlier contract. The material is not
used regularly by Tiptop and any stock that was not used to manufacture “Superb” would
be sold. The company does not carry a stock of Splash and the units required would be
specially purchased.
Costs per
meter of raw
material
Raw material Quantity Current Original cost Current Current
required per stock Levels replacement resale value
unit of (meters) cost
Superb Rs. Rs.
(meters) Rs.
Posh 1.00 1,00,000 2.10 2.50 1.80
Flash 2.00 60,000 3.30 2.80 1.10
Splash 0.50 nil ----- 5.50 5.00
Labour : Production of each “Superb” would require a quarter of an hour of skilled labour
and two hours of unskilled labour. Current wage rates are Rs.3 per hour for skilled and Rs.2
per hour for unskilled labour. In addition, one foreman would be required to devote all his
working time for one year in supervision of production of Superb. He is currently paid an
annual salary of Rs.15000. Tiptop is currently finding it very difficult to get skilled labour.
The skilled workers needed to manufacture “superb” would be transferred from another
job on which they are earning a contribution surplus of Rs.1.50 per labour hour, comprising
sale revenue of Rs.10 less skilled labour wages of Rs.3 and other variable costs of Rs.5.50. It
would not be possible to employ additional skilled labour during the coming year. The
company has a large force of idle unskilled workers. Because the company intends to
expand in the future, it has decided not to terminate the services of any unskilled worker in
the foreseeable future. The foreman is due to retire immediately on annual pension of
Rs.6000 payable by the company. He has been prevailed upon to stay on for a further one
year and to defer his pension for one year in return for his annual salary.
Machinery: Two machines would be required to manufacture “Superb” MT4 and MT7. Details
of each machine are as follows:
Start of year End of the year
Rs. Rs.
MT4 Replacement cost 80,000 65,000
Resale value 60,000 47,000
MT7 Replacement cost 13.000 9,000
Resale value 11,000 8,000
Straight line Depreciation has been charged on each machine for each year of its life. Tiptop
owns a number of MT4 machines, which are used regularly on various products. Each MT4
is replaced as soon as it reaches the end of its useful life. MT7 machines are no longer used
and that one which would be used for “Superb” is the only one the company now has. If it
was not used to produce “Superb’, it would be sold immediately.
Overheads: A predetermined rate of recovery for overhead is in operation and fixed

overheads are recovered fully from the regular production at Rs.3.50 per labour hour.
Variable overhead costs for “Superb” are estimated at Rs.1.20 per unit produced.
For decision-making, incremental costs based on relevant costs and opportunity costs are
usually compute.
You are required to compute such a cost sheet for “superb” with all details of materials,
labour, overheads etc., substantiating the figures with necessary explanations.
Answer
Notes
Posh Posh is being used regularly. Its current purchase price (current
replacement cost) is its relevant cost.
Flash 60000 units are in stock. These are not required. Current resale value is
relevant cost.
40000 units will be purchased. Current purchase price (current replacement
cost) is its relevant cost.
Splash Not in stock. It will be purchased. Current purchase price (current
replacement cost) is its relevant cost.
Skilled Relevant cost is Rs.4,50 per hour. ( Rs. 3 wages + Rs.1.50 contribution lost)
Labour
Unskilled Relevant cost is nil as the labour is sitting idle and the management has
decided not to terminate their services.
Foreman Salary Rs.15000 savings of pension Rs.6000
Fixed Irrelevant as not being incurred
overhead
Market Sunk cost. Hence, irrelevant.
Survey
MT4 Regular use. Change in the replacement cost is relevant cost.
MT7 Not needed for business. Hence change in resale value is relevant cost.
Cost Benefit Analysis of proposal of introduction of Superb

Calculations Amount
Benefit : Sales (A) 50000 units @ Rs.18 9,00,000
Costs :
(A) Raw materials
Posh 50000 X 2.50 1,25,000
Flash (In Stock) 60000 X 1.10 66,000
Flash (Purhcase) 40000 X 2.80 1,12,000
Splash 25,000X 5.50 1,37,500
(B) Labour
Skilled 12500 hours@ Rs.4.50 56,250
Unskilled Nil -----
Foreman 15000 minus 6000 9,000
(C) Machinery
MT4 80000 minus 65000 15,000
MT7 11000 minus 8000 3,000
(D) VO 50000 x 1.20 60,000
TOTAL costs (B) 5,83,750
Net Benefit (A – B)
3,16,250
Recommendations: The proposal may be accepted as it results in positive net benefit.
Q. No 89 The Aylett and Co. has been offered a contract, if accepted would significantly
increase next year’s activity level. The contract requires the production of 20000 Kg. of
product X and specifies a contract price of Rs.100 per kg. The resources used in the
production of each kg. of X include the following:
Resources per kg. of Product X

Labour Grade 1 2 hours
Grade 2 6 hours
Materials A 2 units
B 1litre
Grade1 labour is highly skilled and although it is currently underutilized in the firm, it is
Aylett’s policy to continue to pay grade 1 labour in full. Acceptance of the contract would
reduce the idle lie of Grade1 labour. Idle time payments are treated as non-production
overheads.
Grade 2 is unskilled labour with a high turnover and may be considered a variable cost. The
costs to Aylett of each type of labour are:
Grade 1 Rs.4 per hour

Grade 2 Rs.2 per hour
The materials required to fulfill the contract would be drawn from those materials already
in stock. Material A is used within the firm and any usage for the contract will necessitate
replacement. Material B was purchased to fulfill an expected order that was not received, if
material B is not used for the contract, it will be sold. For accounting purpose FIFO is used.
The various values and costs of A and B are:
A B
Per unit Per litre
Rs. Rs.
Book value 8 30
Replacement cost 10 32
Net realizable value 9 25
A single recovery rate for fixed factory overheads is used throughout the firm even though
some fixed production overheads could be attributed to single product or department. The
overhead is recovered per productive labour hour and initial estimates of next year’s
activity, which excludes the current contract, show fixed production overheads of
Rs.6,00,000 and productive labour hours of 3,00,000. Acceptance of the contract would
increase fixed production overheads by Rs.228000. Variable production overheads are
accurately estimated at Rs.3 per productive hour.
Acceptance of the contract would be expected to encroach on the sale and production of
another product, y which is also made by Aylett. It is estimated that sales of Y, would then
decrease by 5000 units in the next year only. However this forecast reduction in sales of Y
would enable attributable fixed factory overheads of Rs.58000 to be avoided. Information
on Y is as follows:
Per Unit
Sales price Rs.70
Labour Grade 2 4 hours
Materials - relevant variable costs Rs.12
All activity undertaken by Aylett is job costing using full, absorption, costing in order to
derive profit figure for each contract. If contract X is accepted it will be treated as a separate
job for routine costing purposes. The decision to accept or reject the contract will be taken
in sufficient time to enable the estimated effects to be incorporated in the next year’s
budgets and also in the calculations carried out to derive the overhead recovery rate to be
used in the forth coming year.
Advise Aylett on the desirability of the contract.
Answer Notes
Labour 1 Relevant cost is nil as it is idle labour.
Labour 2 Relevant cost is Rs. 2 per hour. It is variable cost.
Material A Relevant cost is replacement cost as it is tan item of regular use.
Material B Relevant cost is net realizable value it is surplus to any other use.
Working note I : Profit lost on Y (on relevant costing basis)

Sale 3,50,000
Material (FIFO) 5000 x 12
Labour 5000 x 4 x 2
VO 5000 x 4 x 3
FO 58000
Total 2,18,000
Profit 1,32,000
Cost Benefit Analysis of decision regarding acceptance of new contract

Calculations Amount
Benefit : Sales 20,000 x 100 20,00,000
Costs :
(I) Raw materials
A 20000 x 2 x 10 4,00,000
B 20000 x 1 x 25 5,00,000
(II) Labour
Grade 1 --------- --------
Grade 2 20000 x 6 x 2 2,40,000
(III) VO 20000 x 8 x 3 4,80,000
(IV) F0 2,28,000 2,28,000
(V) Lost Profit on Y
(see Working note ) 1,32,000 1,32,000
Total relevant costs 19,80,000
Net Benefit
(sales – total relevant costs) 20,000
Recommendations: The proposal is desirable as it results in positive net benefit.
Q.No.90 A company has been making a machine to order for a customer but the customer
has since gone into liquidation, and there is no prospectus that any money will be obtained
from the winding up of the company.
Costs incurred to-date in manufacturing the machine are Rs.50,000 and progress payments
of Rs.15,000 have been received from the customer prior to the liquidation.
The sales department has found another company willing to buy the machine for Rs.34,000
once it has been completed.
To complete the work, the following cost would be incurred:
(a) Materials – these have been bought at a cost of Rs.6000. They have no other use, and if
the machine is not finished, they would be sold as a scrap for Rs.2000.
(b) Further labour costs would be Rs.8000. Labour is in short supply, and if the machine is
not finished, the work force would be switched to another job, which would earn Rs.30000
in revenue and incur direct costs (not including direct labour) of Rs.12000 and absorbed
fixed overhead of Rs.8000.
(c) Consultancy fees, Rs.4000. If the work is not completed, the consultant’s contract would
be cancelled at a cost of Rs.1,500.
(d) General overheads of Rs.8000 would be added to the cost of additional work.
Should the new customer’s offer be accepted? Prepare a statement showing the economics
of the proposal.
Answer
C.B.A. of Proposal Regarding Completion of the machine for the New Customer
Cost Benefit
Sale price of machine Rs.34,000
Material (Benefit to be lost) Rs.2,000

