Example 3: XYZ Ltd. made a flexible budget last year at three different levels and operated at 70% capacity. Seeing the last year's performance and market trend, management of the company has decided to operate at 85% capacity. Last year's flexible budget at three different capacity levels (Rs. lakhs) as given below:- 60% 70% 80% 180 210 240 Direct Material 120 140 160 Direct Labour Production Overheads 75 85 95 Selling and Distribution Overheads 40 45 50 Administration Overheads 50 50 50 Total 465 530 595 (a) Draw a budget at 85% capacity with the following expected increase in cost: Material, Variable Production Overheads and Variable Selling and Distribution Overheads @ 8% and Direct Labour, Fixed Production Overheads, Fixed Selling & Distribution Overheads and Administration Overheads @ 10% (b) Suggest the Management to take care of possible problems which you anticipate due to the increase of capacity utilization. Solution