1. Marginal Costing: Cost Volume Profit Analysis: Case of Apex Homesets Pvt Ltd

Apex Homesets Pvt Ltd was the manufacturer of kitchen appliances producing and selling apples like chimneys, mixer grinders, juicers, gas stoves and rice cookers etc. Nikumbh Pawar was heading the rice cooker division. The price of the best-selling 5-litre rice cooker was rupees 2,500. The variable cost for the same was 1,500 rupees and the fixed cost for the current sales of 10,00,000 rupees per month was rupees 3,50,000.

Although the rice cooker division was making profit, Nikumbh was concerned about the safety. He thought that it was time to make serious efforts towards increasing sales and capturing bet e margin of market share. He called his sales managers and asked them to brainstorm over this and get back s within a week with individual solutions to improve sales. After a week, he got the following proposals from his managers;

Manager 1: An increase in sales budget by rupees 1,00,000 will provide rupees 3,00,000 increase in sales.

Manager 2: Increasing quality of rice cooker at an additional cost of 100 per unit would improve the sales by 80 more units.

Manager 3: If selling price is dropped by rupees 200 per rice cooker and advertising budget is increased by rupees 1,50,000 per month, the sales would increase by 50%

Manager 4: If there is a switch for salespeople from flat salary of 60,000 per month to a sales commission of 150 per rice cooker sold, the sales would increase by 15%.

Nikumbh called his cost accountant Rajiv to analyse all these proposals and find out if these proposals were indeed helpful in increasing sales as well as profit. He decided to reward the manager whose idea generated maximum profit.

QUESTIONS FOR DISCUSSION:

1. What was the current margin of safety (MOS) for rice cooker sales? Was Nikumbh's fear of low

MoS reasonable?

2. If you are in place of Rajiv, whose idea you would determine as the best?

3. There was a proposal from one of the distributors who was willing to buy 200 rice cookers if the company gave him a discount off the price of rupees 2,500. The sale would not disturb regular sales and since there was available capacity, it would not change the fixed costs. Nikumbh wanted to make rupees 80,000 on this sale. What price should he quote?