Labour (Benefit to be lost) Rs.18,000
Consultancy Fees (Cost to be incurred) Rs.2,500
Total Rs.22,500 Rs.34,000
Recommendation: The new customer’s offer may be accepted as its benefit is more than
its cost.
Q. No. 91 BUE is a group consisting of four operating companies British Angles, British
Bars, British Circles and British Dies.
British Dies proposes to place a contract for a sub-assembly to be used in one of submits a
quotation and , in accordance with BUE policy, has to obtain quotations from any suitable
company within the group and at least one outside company.
Within the group, British Angles is approached at the most suitable company and submits a
quotation of £2,400. In order to do the job, however, British Angles will need to sub-
contract some of the work to British Bars and some to British circles.
Arrangements between the companies for this sub-contract are as follows: British Angles
will buy from British Bars special parts at a price of £ 200. British Angles will buy from
British components at a price of £1,500.
To make up its components however, British Circles must buy from British Bars standard
parts at a price of £ 380.
From companies outside the group, British Dies obtains the following quotations:
- Italment quotes £ 1,650.
- Deutschmet quotes £ 1,800 but will buy certain components from British Angles
for the job £550. In order to make these components British Angles will have to
buy parts from British Circles at a price of £350.
The following information is also given:
1. British Circles’ prices included a 25 per cent profit margin on total cost (including
where appropriate, any special parts brought in).
2. British Bars’ price of £380 is the current market price for these parts. They are in
heavy demand by buyers outside the BUE group, and their supply from British Bars
is severely limited.
3. The variable costs of each group company relating to the work for which it has
quoted are:
 as a proportion of the total cost of the work it does itself (i.e., excluding parts or
components bought from other group companies).
British Angles 60 per cent
British Circles 80 per cent
 as a proportion of selling price:

British Bars 75 per cent
4. British Angles’ total costs (including purchase from British Bars and British Circles)
for the British Dies contract are £2,200, and it assesses that it could make profit of
33-1/3 per cent on the cost of its own work on the Deutshment contract.
Recommend whether, from the BUE group point of view, it is more advantageous for
the contract to be placed with British Angles, Italment, or Deutshment.
Answer
Relevant cost (from group as a whole point of view) under each of three alternatives
British Angles Duetshmet Italment
Net cash outflow to outsiders ---- 1800 - 550

= 550 1650
Cost to be incurred :
 BA 300 90 --
 BB 150 -- --
 BC 656 224 --
Benefit to be lost :
 BB 380 -- ---
Total relevant cost 1486 1564 1650
The order may be placed with BA as this alternative results in minimum amount of relevant
cost.
Q.No.92: Companies RP, RR, RS and RT are members of a group. RP wishes to buy an
electronic control system for its factory and, in accordance with group policy, must obtain
quotations from companies inside and outside of the group.
From outside of the group the following quotations are received:
 Company A quoted Rs. 33,200.
 Company B quoted Rs.35,000 but would buy a special unit from RS for Rs.13,000.
To make this unit, however, RS would need to buy part from RR at a price of
Rs.7.500.
The inside quotation was from RS whose price was Rs.48,000. This would require RS
buying parts from RR at a price of Rs.8,000 and units from RT at a price of Rs.30,000.
However. RT would need to buy parts from RR at a price of Rs.11,000.
Additional data are as follows:

 RR is extremely busy with work outside the group and has quoted current market
prices for all its products.
 RS costs for the RP contract, including purchases from RR and RT, total Rs.42,000.
For the company B contract it expects a profit of 25 per cent on the cost of its own
work.
 RT price provide for a 20 per cent profit margin on total costs.
The variable costs of the group companies in respect of the work under consideration are:
 RR: 20 per cent of selling price.
 RS: 70 per cent of own cost (excluding purchases from other group companies.)
 RT: 65 per cent of own cost (excluding purchases from other group companies)
Advise the course of action.
Answer
Statement showing relevant costs (from group point of view) under each of three alterantives
RS A B
Net payment to outsiders 33,200 22,000
Cost to be incurred:
RT 9,100 --- ---
RS 2,800 --- 3,080
RR 19,000 7,500
Total 30900 33200 32580
Recommendation: The order may be placed with RS as the relevant cost of this alternative is
minimum.
Statement showing relevant costs (from group point of view) under each of three alterantives
RS A B
Net payment to outsiders 33,200 22,000
Cost to be incurred:
RT 9,100 --- ---
RS 2,800 --- 3,080
RR 19,000 7,500
Total 30900 33200 32580
Recommendation: The order may be placed with RS as the relevant cost of this alternative
is minimum.
ALLOCATION OF JOINT COST AMONG JOINT PRODUCTS
There are three important methods of allocation of joint costs among joint products. These
are given below in order of preference. (Before allocation of joint costs to joint products, the
amount of joint cost may be reduced by cost of by-products. If cost of by-product is not
available, the amount of joint cost may be reduced by sale value of by-products).
(i) Sales value at split off point, i.e., sales value before any separate cost. Example:
Joint cost Rs. 1,00,000. Three products A,B and C are obtained from the joint cost.
Without any separate cost these can be sold for Rs. 70,000 Rs. 50,000 and Rs.
80,000 respectively. After additional cost of Rs. 2,000 Rs, 10,000 and Rs. 6,000,
these could be sold for Rs. 80,000, Rs. 70,000 and Rs. 1,00,000 respectively.
Allocate joint costs of Rs. 1,00,000 among A,B and C.
Products Sale value Joint Cost

At split off
A 70,000 35,000
B 50,000 25,000
C 80,000 40,000
2,00,000 1,00,000
(ii) Net Realization Method: Under this method, Joint costs are allocated in the ratio
of “Final Sale Value minus Separate Cost”. Example: Joint cost Rs. 5,00,000. Three
products A, B and C are obtained by incurring additional cost Rs. 10,000, Rs.
20,000 and Rs. 30,000 respectively. Sales are Rs.1,00,000, Rs.3,00,000 and Rs.
5,00,000 for A,B and C respectively. Allocate joint costs among joint products.
Products sale Separate cost Net Realization Joint Cost
A 1,00,000 10,000 90,000 53,571
B 3,00,000 20,000 2,80,000 1,66,667
C 5,00,000 30,000 4,70,000 2,79,762
9,00,000 60,000 8,40,000 5,00,000
(iii) Ratio of units of output: This method is not considered as a good method as it
does not consider the value of ingredients of various products.
A word of caution: If any special method is given in the question, only that method should
be applied. That method may or may not be one of these three methods.
Q.No.93 You are the Accountant of a company operating a simple chemical process
producing from a single raw material four different products. A, B, C and D your production
Manager is considering proposals to discontinue certain work at present done on these
products and has therefore asked you to prepare report, giving.
(a) A statement of the profit made or loss incurred on each of the four products
A, B. C& D under present conditions.
(b) An assessment of the change in the profit or loss given in answer to (a) above,
if the proposals being considered were adopted.
(c) Any recommendations you consider you should put forward arising out of
the assessment.
Your report should be based on the information given below. The cost of material for the
year ended was Rs. 3,35,000 and the initial processing cost amounted to a further Rs.
6,41,000. All the four products A,B,C and D are produced simultaneously at a single split-off
point. Product C is sold immediately without further processing. The other three products
are subject to further processing before being sold. It is the company’s policy to apportion
the cost prior to the split-off point on suitable sales value basis.
The output, sales and additional processing cost for the year were as follows:
Output In units Sales (Rs) Additional Processing cost (Rs.)
A 4,00,000 9,60,000 2,00,000
B 89,725 2,90,000 1,60,000
C 5,000 40,000 ……
D 9,000 3,00,000 10,000
The proposal being considered by the production manager is to sell to other processors the
products immediately after the split off point without any of the present additional
processing being done. The additional processing costs of product A, B, and D would their
either no longer be incurred or be charged to an alternative profitable use. The prices per
unit to be obtained from the other processors would be: A: Rs. 1.60 B: Rs. 2.00 C: Rs. 8.00 D
Rs. 25.00.
Answer
Note 1: Joint cost of Rs.9,76,000 should be divided in the ratio of sale value at split off point.
Sale value at Joint cost
spoilt off point
A 640000 976000 x 640000/1084450 =5,75,997
B 179450 976000 x 179450/1084450 =1,61,505
C 40000 976000 x 40000/1084450 = 36,000
D 225000 976000 x 225000/1084450 = 2,02,498
10,84,450
Statement Showing Joint Cost Among Joint Products

Products Final sales Value Joint cost Separate costs Profit/
(see note 1) (Loss)
A 9,60,000 5,75,997 2,00,000 1,84,003
B 2,90,000 1,61,505 1,60,000 (31,505)
C 40,000 36,000 --- 4,000
D 3,00,000 2,02,498 10,000 87,502

Total 15,90,000 9,76,000 3,70,000 2,44,000
Cost Benefit analysis regarding discontinuance of further processing

Cost of further Benefit (Increase in Impact of discontinuance
processing sales due to further
processing)
A 3,20,000 2,00,000 Profit will decline by 1,20,000
B 1,10,550 1,60,000 Profit will rise by 49450
D 75,000 10000 Profit will decline by 65000
Recommendation: If possible further processing of only B may be stopped.
Q. No.94
Pigments Ltd. Is a chemical factory producing joint products J, K and L at a joint cost of
production of Rs.9,60,000. The sales are:
J 60,000 units at Rs.5 per unit
K 20,000 units at Rs.20 per unit
L 40,000 units at Rs.10 per unit
The company seeks your advice regarding the following options:
Option I : After the joint process, all of L can be further processed to make 36,000 units of
M, at additional processing cost of Rs.1,80,000 and M can be sold at Rs.18 per unit.
Option II : the facilities used to convert L to M may be used to make 7000 units if an
additional product A, with a different raw material input. A can be made at an additional
variable manufacturing cost of Rs.12 per unit and will fetch a selling price of Rs.30, but the
company will have to offer one unit of J as a free gift for each unit of A sold.
Evaluate the proposals using incremental cost approach. [CA FINAL Nov.2011]
Answer
Option I Option II
Cost : processing cost 1,80,000 Cost : Processing 1,80,000
Foregone sales 4,00,000 VC 84,000
Total 5,80,000 Foregone sale 35,000
Total 299,000
Revenue: 36000 units of M @Rs.18 6,48,000 Revenue : 7000 units of A @Rs.30
: Rs.2,10,000
Net gain 68,000 Net loss Rs.89,000
On the basis of above information, option I is recommended.

