DECISIONS INVOLVING ALTERNATIVE CHOICES 1. A toy manufacturer makes an average net profit of Rs. 2.

50 per piece on a selling price of Rs. 14.30 by producing and selling 60,000 pieces or 60% of the potential capacity. His cost of sales is: Direct material Rs. 3.50 Direct wages Rs. 1.25 Works overhead Rs. 6.25 (50% fixed) Sales overhead Rs. 0.80 (25% variable) During the current year, he anticipates that his fixed charges will go up by 10%, while rates of direct material and direct labour will increase by 6% and 8% respectively. But he has no option of increasing the selling price. Under this situation he obtains an offer for an order equal to 20% of his capacity. The concerned customer is a special customer. What minimum price will you recommend for acceptance to ensure the manufacturer an overall profit of Rs. 1,67,300. 2. The following data relate to a manufacturing company: Plant capacity : 4,00,000 units per annum Present utilization: 40% Actual for the year were: Selling price Rs. 50 per unit Materials cost Rs. 20 per unit Variable manufacturing costs Rs. 15 per unit Fixed costs Rs. 27 lakhs In order to improve capacity utilization the following proposals are being considered: Reduce selling price by 10% Spend additionally Rs. 3 lakhs on sales promotion. How many units should be made and sold in order to earn a profit of Rs. 5 lakhs per year? 3. A business produces three products A, B and C for which the standard variable costs and budgeted selling prices are as follows: Particulars A (Rs.) B (Rs.) C (Rs.) Direct material 3 6 8 Direct wages 4 4 10 Variable overhead 3 5 7 Selling price 18 25 48 In two successive periods, sales (units) are as follows: A B C Period I 10,000 10,000 10,000 Period II 20,000 13,000 5,000 The budgeted fixed overheads amounted to Rs. 1,35,000 for each period. In spite of increased sales the profit for the second period has fallen below that of the 1st period. Present figures to management to show why this fall in profit should or should not have occurred. 4. A T.V. manufacturing company finds that while it costs to make component X, the same is available in the market at Rs. 5.75 each, with all assurance of continued supply. The breakdown of cost is:

Materials Labour overheads Variable overheads Depreciation and other fixed cost Total

Rs. 2.75 each Rs. 1.75 each Rs. 0.50 each Rs. 1.25 each Rs. 6.25 each

1. Should the company make or buy the component? 2. What should be your decision if the supplier offered component at Rs. 4.85 each? 5. S Ltd. Manufactures and markets a single product. The following information is available: Materials Conversion costs (variable) Dealers margin Selling price Fixed cost Present sales Capacity utilization Rs. 8 per unit Rs. 6 per unit Rs. 2 per unit Rs. 20 per unit Rs. 2,50,000 80,000 units 60%

There is acute competition. Extra efforts are necessary to sell. Suggestions have been made for increasing sales: 1. By reducing sales price by 5% 2. By increasing dealers margin by 25% over the existing rate. Which of the two suggestions you would recommend if the company desires to maintain the present profit? 6. The cost of a manufacturing company for the product is: Materials Labour Variable expenses Fixed expenses Total Rs. 12 Rs. 9 Rs. 6 Rs. 18 Rs. 45

The unit of product is sold for Rs. 51. The companys normal capacity is 1,00,000 units. The figures given above are for 80,000 units. The company has received an offer for 20,000 units at Rs. 36 per unit from a foreign customer. Advice the manufacturer on whether the order should be accepted. Also give your advice if the order is from a local merchant. 7. You are given the following information in respect of products X and Y of Bee Cee Co. Ltd. Particulars X Y Selling price Rs. 42 Rs. 33 Direct material Rs. 15 Rs. 15 Labour hours (50 paise per hour) 18 hours 9 hours Variable overheads 50% of direct wages 50% of direct wages Show which product is more profitable during labour shortage.

8.

A company engaged in plantation activities has 200 hectares of virgin land which can be used for growing jointly or individually tea, coffee and cardamom. The yield per hectare of the different crops and their selling price per kg. are as under: Product Tea Coffee Cardamom Yield (kgs.) 2,000 500 100 Selling Price (Rs. Per kg) 20 40 250

The relevant cost data are given below: (a) Variable cost per kg.: Particulars Tea (Rs.) Labour charges 8 Packing materials 2 Other costs 4 Total cost 14 (b) Fixed cost per annum: Particulars Cultivation and growing cost Administrative cost Land revenue Repairs and maintenance Other costs Total costs

Coffee (Rs.) 10 2 1 13

Cardamom (Rs.) 120 10 20 150

Amount (Rs.) 10,00,000 2,00,000 50,000 2,50,000 3,00,000 18,00,000

The policy of the company is to produce and sell all the three kinds of products and the maximum and minimum are to be cultivated per product is as follows: Product Maximum Area (hectares) Minimum Area (hectares) Tea 160 120 Coffee 50 30 Cardamom 30 10 Calculate the priority of production, the most profitable product mix and the maximum profit which can be achieved.