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(a) M 8.3 Raw Materials Decision - Local Purchase vs Other Purchase X Ltd has two factories, one at Lucknow and another at Pune producing 7,200 Tonnes and 10,800 Tonnes of a product against the maximum production capacity of 9,000 and 11,880 Tonnes respectively at Lucknow and Pune. 10% of the raw material introduced is lost in the production process. The maximum quantity of Raw Material available locally are 6,000 and 13,000 Tonnes at 3720 and 729 per Tonne at Lucknow and Pune respectively. For the additional needs, a Supplier of Bhopal is ready to supply raw material at our factory site at * 792 per Tonne. Other Variable costs of the production process are *22.32 Lakhs and 32.94 Lakhs and Fixed Costs are 18 Lakhs and 24.84 Lakhs respectively for Lucknow and Pune Factory. The output is sold at a Selling Price of 1,450 and 1,460 per tonne by Lucknow and Pune Factory respectively. You are required to compute the Cost per Tonne 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 present total output of 18,000 Tonnes whereby the Company may earn Optimum Profit? Solution: 1. Material Purchased and Costs thereof M17 8.4 Purchase Decision - Maximum Price to Supplier 3C Ltd, produces a gadget made up of special Steel Piates. The Company gets an order for supply of 50,000 gadgets at a price of 3 680 per unit. The Gadgets are made of two halves fupper part and lower part) and then welded together. The Cost structure is: Materials 15 kg per hall @ 10 per kg. Labour 60 per half. Welding Charges and Fitting Charges would be 20 per gadget. The special Steel Plates are in short supply and ABC Ltd has stock of only 750 Tons. A Supplier has only the lower part and was offered to supply 50,000 numbers. Transportation and Handling will cost 6 per half. (Consider 1 ton = 1,000 kg) ABC Ltd could either execute its order to the extent of material available, or could fulfill the entire order by buying the lower art from the Supplier. Evaluate both the options and find out the Maximum Price that ABC would be willing to pay the Supplier per lower part if- it wants to retain the same level of Profit per unit as in own manufacture. 2 If any additional revenue is preferred. Present your calculations to the nearest rupee. Particulars 9.1. Evaluation of Alternatives and Decision Making - Effect on Operating Income tives and Decision-Making Bland makes Industrial Power Drills which are made by the use of a components A (Electrical & Mechanical Components and B N09 Plastic Housing). The following table shows the cost of Plastic Housing separately from the cost of Electrical & Mechanical components - e A&B Sales 1,00,000 units at 100 Electrical & Mechanical Components Plastic Housing Industrial Drills Variable Costs: 1,00,00,000 Direct Material Direct Labour 44,00,000 5,00,000 49,00,000 Variable Factory Overhead 4,00,000 3,00,000 7,00.000 1,00,000 200.000 3,00.000 Other Variable Costs 1,00,000 1,00.000 Sales Commission at 10% of Sales 10,00,000 10,00.000 Total Variable Costs 60,00,000 10,00,000 70,00.000 contribution 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: During the year, a prospective customer offered = 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 of B Ltd, if it accepts the offer 2. A Supplier offers to manufacture the yearly supply of 1,00,000 units Plastic Housing Components for 13.50 each Assume that B Ltd would avoid * 3,50,000 of the costs assigned to Plastic Housing if it purchases. Calculate the Operating Income, if B Ltd decides to purchase the Plastic Housing from the Supplier. Assuming that B Ltd could purchase 1,20,000 units (Plastic Housing Components) for 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 130 each in addition to the costs are related to the to 100 000 renular units) at a Variable Cost of 90 each, excusive of Housings & exclusive of the 10% Sales most preferable due to maximum additional profit. 2,75,000) = 5,01,000. M00 B C 5.3 Hiring Out Spare Capacity - Evaluation of Alternatives - ROI Approach Book question BLtd manufactures Product X. The Company operates a single shift of 8 hours for 300 days in a year. The Capital Employed In the business is 18 Crores. The manufacturing operations of the Company comprise of four Production Departments. The Sompany at present produces 9,000 units of Product X at maximum capacity. However, the capacity utilisations of all the four Departments are not equal and the present individual capacity utilisations are as under - Department . Capacity Utilisation 75% 100% 70% The present Return on Capital of the Company has gone down to 10% from the earlier cut-off rate of 15% due to increased cost production. As the Company cannot operate more than one shift, the Management is considering two alternative proposals to increase the Return on Capital Employed. Alternative l: To hire out the surplus capacity of departments A, C and D. The cost and revenue projections are - Department Hire Charges per Hour Incremental Cost per Hour A *2,500 * 2,000 1,800 1,500 D 1,600 1,200 D 50% Alternative II: To increase the installed capacity of the Factory to 12,000 units by adding Plant and Machinery in Department B ut a Capital Cost of 4 Crores. Any balance surplus capacity in other Departments after meeting the increased volume to be hired out as per Alternative l. The additional units would fetch an Incremental Revenue of * 1,600 per unit. Evaluate the two proposals and suggest to the Management, which of the two proposals is to be accepted. tion 1. ROCE under Alternative I (Output = 9,000 units) RTP 94 Alternative means of using Idle Capacity - Evaluation and Profitability Analysis XYZ Ltd is manufacturing two products X and Y, the details of which are given below- Product X Product Y Particulars Sales Units 5,000 10,000 25% 40% Capacity utilized Selling Price 1,000 1200 Direct Material 7300 500 Direct Wages (* 100 per worker-day) 7250 200 Fixed Overheads of * 20 Lakhs will remain unchanged at present level of production. While making a Production Plan for the next year, the following changes which are expected to have impact on cost are given below- Rise in Cost: Direct Material and Direct Wages is expected to rise by 5%. Variable OH will remain at 100% of Direct Wages. Rise in Price: Present volume of sale can be achieved with 6% rise of Price of A and 4% rise in B. 1. Proposal 1: Use idle capacity to produce X, keeping present price to take care of additional sale. 2. Proposal 2: Produce Y with idle capacity with ng increase in price. Efficiency may go down by 16% because of newly recruited workers. Machine wise cap arity Ental In this question Copaidy ditied for Martie = 65.1. ease in contribution is higher in C. Scrap Calculation RTP, M 04 3. Contribution and Profit Analysis under different alternatives - Regular vs Substitute Materials A Company has a normal manufacturing capacity of 1,50,000 units of a product per annum. The actual costs based on this output achieved during the last year were as under - Direct Materials 20 35 Variable Overheads Direct Labour 20 Fixed Overheads 20 The budget for the next year envisages the following increases Direct Materials 33 1/3rd% Variable Overheads Direct Labour 10% Fixed Overheads 5% 15% In view of the substantial increase in Material Costs, the Company explored the possibilities of using a substitute material. The Company has been able to identify a cheaper source of Direct Materials, which will cost * 40 per unit of output. The tests reveal that the use of cheaper Direct Material as above will make the following impact on the costs - Direct Labour Cost will increase by 1 per unit of output. It will lead to 5 % rejection in output. It will result in a final quality-testing programme evaluating an additional Fixed Cost of 4,00,000. The Selling Prices are estimated as under for different levels of sales volume for the next year - Selling Price per unit() 144 152 Demand (in 1,000 units) 190 170 150 140 128 136 160 125 168 110 176 95