Q. No. 95 S.V. Ltd is able to produce 2,00,000 Kgs AXE and 4,00,000 Kgs of BXE from the
input of 6,00,000 Kgs. of raw material ‘F’ the selling prices of these articles are AXE Rs. 6 per
Kg. and BXE Rs. 4.50 per kg. The processing cost amount to Rs. 20 Lakhs per month as under:
Rs.
Raw material ‘F’ 6,00,000 Kg x Rs. 2 12,00,000
Variable processing costs 6,00,000
Fixed Processing costs 2,00,000
Total 20,00,000
The company has the following two proposals under consideration:

(a) Product AXE can be further processed by mixing it with other purchased material.
There is a market potential for absorbing the entire product AXE when processed
further into PXE. The selling price of PXE is Rs. 13 per Kg Each Kg of PXE requires
one kg of AXE as raw material. Additional cost of other materials labour and
overheads to process AXE into PXE amount to Rs. 16,00,000 per month.
(b) A new raw material has just become available. The processing costs will remain the
same but the process will yield 2 kgs of AXE for every 3 kgs of BXE. The total
quantity of the new raw material is limited to 6,00,000 kgs.
(i) Find the profit arising from the sale of AXE and BXE as originally planned.
(ii) Evaluate the proposal for further processing of AXE and PXE and present a
statement of profit.
(iii) Evaluate the proposal for substitution of the existing raw material by new raw
materials and find the maximum price the company can afford to pay for the new
raw material for retaining the existing profit.
Answer
(i)
Statement Showing Originally Planned Profit
Particulars Amount
Sales
2,00,000 x 6.00
4,00,000 x 4.50 30,00,000
Costs :
Material 12,00,000
Variable Processing cost 6,00,000
Fixed processing cost 2,00,000 20,00,000
Profit 10,00,000
(ii)
Cost Benefit analysis of Proposal regarding further processing of AXE
Cost Benefit
Foregone Sale 12,00,000 -
Cost 16,00,000
Sales 26,00,000
Total 28,00,000 26,00,000
Recommendation : Further processing may not be done as its cost is more than its benefit.
Statement of Profit (Further processing)

Particulars Amount
Sales
2,00,000 x 13.00
4,00,000 x 4.50 44,00,000
Costs :
Material 12,00,000
Variable Processing cost 6,00,000
Fixed processing cost 2,00,000
Additional cost 16,00,000 36,00,000
Profit 8,00,000
(iii)
Note: Using 6,00,000 Kgms. of the new material, we can produce Axe and BXE in the ratio of
2:3 i.e. 240000 AXE and 360000 BXE.
Statement Showing affordable Price for New Material

Amount (Rs.)
Revenue using new material:

240000x6.00
360000x4.50 30,60,000
Revenue using old material 30,00,000
Incremental Revenue 60,000
(This is affordable additional cost of
material)
Affordable additional cost of new material
= Rs.60000/600000 =0.10
Affordable new price of raw material =

Rs.2.10
DECISION- MAKING UNDER UNCERTAINTY

Decision making is the process of choosing the best alternative. The problems of decision
making we discussed so far, had only two aspects: (a) Acts (also known as actions, courses
of actions, strategy etc.), and (b) outcomes (the results of the acts, i.e., profit, loss, cost etc).
The problems that we are going to discuss now shall have three aspects: (a) Acts, (b)
Events, and (c) Outcomes. We shall be finding the expected outcome of each of the acts. We
shall be taking the decision on the basis of expected outcomes.
Q. No.96 Invest Ltd. is considering which of two methods it should use to market its
investment services to the public. One is direct mailing and the other is newspaper
advertisement. It regards these forms of marketing as mutually exclusive. It has a budget for
expenditure on marketing of £200,000. Cost of direct mailing is £0.25 for each ‘letter’.
Previous experience leads the company to expect a response rate of between 6 per cent and
12 per cent with an average of 8 per cent. The chances of the lower, higher and average
response rate actually occurring are estimated to be 15 per cent, 20 per cent and 65 per
cent respectively. Newspaper advertisements have also been used in the past and these also
produce varying response rates. Invest Ltd’s budget would allow it to run a campaign of
weekly insertions (i.e., 52 in total) in certain suitable Sunday newspaper. Again based on
past experience, it can expect response rates varying between 700 and 2,000 per insertion
with an average of 1,400. The chances of the lower, higher and average response rates
actually occurring are 20 per cent, 25 per cent and 55 per cent respectively. In either case
only 40 per cent of the response can be expected to produce a sale. Each sale generates a
net income of £10. Which method you recommend?
Answer
No of letters: 2,00,000/0.25 = 8,00,000
Possible responses:
Low Average High
8,00,000x0.06 = 48,000 8,00,000x0.08 = 64,000 8,00,000x0.12 = 96,000
700 x52 = 36400 1400 x 52 = 72800 2000 x 52 = 104000
Pay off Matrix

Events → Low Average High Expected
Response Response Response contribution
Acts ↓
Direct Mailing 48000x0.40x 64,000x0.40x 96,000x0.40x

10x0.15 10x0.65 10x0.20
= 28,800 = 1,66,400 = 76,800 2,72,000
News Papers 36400x0.40x 72,800x0.40x 104000x0.40x
10x0.20 10x0.55 10x0.25
= 29120 = 160160 = 1,04,000 2.93,280
Recommendation: Newspapers advertisement is recommendation as the amount of its
contribution is higher.
Q. No.97 The partners of Fancy Toys Manufacturing company are considering the market
potential of a new toy JUMBO which like many toys, may have great fad appeal. The sales
manager, who is highly experienced in the fad market, is certain that the total sale of JUMBO
(during the period it has special public appeal) will not be less than 25,000 units. Plant
capacity limits total production to a maximum of 80,000 units during JUMBO’s brief life.
According to the sales manager, there were 2 chances in 5 for a sales volume of 50000. The
probability of sales exceeding 50,000 units is four times the probability that it will be less
than 50,000.
If sales exceed 50,000 units, volume of 60,000 and 80,000 units are equally likely A 70,000
units volume is four as likely as either.
Variable production costs are estimated at Rs. 30 per unit Selling price is likely to be Rs. 50
per unit and the special manufacturing equipment (which has no salvage value or alternate
use) costs Rs. 8,00,000. Assume, for simplicity, that the above-mentioned are the only
possible sales. Should Jumbo be produced?
Answer
Let the probability of 60000 demand = y
Hence, Probability of 80000 demand = y
Therefore, Probability of 70000 demand = 4y
Probability of more than 50000 = 6.00y

Probability of less than 50000 = 1.50y
Probability of 50000 = 2/5 i.e. 0.40
1.50y + 0.40 + 6y = 1 y = 0.08

Events Minimum 50000 60000 70000 80000 Expected
(Demand) 25000 contribution
Probability 0.12 0.40 0.08 0.32 0.08
Acts ↓
Produce 25000x 50000x 60000x 70000x 80000x

20x0.12 20x0.40 20x0.08 20x0.32 20x0.08 11,32,000
Not
Produce ----- ---- ---- ---- ---- Nil
Expected Profit:
Produce : 1132000 – 8,00,000 = 3,32,000
Not to Produce : Nil
The Jumbo may be produced as this act results in profit.
Q.No.98 The Jon Co. has just agreed to supply Arom Chemical Inc. with a substance critical
to one of Arom’s manufacturing process. Due to the critical nature of the substance, job Co.
has agreed to pay Arom $ 1,000 for any shipment that is not received by Arom by the day it
is required.
Arom establishes a production schedule which enables it to notify Jon Co. of the
necessary quantity 15 days in advance of the required date. Jon can produce the substance
in 5 days. However, capacity is not always readily available which means that Jon may not
be able to produce the substance for several days. Therefore, there may be occasions when
there are only one or two days available to deliver the substance. When the substance is
completed by Jon Co’s manufacturing department and released to its shipping department,
the number of days remaining before Arom needs the substance will be known.
Jon Co. has undertaken a review of delivery reliability and costs of alternative shipping methods.
The results are presented in the following table:
Shipping Cost Pr
Method Per obability
shipmen that the
t shipmen
t will
Take
days.
1 2 3 4 5 6
Motor $100 … … 0.10 0.20 0.40 0.30

freight
Air Freight $200 … 0.30 0.60 0.10 … ……
Air Express $400 0.80 0.20 …… … … …
Prepare a decision table which can be used by Jon Co’s shipping clerk which delivery
alternative to select.
Answer:
1 day left
Acts↓ May reach May not reach Expected cost
Motor Freight 100 x 0 1100 x 1 1,100

Air Freight 200 x 0 1200 x 1 1,200
Air Express 400 x 0.80 1400 x 0.20 600
2 days left
Motor Freight 100 x 0 1100 x 1.00 1,100
Air Freight 200 x 0.30 1200 x 0.70 900
Air Express 400 x 1.00 1400 x 0.0 400
3 days left
Motor Freight 100 x 0.10 1100 x 0.90 1,000
Air Freight 200 x 0.90 1200 x 0.10 300
Air Express 400 x 1.00 1400 x 0 400
4 days left
Motor Freight 100 x 0.30 1100 x 0.70 800
Air Freight 200 x 1 1200 x 0 200
Air Express 400 x 1 1400 x 0 400
5 days left
Motor Freight 100 x 0.70 1100 x 0.30 400
Air Freight 200 x 1 1200 x 0 200
Air Express 400 x 1 1400 x 0 400
6 or more days left

Motor Freight 100 x 1 1100 x 0 100
Air Freight 200 x 1 1200 x 0 200

Air Express 400 x 1 1400 x 0 400
Table Showing suggested Shipping Mode

Days left Mode
1 Air Express
2 Air Express
3 Air Freight
4 Air Freight
5 Air Freight
6 or more Motor Freight
GENERAL PROBLEMS
Q. No. 99
Cool Ltd sells a gadget and has estimated the market capacity as 50,000 units a year. The
directors have set the company a sales objective of between 50 per cent and 80 per cent of
this potential. The sales force is divided into five equal areas and the objective is expected
to be achieved by using the salesman in the following number.
Number of salesmen used per area Market penetration expected

5 50
6 58
7 65
8 71
9 76
10 78
11 80
All the products are manufactured at one location at factory cost of Rs. 80 each and are sold
at standardized price of Rs. 100 each. The transport and installation cost varies in relation
to the distance from the factory as under:
Sales area Variable distribution as per unit (Rs.)

1 10
2 8
3 6
4 4
5 2
At present 35 salesman are employed are employed at an average cost of Rs. 8,000 per
annum. Calculate the highest total contribution possible using 35 salesman.
Answer
5 salesmen should be sent to each of the 5 areas. This way we assign jobs to 25 salesmen.
Contribution
Salesman ↓ Area 1 Area 2 Area 3 Area 4 Area 5
26th 800x10 800x12 800x14 800x16 800x18
27th 800x10 800x12 800x14 800x16 700x18
28th 800x10 800x12 800x14 700x16 700x18
29th 800x10 800x12 800x14 700x16 600x18
30th
31st 800x10 800x12 700x14 600x16 600x18
32nd 800x10 800x12 700x14 600x16 500x18
33rd 800x10 800x12 600x14 600x16 500x18
34th
35th 800x10 700x12 600x14 500x16 500x18
Statement showing total contribution

Area Contribution
1 5,000 x 10
2 5,800 x 12
3 6,500 x 14
4 7,100 x 16
5 7,600 x 18
Total Rs.4,61,000
Q. No. 100: The overhead expenses of a factory, producing a single article at different operating
levels are follows:
Operating level : capacity Works Overhead : Rs
80% 72,000
100% 80,000
60% 66,000
120% 1,00,000
The factory is at present working at 60 per cent operating level and its annual sales amount
is Rs. 2,88,000.
Selling prices have been based on 100 per cent capacity and have following relationship with
costs at this level:
Factory cost 66.2/3% of sales value
Administrative and selling

Expenses (of which 75% is variable) 20.00% of sales value
The management receives an offer for carrying out some work for another company valued
at Rs. 66,000 per annum which will take up 40 per cent of capacity. The prime cost for the
work is estimated at Rs. 40,000. There will be an addition to administrative expenses of Rs.
3,000 per annum.
The sale manager estimate that the sales of the company’s own product will increase to 80
per cent of capacity by the time new order would be received. Prepare a statement showing
profit if the order is not accepted and if it is accepted.
Answer
Working Note:
100 capacity:
Sales 2,88,000x100/60 = 4,80,000
Factory cost 3,20,000
Factory overheads 80,000
Prime cost 2,40,000
Administration & Selling overheads 96,000
Variable A & S O 72,000
Fixed A & S O 24,000
Accounting Information for decision regarding acceptance of the works order
Two Alterantives:
(A) Operate at 80% capacity
(B) Accept the works order and operate at 120% capacity
Statement showing the profit of the company under each of the two Alternatives
A B
Sales 3,84,000 3,84,000 + 66,000
Costs:
Prime Cost 192000 192000+40,000
Works Overhead 72,000 1,00,000
Additional Administrative expenses ---- 3,000
Fixed Admi. and selling Overhead 24,000 24,000
Variable administration & S. overhead 57600 57,600
Total 3,45,600 4,16,600
Profit 38,400 33,400
Recommendation: The Work order may not be accepted as its acceptance results in
reduced amount of profit.
Q. No. 101 A product can be manufactured at 50 units per hour in a semi-automatic

machine and 100 units in automatic machine. Manufacture is undertaken on job basis
according to customer’s order.
The cost of setting-up per order: Rs. 200 in semi-automatic line and Rs. 1,000 in automatic
line. Daily cost of labour: Semi-automatic method Rs. 400; automatic method Rs. 200. Cost
of power semi-automatic Rs. 50 and automatic Rs. 300 per day. In case of semi-automatic
machines fixed overhead would be Rs. 500 per day.
Variable overheads may be taken at 40 per cent of wages in case of automatic machine and
10 per cent of wages in semi-automatic machine. Fixed overheads will increase by Rs.
2,50,000 p.a. in case of automatic machine apart from depreciation and interest. Cost of
automatic machine is Rs. 200,000 higher than that of semi-automatic machine. Semi –
automatic machine can be purchase at Rs. 3,00,000.
Market or material is not a limiting factor.
10 per cent depreciation and 15 per cent interest on capital per annum are to be taken into
consideration.
Daily working hours are 8, and on average 25 working days are available per month. 20 per
cent of the net working time is lost in both the cases for setting up, change of jigs, rest etc.
The factory is booked in advance for a few years.
Which method will be preferable, if the average order size is?
(i) 1,000 units (ii) 10,000 units
Determine the order size at which we may be indifferent as to whether we should have
automatic or semi-automatic machine.
Answer:
Teaching Note: Market is not the key factor. It means whatever is produced, that will be
sold. It means any machine that will install will work only at full capacity.
Statement showing cost per unit (other than the setting up cost) under each of two machines
Semi-automatic Automatic
Annual output 1,00,000 2,00,000

Costs:
Labour 400x25x12 = 1,20,000 200x25x12 = 60,000
Power 50x25x12 = 15,000 300x25x12 = 90000
Variable overhead 120000x0.10 = 120000 60,000 x 0.40 = 24,000
Fixed overhead 500x25x12 = 1,50,000 4,00,000
Depreciation + interest 25% of 3,00,000 = 75000 25% of 5,00,000

=125000
Total cost 3,72,000 6,99,000
Cost per unit (exclusive of setting 3.72 3.495

up cost)
Order size 1000 units

Statement showing total cost for 1000 units made from each of the two machines
Setting cost 200 1000
Other costs 3720 3495
Total cost 3920 4495
Recommendation: Semi-automatic machine is recommended if the expected order size is

1000 units.
Order size 10000 units

Statement showing total cost for 10000 units made from each of the two machines
Setting cost 200 1000
Other costs 37200 34950

Total cost 37400 35950
Recommendation: Automatic machine is recommended if the expected order size is 10000

units.
Let indifference point is y units order size.

200 + 3.72y = 1000+ 3.495y
y = 3555.55 units.
If the order size is up to 3555 units, semi-automatic may be preferred. For order size of
3556 or more, automatic is recommended.
Q.NO.102 Fitwall Ltd. a large manufacturing company has three factories namely factory ‘A’
factory ‘B’ and factory ‘C’. All the three factories produce the same product which is sold at
Rs. 375 per unit. The factory wise estimates of operating results for 2006 are as under:
(Rs. Lakhs)
A B C Total
sales 300 1,200 600 2,100
Costs:
Raw materials 75 350 145 570
Direct labour 75 280 140 495
Factory Overhead
Variable 20 110 55 185
Fixed 40 120 60 220
Selling & Distribution
Overheads- variable 23 70 40 133
Fixed 15 50 30 95
Administration overheads 20 90 40 150
Head Office expenses 12 50 30 92
Total 280 1,120 540 1,940
Profit 20 80 60 160
When the above estimates were under finalization, the company’s legal department advised
that the lease of factory ‘A’ was due to expire on 31 st December 2005 and that is could be
renewed by enhancing the lease rent by Rs. 12 lakhs per annum. Since this enhancement
will have a heavy on the profitability of the company, the management is constrained to
examine the proposals which are as under:
(i) Renew the lease and bear the impact.

(ii) Close down factory ‘A’ sell of the plant, machinery and stock and liquidate all
liabilities, including the staff and workers’ retrenchment compensation from the
sale proceeds which are sufficient for the purpose. In order however to maintain
the customer relations, the total planned output of the factory ‘A’ will be
transferred to either ‘B’ or factory ‘c’ plant capacity is available at both the
factories to take over the manufacture. The additional cost involved in the
manufacture of the extra output so transferred in factories ‘B’ and ‘C’ are
estimated as under:
(iii)
Factory ‘B’ Factory ‘C’
(a) Additional fixed overheads due to increased

capacity utilization (per annum) Rs. 50 lakhs Rs. 40 lakhs
(b) Additional freight, selling and other
overheads to produce and distribute the
output to the present customers of factory ‘A’ Rs. 25 per unit Rs. 35 per unit
You are required to prepare a comparative statement of profit for alternative courses
of action and give your recommendation.
Answer
Working note 1
A B C
3,00,00,000 12,00,00,000 6,00,00,000

No. of units --------------------- -------------------- -------------------
375 375 375
= 80,000 units = 3,20,000 units = 1,60,000 units
A B C
Variable cost (Rs. Lakhs) (Rs. Lakhs) (Rs. Lakhs)
75 350 145
75 280 140
20 110 55
23 70 40
Total 193 810 380
Three alternatives:
(I) Renew lease. Carry on production and sales as at present.
(II) Close A. 80000 units currently made at A may be made at B. These units may be sold
at A by B.
(III) Close A. 80000 units currently made at A may be made at C. These units
may be sold at A by C
Statement showing profit under each of three alternatives (Rs Lakhs)

I II III
Sales 2100 2100 2100
Costs:
Variable cost 1383* 1392.50** 1380***
Fixed factory overhead 220 180 180
Lease rent 12 --- ---
Additional F.O. --- 50 40

Fixed Selling overhead 95 80 80
Administration Exp. 150 130 130
HO exp. 92 92 92
Additional cost --- 20 28
Total 1952 1944.50 1930
Profit 148 155.50 170
*193 + 810 + 380 = 1383

** 810+25% of 810 +380 = 1392.50
*** 810 + 380 + 50% of 380 = 1380
Q. No. 103 A company manufactures and sells at Rs. 55 each a product for which the
demand is extremely variable and has fluctuated randomly over the past two years from a
minimum of 4,000 units per months to a maximum of 8,500 units per month. The factory’s
maximum capacity is 8,000 units.
Because of this variability, the company has the following production arrangements:
1. It holds a permanent labour force able to produce at 6,000 units per month. The
direct labour cost at this level is Rs. 20 per unit.
2. If it expects a production requirement above 6,000 in any month, it can book
additional labour facilities one month ahead from an agency, but must pay of a
rate of Rs. 25 per unit as the direct labour cost for these extra facilities. Such
bookings represent a firm commitment on the company’s part.
3. If it expects a production requirement to be below 6,000 in any month it can lay
off some of its permanent labour force in ‘batches’ of 500 units of production at a
cost of Rs. 3,500 per ‘batch’ per month. To do this it must give notice in the
previous month.
During the past year the company’s actual production (for which it had made forward
monthly labour planning) and order actually received were:
Month Actual order Received Actual Production

Units Units
1 7,500 6,500
2 5,000 7,000
3 6,000 5,500
4 6,000 5,000
5 7,000 6,500
6 4,500 6,500
7 5,500 7,500
8 7,000 6,500
9 8,500 7,000
10 6,500 6,000
11 6,500 6,000
12 4,000 5,000
Total 74,000 75,000
In month I, operating stock was nil and there was no unfulfilled order. Other relevant data
are as follows.
- Direct material cost is Rs. 15 per units.
- Cost of holding stock is Rs. 2 per unit per month. This is charged against the
month of sale.
- If the company is out of stock and cannot deliver during the month in which an
order is received, the selling price is reduced by 10 per cent (of the normal
selling price) for each month delivery is delayed.
- Fixed costs for the company are Rs. 80,000 per month.
- Stock carried forward is valued at 35 per unit.
- The company sells each month whatever is available from production and stock
to meet orders received.
You are to calculate the net profit for the company for the past year.
Answer
Month Order size Production Pending order stock
1 7500 6500 1000 ----

2 5000 7000 ---- 1000
3 6000 5500 ---- 500
4 6000 5000 500 ----
5 7000 6500 1000 ----
6 4500 6500 ---- 1000
7 5500 7500 ---- 3000
8 7000 6500 ---- 2500
9 8500 7000 ---- 1000
10 6500 6000 ---- 500
11 6500 6000 ---- ----
12 4000 5000 ---- 1000
Total 74,000 75000 2500 10500
Working notes:
Sales : 74000x55
Discount : -2500x5.50 4056250
Carrying cost 9500x2 = 19000

(Carrying cost for 1000 units in the stock of 12th month will be charged next year as the cost
of carrying is charged in the month of sales)
Labour :
75000x20 +5[500+1000+500+500+1500+500+1000] +[3500 +7000+7000]
= 15,45,000
Profit Statement
Amount (Rs.)
Sales 74000 units 40,56,250
Cost:
Direct materials (75000 units) 11,25,000
Labour 15,45,000
Carrying cost 19,000
Fixed overhead 9,60,000
36,49,000
Less C.Stock 35,000 36,14,000
Profit 4,42,250
TRY YOURSELF Q.No.104 A Company buys and sells a product whose demand over
the past few years has fluctuated between 8000 and 17000 units per month. Its selling
price is Rs. 60 per unit. Data for last year were:
Months 1 2 3 4 5 6 7 8 9 10 11 12 Total
Orders
received
(‘000 units) 16 14 14 13 10 15 10 9 17 12 10 12 152
Purchases
(‘000 units) 11 10 16 14 12 12 14 16 17 16 12 15 165
In the beginning of month I, there was a stock of1000 units and there were no unfilled
orders from customers.
Arrangements with the suppliers are that:

1. There is a standing order of 12,000 units per month @ Rs. 35 per unit.
2. If more are needed in any month the price of extra items is Rs. 40 per unit.
3. If fewer are needed in any month, the quality ordered can be reduced in lots of 1000
units at a penalty of Rs. 9 per unit.
4. For any change from the standing order, two months’ notice must be given (such that
a request for a change in month 3 must be notified in month 1, and so on.)
Other data:
(i) The cost of holding stock is Rs.3 per unit per month. It is charged against the
month of sale.
(ii) If the company is out of stock, it must reduce the price to the customers by 10%
of nominal selling price for each month of delivery delay.
(iii) Stock carried forward is valued at Rs.35 per unit.
(iv) Fixed cost is Rs.1,00,000 p.m.
Calculate the net profit for the last year.
Answer: Working Note 1:

Purchases:1,65,000(35)+ 5(4000+2000+2000+4000+5000+4000+3000) + 9(1000+2000)
= 59,22,000
Working Note 2:
Statement showing Month Ending position of Stock and pending order
Month Order Purchase Stock Pending order
(‘000) (‘000) (‘000) (‘000)
1 16 11 4
2 14 10 8
3 14 16 6
4 13 14 5
5 10 12 3
6 15 12 6
7 10 14 2
8 9 16 5
9 17 17 5
10 12 16 9
11 10 12 11
12 12 15 14
TOTAL 152 165 44 34
Profit Statement
Calculations Amount
Sales 152000x60
Less discount -34000x6 89,16,000
Opening Stock 1000x35
+Purchases +59,22,000
- C. Stock -14000x35
+Fixed Cost +12,00,000
+Carrying cost +31,000x3 67,60,000
Profit 21,56,000
Q. No. 105 The management of Kabra Limited is alarmed at the high under utilization of
installed capacity. The workers of Kabra Ltd. have a very strong union. Any attempt by
management to increase production is opposed by the union on the ground that the
workers are working as per normal standards and that any extra unit produced does not
fetch any reward to workers.
The management, having realized that there is capacity, puts forth an incentive scheme
which rewards the workers, staff as well as management.
As per the proposed scheme, after-tax incremental profit will be shared by all as follows:
- 30% to be ploughed back.
- 40% to be shared by workers, and
- 30% to be shared by staff
In case there is a loss, no reward will be given to anyone.
Presently the company is producing 1-lakh units. The current cost and structure is as follows:
Rs. Per 1,000 units
Prime cost 15,003
Works overhead 7,490
Administration 2,650
Selling overheads 99
Sale Value 25,150
The above figures include fixed cost to the extent of 20 per cent works overheads, 30 per
cent administration overheads and 100 per cent selling expenses.
The company pays 50 per cent tax. However, the reward under the scheme given to workers
(not staff) is tax deductible.
You are required to calculate the annual share in absolute amounts for each of the
beneficiary at various levels at an interval 1 per cent from 1 per cent to 8 per cent increase
in production over present target. [ICWA]
Answer
Cost per 1,000 units
Total cost Fixed cost Variable cost
Prime cost 15,003 nil 15003
Works overheads 7,490 1498 5992
Administration 2,650 795 1855
Selling Overheads 99 99 ---
Total 25,242 2,392 22,850
Current FC = 2,39,200
Unit VC = 22.85
SP = 25.15
Contribution per unit = 2.30
Current Scenario : Contribution : 1,00,000x2.30 = 2,30,000

FC 2,39,200
Loss 9,200
Let sales increase by 1000 units. Contribution will increase by Rs.2300

Let pay Rs. x to the worker on profit of Rs.1000.
0.40[2300 – {(2300-x).0.50}] = x
x = 575
Profit 2300
Payment to worker 575

Taxable income 1725
Tax (50% of taxable income) 862.50
After tax profit 2300 – 862.50 = 1437.50
Staff :30% of after-tax profit 431.25
Plough back : 30% of after-tax profit 431.25
Sales(Units) Profit/(Loss) Tax Staff Worker Plough back
1,00,000 (9200) - - - -
1,01,000 (6900) - - - -
1,02,000 (4600) - - - -
1,03,000 (2300) - - - -
1,04,000 BEP - - - -
1,05,000 2300 862.50 431.25 575 431,25
1,06,000 4600 1725 862.50 1150 862.50
1,07,000 6900 2587.50 1293.75 1725 1293.75
1,08,000 9200 3450 1725 2300 1725
Q. No. 106 Reel and Roll Ltd., manufactures a range of film extensively used in the cinema
industry. The films, once manufactured are packed in circular containers and stored in specially
constructed crates line with “protecto”. These crates are manufactured and maintained by a
special Department within the company and the department costs last year are as under:
Rs. Rs.
Direct Materials (including 1,40,000

“Pratecto”)
Direct labour 1,00,000
2,40,000
Overheads:
Department manager 16,000
Depreciation of machine 30,000
Maintenance of machine 7,200
Rent (Portion of 9,000

warehouse)
Other miscellaneous costs 31,500 93,700
3,33,700
Administration overhead (20% of direct costs
Pack knack Associates has approached the Reel and Roll Ltd., offering to make all the crates
required on a four-year contract for Rs. 2,50,000 per annum and /or to maintain them for a
further Rs. 50,000 per annum.
The following data are relevant:

(i) The machine used in the department cost Rs. 2,40,000 four years ago and will
last four more years. It would be currently sold for Rs. 50,000.
(ii) A stock of “protecto” was acquired last year for Rs. 2,00,000 and one fifth was
used last year and included in the material cost. It originally cost Rs. 1,000 per
ton, but the replacement cost is Rs. 1,200 per ton and it could be currently sold
for Rs. 800 per ton.
(iii) The department has acquired warehouse space for Rs. 18,000 per annum. It uses
only one-half of the space; the rest is idle.
(iv) If the department were closed, the Manager will be transferred to another
department, though there is no work for him; but all the labour force will be
made redundant, and the terminal benefits to be met will amount to Rs. 15,000
per annum. In that event, Pack Knack Associates will undertake to manufacture
and maintain the crates.
If Reel and Roll Ltd., continued to maintain the crates, but left their manufacturer to
pack Knack Associates.
(i) The machine will not be required.
(ii) The manager will remain in the department.
(iii) The warehouse space requirements will not be reduced.
(iv) Only 10 per cent of all materials will be used.
(v) Only one worker will be dispensed with and taking terminal benefit to be met
into account, the saving will be Rs. 5,000 per annum.
(vi) The miscellaneous costs will be reduced by 80 per cent.
If the Reel and Roll Ltd. continued to manufacture the crates but left their maintenance to
Pack Knack Associates.
(i) The machine will be required.
(ii) The manager will remain in the department.
(iii) The warehouse space will be required.
(iv) 90 per cent of all the materials will be required.
(v) The labour force will continue.
(vi) The miscellaneous costs will be reduced by 20 per cent.
Assuming that for the four years period there is no significant change envisaged in the
pattern of other costs, you are required to evaluate the alternate course of action with
supporting figures of cash flows over the four-year period and advise accordingly. Ignore
time value of money.
Answer:
Note:
(i) The decision has to be taken on the basis of cash flows;
(ii) Protecto has already been purchased. Its usage does not involve any cash flow.
Similarly depreciation is also a non-cash item.
Accounting information for decision regarding transfer of manufacture and /or

maintenance of crates to Pack and Knack.
Four Alternatives:
(A) Status Quo, i.e., continue to manufacture and maintain the crates
(B) Transfer both activities to Pack and Knack
(C) Transfer Manufacture to P & K; continue to maintain the crates
(D) Transfer Maintenance to P & K, continue to manufacture the crates
Statement showing 4 years cash flows under each of four Alternatives

A B C D
Payment to P & K --- -12,00,000 -10,00,000 -2,00,000
Material (Other than Protecto) -4,00,000 --- -40,000 -3,60,000
Labour -4,00,000 -60,000 -3,80,000 -4,00,000
Manager’s salary -64,000 -64,000 -64,000 -64,000
Rent -72,000 --- -72,000 -72,000
Other Misc. -1,26,000 --- -25,200 -1,00,800
Maintenance of machine -28,800 --- ---- -28,800
Sale of Protecto --- +1,28,000 +1,15,200 +12,800
Sale of machine --- +50,000 +50,000 ---
Net cash flow -10,90,800 -11,46,000 -14,16,000 12,12,800
Recommendation: Status Quo is recommended as all other alternatives are costlier to this
alternative.
Q. No 107: Ze-Te Fashions is a high-fashion women’s garments manufacturer. It is planning

to introduce a new fashion garment in the market in the forthcoming Diwali season. Four
meters of cloth (material) are required to layout the dress pattern. After cutting, some
material remains that can be sold as a cut-piece. The left-over material can also be used to
manufacture a matching cap and handbag.
Ze-Te expects to sell 2,500 dresses, if matching caps and handbags are not provided and
20% more, if matching caps and handbags are made available. The market research
indicates that the cap and/or handbag cannot be sold independently, but only as
accessories with the dress.
The following combination of sales is expected:
Complete sets of dress, cap and handbag 68%
Dress and Cap only 12%
Dress and handbag only 09%
Dress only 11%
Total 100%
The material used in the dress costs Rs. 60 per metre. The cost of cutting the dress, if the
cap and handbag are not manufactured, is estimated at Rs. 20 a dress and the resulting
remnants can be sold for Rs. 5 for each dress cut out.
If the cap and handbag are to be manufactured, it requires a more delicate and skillful
cutting and hence cutting cost will increase by Rs. 8 per dress.
The selling prices and the other costs to complete the three items, once they are cut, are as
follows:
Selling Price per unit (Rs.) Other costs per unit (Rs.)
Dress 400 48.00
Cap 29 6.50
Handbag 18 3.00
Other costs per unit exclude the cost of material and cutting.
Should the company go in for caps and handbags along with dresses?
(CA Final May, 2001)
Answer
Accounting Information for Decision regarding selling the Accessories
(A) Only the Dresses may be sold
(B) Accessories may also be sold
Statement showing profit under A Alternative
Amount
Sales 2500 x 400 10,00,000
Costs:
Material 2500x235
Cutting Charges 2500x20
Other charges 2500x48 7,57,500
2,42,500
Statement showing profit under B Alternative

Amount
Sales:
Dresses 3,000 x 400
Caps 2,400 x 29
Handbags) 2,310 x 18 13,11,180
Costs:
Material (all three items) 2400 x 240
Material (only dresses) 600x235
Cutting Charges(all three) 2400x28
Cutting Charges(only dresses) 600x20
Other charges (Dresses) 3000x48
Other charges (Caps) 2400x6.50
Other charges (Handbags) 2310x3.00 9,62,730
Profit 3,48,450
Q.No.108 Panchwati Cements Ltd produces ‘43 grade’ cement for which the company has an
assured market. The output for 2004 has been budgeted at 1,80,000 units at 90% capacity
utilization. The cost sheet based on output (per unit) as follows:
Rs.
Selling Price 130
Direct Material 30
Component EH 9.40
Direct wages @ Rs. 7 per hour 28
Factory overhead(50%fxed) 24
Selling and distribution overheads (75% variable) 16
Administrative overhead (fixed) 5
The factory overheads are applied on the basis of direct labour hours.
To utilize the idle capacity and to improve the profitability of the company, the following
proposals were put up before the Board of Directors for consideration:
(i) An order has been received from abroad for 500 units of Product ‘53 grade’
cement per month at Rs.175 per unit. The cost data are :
Direct material Rs.56 per unit, direct labour 10 hours per unit, selling and
distribution overhead applicable to this product order is Rs.14 per unit and
variable factory overheads are chargeable on the basis of direct labour hours.
(ii) The company at present manufactures component ‘EH’, one unit of which is required
for each unit of product ‘43grade’. The cost details for 15000 units of components EH
are as follows:
Rs.
Variable overheads 25,500
Fixed overheads 33,000
Total 1,41,000
The component EH however is available at the market at Rs.7.90 per unit.

(iii) In the event of company deciding to purchase the component EH from market,
the company has two alternatives for the use of the capacity so released which
are as under:
(a) Rent out the released capacity at Re.1 per hour.
(b) Manufacture component ‘GYP’ which can be sold at Rs.8 per unit. The cost data
of this component for 15000 units are:
Rs.
Factory Variable overheads 13,500
Other variable overheads 25,500
Total 1,12,500
Required:
(i) Prepare a statement showing profitability of the company envisaged in the
budget
(ii) Evaluate the export order and state whether it is acceptable or not.
(iii) Make an appraisal of proposal to manufacture component EH and state whether
the component EH should be manufactured in the factory or purchased from the
market. Assume that no alternative use of spare capacity is available.
(iv) Evaluate the alternative use of the spare capacity and state whether to
manufacture or buy the component EH and if your decision is to buy the
component EH, which of the two alternatives for the use of spare capacity will
you prefer? (Nov. 2004)
Answer:
(i) Statement Showing Original Budget
Calculations Amount
Sales 1,80,000x130 2,34,00,000
VC of main product:
Material 1,80,000x30
Direct wages 1,80,000x28
VFO 1,80,000x12
VSO 1,80,000x12
VC of EH :
Material 1,80,000x2.00
Direct wages 1,80,000x3.50
VFO 1,80,000x1.70 1,60,56,000
Contribution 73,44,000
Fixed FO 1,80,000x12
Fixed Selling overheads 1,80,000x4
Fixed administrative 1,80,000x5
Fixed overhead EH 1,80,000x2.20 41,76,000
Profit 31,68,000
(ii) Note: Let’s find whether there is spare capacity to produce for the export order.
Time per unit of main product 4,00 hours
Time per unit of EH 0.50 hour
Total time per unit of ‘43 grade’ 4,50 hours
Total Hours worked at present (90% of 4.50 x 1,80,000 = 8,10,000
capacity)
Spare capacity (10%) 90,000 hours
Hours required for export order 5000 hours per month, i.e., 60,000 hours
There exists spare capacity to produce the goods for the export order.
Monthly Cost Benefit Analysis of the export Order

Cost Benefit
Sale 500x175
Costs:
Material 500x56
Labour 500x70
VFO 500x30
VSO 500x14
85,000 87,500
Recommendation: The export order may be accepted as its benefit is more than its cost.
(iii) Cost Benefit analysis of Proposal regarding External Purchase of EH
Cost Benefit
Cost 1,80,000x7.90
Savings of Costs:
Material 1,80,000x2
Direct wages 1,80,000x3.50
VFO 1,80,000x1.70
14,22,000 12,96,000
Recommendation: The external purchase may not be made as its cost is more than its
benefit. (The cost of external buying exceeds that of making by Rs.1,26,000.
(iv) Evaluation of use of capacity to be spared by external purchase of EH.
(Each unit of EH requires 0.50 Hour)
Rent the released capacity (A) 90,000 hours @ Re.1/hour = Rs.90000
Each unit of GYP requires 0.30 hour.

Hence, in 90,000 hours the company can
produce 3,00,000 units of GYP.
Contribution from GYP

SP : 8.00
VC/unit 7.50 3,00,000 units@ 0.50 = Rs.1,50,000
Recommendation: EH may be purchased and the capacity so released may be used for
making GYP.
Q.No.109: Bloom Ltd makes 3 products, A, B and C. The following information is available:
(Figures in Rupees
per unit)
A B C
Selling price (Peak-season) 550 630 690
Selling price (off season) 550 604 690
Material cost 230 260 290
Labour (Peak-season) 110 120 150
Labour (Off season) 100 99 149
Variable production overhead 100 120 130
Variable selling-overhead 10 20 15
(only for the peak-season)
Hours
Labour hours required for one unit of
production 8 11 7
Material cost and variable production overheads are the same for the peak-season and off
season. Variable selling overheads are not incurred in the off-season. Fixed costs amount to
Rs.26,780 for each season, of which Rs.2000 is towards salary for special technician,
incurred only for product B, and Rs.4780 is the amount that will be incurred on after-sales
warranty and free maintenance of only product C, to match the competition.
Labour force can be interchangeably used for all the products. During peak-season, there is
labour shortage and the maximum labour hours available are 1617 hours. During off
season, labour is freely available, but demand is limited to 100 units of A, 115 units of B and
135 units of C, with production facility being limited to 215 units for A, B and C put
together.
(i) Advise the company about the best product mix during the peak-season for
maximum profit.
(ii) What will be the maximum profit for the off-season?
[CA Final Nov. 2008 AMA Q. No. 1(a) 12 marks]
Answer
(i)
PEAK-SEASON
Note: There is no mention of upper limit for the demand. Hence, we interpret that Bloom
shall be able to sell all that it produces. Given the labour limits, its product- mix
should contain only one product, i.e., the product that gives the maximum amount of profit.
Maximum possible production:
A : 1617/8 = 202 units B: 1617/11 = 147 units C : 1617/7 = 231 units
Statement showing total Profit under each of three Products

A B C
Sales 202x550 = 147x630 = 231x690 =
1,11,100 92,610 1,59,390
Costs:
Material 46,460 38,220 66,990
Labour 22,220 17,640 34,650
V. Production O. 20,200 17,640 30,300
V. Selling Overhead 2,020 2,940 3,465
Fixed overheads 20,000 22,000 24,780
Total 1,10,900 98,440 160185
Profit /(Loss) 200 (5830) (795)
Recommendation: Bloom may produce only A during the peak-period as only this
alternative results in profit.
(ii)
OFF-SEASON
Note: Demand is the key factor. Product specific fixed costs are also there. Hence, the
decision will be guided by net contribution per unit of output. Net contribution =
contribution – specific fixed cost.
Statement Showing net contribution per unit under each of three products
A B C
SP 550 604 690
VC:
Material 230 260 290
Labour 100 99 149
V. Production O. 100 120 130
Total 430 479 569
Contribution 120 125 121
Specific FC
A : nil nil
B : 2,000/115 17.39
C : 4780/135 35.41
Net contribution 120 107.61 85.59
Recommendation: Bloom may produce and sell 100 units of a and 115 units of B.
Statement showing total Profit during Off-season (Rs)
A B Total
Contribution 100x120 115x125 26,375
FC 22,000
Profit 4,375
Q.No.110: Zed Ltd operates two shops. Product A is manufactured in shop –I and customers’
jobs against specific orders are being carried out in shop -2. Its annual statement of income is:
(Rs.)
Shop –1 Shop –2 Total
(Product A) (Job works)
Sales/income 1,25,000 2,50,000 3,75,000
Material 40,000 50,000 90,000
Wages 45,000 1,00,000 1,45,000
Depreciation 18,000 31,500 49,500
Power 2,000 3,500 5,500
Rent 5,000 30,000 35,000
Heat and light 500 3,000 3,500

Other expenses 4500 2,000 6,500
Total costs 1,15,000 2,20,000 3,35,000
Net Income 10,000 30,000 40,000
The depreciation charges are for the machines used in the shops. The rent and heat and
light are apportioned between the shops on the basis of floor are occupied. All other costs
are current expenses identified with the output in a particular shop.
A valued customer has given a job to manufacture 5000 units of X for shop 2. As the
company is already working at its full capacity, it will have to reduce the output of A by 50%
to accept the said job. The customer is willing to pay Rs.25 per unit of X. The material and
labour will cost Rs.10 and Rs.18 respectively per unit. Power will be consumed on the job
just equal to the power saved on account of reduction of output of A. In addition, the
company will have to incur additional overheads of Rs.10.000.
You are required to compute the following in respect of this job:
(i) Differential cost (ii) Full cost (iii) Opportunity cost and (iv) Sunk cost.
Advise whether the company should accept the job.
Answer:
Teaching Note: Differential cost is change in the cost on account of moving from one
alternative to another alternative.
(i) Differential cost of the job:
New Alterative Old Alternative
Material 50,000 20,000
Labour 90,000 22500
Additional Overheads 10,000 ----

Other expenses ---- 2250
Total 1,50,000 44,750
Differential cost = 150000 –

44750 = Rs.1,05,250
(ii) Full Cost:

Material 50,000
Labour 90,000
Additional Overheads 10,000
Depreciation 9,000
Power 1,000
Rent 2,500
Heat and light 250
Total Rs.1,62,750
(iii) Teaching note: Opportunity cost means the contribution lost on account of taking up this
order.
Sales foregone 62500
Costs saved:
Material 20,000
Labour 22,500
Power 1.000
Other expenses 2,250 45,750
Contribution lost (Opportunity cost) 16,750
(iv) Sunk cost

Depreciation 9000
Rent 2500
Heat and Light 250 11,750
Analysis of Job:
Incremental Revenue Rs.62,500
Differential cost Rs.1,05,250
Loss Rs.42,750
Recommendation: The job may not be accepted as it results in cash disadvantage.
Q.No.111
X has taken a shop on lease and made a down payment of Rs.2,50,000. Additionally, the rent
under lease amount is Rs.96,000 per annum. If lease agreement is cancelled Mr X, then the
initial payment is forfeited. Mr X plans to use the shop for the general stores business, and
has estimated operations for the next year as follows: (Rs.)
Sales 25,00,000
Less value added tax 2,80,000
Net sales 22,20,000
Cost of goods sold:
Wages 12,50,000
Manufacturing expenses 2,76,000
Rent including down payment 3,46,000
Rates, lighting and insurance 2,80,000
Audit and general expenses 50,000
Total 22,02,000
Net profit before tax 18,000
In the business, Mr X will be devoting of half time; however no provision has been made for
his remuneration/salary. Mr X also has an option to sublet the shop to his friend for a
monthly rent of Rs.18,000, if he does not use the shop himself.

(i) Identify the sunk and opportunity cost in the above problem.
(ii) State most profitable decision, which should be taken by Mr X, supporting with
appropriate calculation. (C.A. Final Cost Management Nov.2009)
Answer
(i)
Cost Classification
Down payment Sunk cost
Loss of Salary Opportunity cost
Net rental income (18000 p.m. – 8,000 p.m.) i.e., Opportunity cost
Rs.10,000 p.m.
(ii) Statement showing profit from running the ship (decision making point of view)
Net sales 22,20,000
Cost of goods sold:

Wages 12,50,000
Manufacturing expenses 2,76,000
Rent (payment) 96,000
Opportunity cost ( rent) 1,20,000
Rates, lighting and insurance 2,80,000
Audit and general expenses 50,000
Total 20,72,000
Net profit before tax 1,48,000
Mr X may run the business if loss of salary is less than Rs.1,48,000.
Q. No. 112
A businessman employs 20 sewing machinists, but he is aware that ten are better workers
than others. He is considering to conduct a training programme for his ten less efficient
machinists to increase their efficiency to be equal to that of better workers. Relevant data
are as follows:
 There is one sewing machine for each worker
 All the machinists are engaged on similar work and are paid Rs.2.20 each garment
good produced on piece work system.
 To rectify each rejected garment costs Rs.4, this work is done by subcontractor.
 Garment machining department operates for 2000 hours a year
 Average output per machinist (on the basis of all 20 machinists) is 12 good garments
with one rejected per worker per hour. However, 10 less efficient machinists average
only 10 good garments with 1.5 rejected per worker per hour.
 Depreciation of each sewing machine is Rs.10,000 per year and the variable cost of
power, cleaning and preventive maintenance is Rs.5 per machine per hour.
 Fixed overhead other than depreciation is Rs.20 per machine hour.
 Selling price garment is Rs.18.
 Material cost per garment is Rs. 12.
 Training will not reduce the productive hours
 There is no problem in selling the increased output.
You are required
(i) To prepare a statement of comparative costs for better workers and less
efficient workers excluding the material cost
(ii) To find out the benefit derived over a period of 1 year if Rs.1,00,000 is spent
on training course for the less efficient workers to bring their efficiency equal
to that of efficient workers. (CA FINAL NOV. 2005)
Answer :
Working note:
Average output (good garments) per worker: 12
Output (good garments) per less efficient worker : 10
Output (good garments) per efficient worker : 14
Average rejected output per worker : 1
Rejected output per less efficient worker :1.50
Rejected output per efficient worker :0.50
Statement showing cost per unit produced by (i) efficient worker, and (ii) Less efficient worker
(Based on each machine)
Efficient worker Inefficient
worker
Good output
 14 units per hour for 2000 hours 28000
 10 units per hour for 2000 hours 20,000
Rejected output
 0.50 unit per hour for 2000 hours 1000
 1.50 unit per hour for 2000 hours 3000
Total output 29000 23000
Costs:
Material cost @ Rs.12 per unit 3,48,000 2,76,000
Wages @ 2.20 per good garment 61,600 44,000
VO @ Rs.5 per hour 10,000 10,000
Rejection rectification cost 4,000 12,000
Fixed overheads (excluding Depreciation) 40,000 40,000
Depreciation 10,000 10,000
Total 4,73,600 3,92,000
Cost per unit 16.3310 17.0435
Statement showing change in profit on account of training

No training Training Change
Sales
5,20,000 units @ Rs.18 93,60,000 1,04,40,000 10.80,000
5,80,000 units @ Rs.18
Costs:
Training cost Nil 1,00,000
All other costs 4,73,600X10
3,92,000x10 86,56,000
4,73,600x20 94,72,000
--------------- --------------
Total 86,56,000 95,72,000 9,16,000
Net gain on a/c of training Rs.1,64,000
Q.No.113
AB Ltd manufactures product X. the company operates a single shift of 8 hours for 300 days in a
year. The capital employed is Rs.18crores. The manufacturing operations of the company
comprise of four production departments. The company at present produces 9000 units of
product X at maximum capacity. However, the capacity utilization of all the four departments are
not equal and the present capacity utilization are as under:
Departments Capacity utilisation %
A 75
B 100
C 70
D 50
The present return on capital employed has gone down to 10% from the earlier cut off rate
of 15% due to increased cost of production.
The management is considering two alternative proposals to increase the return on capital
employed. The two alternatives are:
Alternative I
To hire out the surplus capacity of departments A, C and D: The cost and revenue projections are
as under:
Department Hire charges per hour Incremental cost per hour
Rs. Rs.
A 2,500 2,000
C 1,800 1,500
D 1,600 1,200
Alternative II
To increase the installed capacity of the factory to 12,000 units by adding plant and
machinery in department B at a capital cost of Rs.4 Crores. Any balance surplus capacity in
other departments after meeting the increased volume to be hired out as per alternative I.
the additional units would fetch incremental profit of Rs.1600 per unit.
Advise the management. (Adapted May, 2000)
Answer
Working note (i)
Calculation of spare capacity (Present scenario)
A 2400 Hours 1800 Hours 600 Hours
B 2400 Hours 2400 Hours Nil
C 2400 Hours 1680 Hours 720 Hours
D 2400 Hours 1200 Hours 1200 Hours
Working note (ii)

Calculation of spare capacity (Proposed scenario)
A 2400 Hours 2400 Hours Nil
B 3200 Hours 3200 Hours Nil
C 2400 Hours 2240 Hours 160 Hours
D 2400 Hours 1600 Hours 800 Hours
Statement showing increase in profit under each of two alternatives

(i) (ii)
Net Hire charges

A 600x500
C 720x300 160x300
D 1200x400 800x400
Profit on 3000 units ------ 48,00,000
Total 9,96,000 51,68,000
Calculation of Return on capital employed

(i) (ii)
180L + 9.96L 180L + 51.68L

=------------------------------------x100 =------------------------------------x100
1800L 2200L
= 10.553% = 10.53%
On the basis of return on capital employed, the first proposal is recommended.
Q. No. 114
Makeshift Manufactures Ltd produces a single product. The company’s annual normal
production is 5 Lakhs units of output on single shift eight hours a day basis in terms of a standard
input of 1 Lakh direct labour hours. Last year’s income statement is given below:
Rs. Rs.
Sales (7 Lakh of units @ Rs. 2.50) 17,50,000
Variable Expenses:
Direct Material 2,80,000
Direct Labour
(1,40,000 hrs. @ Rs. 3.50) 4,90,000
Factory Overheads:
(i) Overtime Premium 1,40,000
(ii) Miscellaneous 2,10,000
11,20,000
Contribution Margin 6,30,000
Fixed Expenses 5,30,000
Profit 1,00,000
Management is concerned about the overtime working done last year (overtime is paid at
double the normal rate) and wants to investigate the possibility of working a second shift.
The cost Accountant of the Company estimates that a second shift would increase costs as
follows an additional factory supervisor at Rs. 30,000 per annum, a night shift allowance of
60 paisa per direct labour hour and an increase in security and administrative cost of
Rs.40,500 a year. Management requires you as their consultant to answer these questions
with supporting figures:
(a) If instead of working overtime a second shift had been introduced at the beginning
of last year itself, would profits have been better? If so by how much?
(b) At what level of requirement of additional hours it would be advantageous to
company to change from overtime working to a second shift?
(c) This year it is estimated that there will be, on last year’s figures 20 per cent increase
in units sold, 10 per cent increase in selling price, 5 per cent increase in direct
material cost per unit and a direct labour rate increase of 0.30 per hour. Assuming
that the overtime would be continued prepare an income statement for the year
based on the current estimates; if a second shift were to be introduced, with an
increase in night shift allowance of 6 paisa per direct labour hour, what would have
been the saving in cost?
[CA (Final) Nov. 1983]
Answer
(i) Working Note: Actual hours worked 140000. Normal capacity 1,00,000 hours.
Extra hours required: 40000
Cost Benefit analysis of Second Shift

Cost Benefit
Night Shift Allowance 24,000

Factory Supervision 30,000
Security & administration cost 40,500
Savings of Overtime Premium 1,40,000
Total 94,500 1,40,000
As benefit of Night Shift is more than its cost, it is recommended.
(ii) Let the requirement of additional hours = x
For indifference between night shift and overtime :
0.60x + 30000 + 40500 = 3.50x
x = 24310.31035 hours.
If requirement of additional hours is less than 24310.31035, overtime is preferred i.e. Night
shift is recommended if the requirement of additional hours exceed 24310.31035 i.e. Night
shift is recommended if the capacity to be operated exceed 124.31031035%.
(iii) Projected Profit Statement (Based on overtime)

Particulars :
Sales 8,40,000 x 2.75 23,10,000

Material consumed 8,40,000x0.42
Labour 1,68,000x3.80
Overtime premium 68,000x3.80
Miscellaneous Exp. 8,40,000x0.30
Fixed cost 5,30,000 20,31,600
Profit 2,78,400
Statement showing change in projected profit in case of night shift

Savings of overtime premium 68000 x 3.80 2,58,400
Costs :
(i) Night shift Allowance 68000 x 0.66
(ii) Factory supervisor 30000
(iii) Security etc 40500 1,15,380
Increase in Profit 1,43,020
Q. No. 115
SM Ltd. is engaged in the manufacture of a range of consumer products. The sales are made
through its own authorized agents who are paid a commission of 20 per cent on the selling price
of the products. The company has prepared the following budget for 1990.
Rs. Lakhs
Sales 225.00
Production Costs:
(i) Prime cost and variable overheads 78.75
(ii) Fixed overheads 36.25
Selling costs:
(i) Agents commission 45.00
(ii) Sale office expenses (Fixed) 2.00
Administration costs (Fixed) 30.00
Total costs 192.00
Profit 33.00
The Company, after the finalization of the above budget, is faced with a demand from its agents
for an increase in their commission to 22 per cent of selling price. The company is therefore
contemplating to dispense with the service of agents and instead employ its own force. In that
event the company expects to incur the following costs:
Rs.Lakhs
Sales Manger’s Salary and expenses 7.50
Salesmen’s expenses, including travelling expenses 2.00
Sales office costs (in addition to the present costs) 5.00
Interest and depreciation on sales dept. vehicles 3.50
In addition to the above it will be necessary to hire 40 salesmen at a salary of Rs. 40,000 per
annum each plus a commission of 5 per cent on sales plus car allowance of Rs. 1 per
kilometer to cover vehicle costs except interest and depreciation which has already been
considered above.
Assuming that the company decides in favour of employing its own sales force, you
are required to answer the following questions:
(i) For the same volume of sales as envisaged in the budget, what is the maximum
average kilometer per annum that the salesman could travel if the company is to
achieves the same budgeted profit as it would have obtained by retaining the
agents and granting them the increased commission which they have demanded.
(ii) At what level of sales would be original budgeted profit be achieved if each
salesman were to travel an average of 14000 km. per annum. Assume all
assumptions inherent in the budget are maintained.
(iii) What is maximum level of commission on sales that the company could afford to
pay if it wished to achieve a 16 per cent increase in its original budgeted profit
and expected a 16 per cent increase in sales at the budgeted selling price and an
average of 16000 km. per annum of travel of travel by each salesman.
(ICWA, Dec. 1989)
Answer :
Working note: Total Fixed costs (in case of salesmen are appointed)(Rs Lakhs)
Fixed Overheads 36.25
Sales Office expenses 2.00
Administration costs 30.00
Salary of salesmen 16.00
Sales manger’s salary 7.50
Sales men expenses 2.0
Sales office cost 5.00
Interest and Dep. 3.50
Total 102.25
(i) Prime cost (% of sales) = (78.75/225) x 100 = 35%
Statement showing calculation of Max. Ave. Km per annum that each salesmen could travel
under the conditions of required profit (Rs Lakhs)
Sales 225.00
Prime cost (35% of sales) -78.75
Salesmen commission (5% of sales) -11.25
Fixed Costs - 102.25
Required profit ( 33 – 4.50) - 28.50
Total travelling allowance 4,25
Travelling Allowance per salesman = 4.25L/40 = Rs.10,625. It means each salesman can
travel 10625 Kilometers p.a.
(ii)
V C = Prime Cost + Salesmen commission = 35% + 5% = 40% of sales
PV ratio = 60%
Amount of travelling allowance = 14000 x 40 = Rs.5,60,000

Sales for Desired Profit and given amount of Travelling allowance;
Fixed Costs + desired Profit + given amount of Travelling allowance

= ------------------------------------------------------
PV ratio
102.25 + 33.00 + 5.60L
= ----------------------------- = 234.75L
0.60
(iii) Working notes:

Expected Sales = 225 + 16% of 225 = 261
Desired Profit = 33 + 16% of 33 = 38.28
Statement Showing Calculation of commission (Rs Lakhs)

Sales (A) 261.00
Costs ( Other than commission) & desired

Profit 91.35
Prime costs (78.75x1.16) 102.25
FC 6.40
Travelling allowance 38.28
Desired profit 238.28
Total (B)
Commission (A minus B) 22.72
22.72
Commission (as % of sales) = -------- x 100
= 8.70
261

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1

COST VOLUME PROFIT ANALYSIS AND

Cost Volume Profit Analysis

BEP can be explained in three different ways:

Sales (units) for required Fixed Cost + Required Profit

Two important points about PV Ratio:

Margin of Safety = Actual sales – B.E.P. sales

Relationship between Margin of Safety, PV ratio and Profit: Up to Breakeven point,

Margin of Safety x P. V. Ratio

Profit in Relation to Sales:

Multiplying both the sides by ‘100/Sales’, we get:

Profit x 100 Margin of Safety x PV Ratio x 100/sales

Putting in simple way, we get

Profit M.S. Ratio x PV ratio

Per Pen (Rs.)

Selling Price 30.00

Variable Cost 19.50

Salesmen commission 1.50

Total variable cost 21.00

Annual fixed expenses are: (Rs.)

Rs. Lakhs Rs. Lakhs

Sales 150 200

Total contribution on Rs.150L sales =

Profit on Rs.150L sales =

Total annual cost % of Total annual cost which

Material 2,10,000 100

Factory overheads 92,000 60

Total cost (other than commission) Rs.4,92,000 (It is 82% of sales)

Sales 4,92,000/0.82 = Rs,6,00,000

SP Sales/Sales units =Rs.6,00,000/40,000=Rs.15

VC (other than commission) Rs.492000 – 92800 = Rs.3,99,200

VC (other than commission) per unit Rs.399200/40000 = 9.98

Commission per unit 8% of 14 = Rs.1.12

VC per unit 9.98 + 1.12 = 11.10

Selling price Rs.52.80/0.80 = Rs.66

Margin of safety Rs.12,00,000

Profit Margin of Safety x PV ratio = 1200000 x 0.20 = Rs.2,40,000

TRY YOUSELF Q.No.6

(i) I Half – year

Margin of safety Rs.1500,000 – Rs.9,00,000 = Rs.600,000

(ii) II Half - year

Sales Rs.3,00,000/0.50 = Rs.6,00,000

(iii) Whole year

Margin of safety Rs.21,00,000 – Rs.18,00,000 = Rs.3,00,000

TRY YOURSELF : Q.No.8

Reasons for Decline in Profit:

PV ratio declines for either or both of the following two reasons

TRY YOURSELF Q. No.10 The following information is given by Z Ltd:

For the year 2008, the following are expected:

It is also known that :

(i) Statement showing estimated trading results in 2008

First Quarter Second Quarter

Gross profit 22,00,000 42,00,000

Selling and Administration 30.40,000 34,40,000

Profit before Tax -8,40,000 7,60,000

Tax ------ 3,04,000

Profit after Tax -8,40,000 4,56,000

Rs.1,31,20,000 Rs.89,20,000 + 34,40,000 = 1,23,60,000

Rs.99,20,000 Rs.77,20,000 + 30,40,000 = 1,07,60,000