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N 09 components 9.1. Evaluation of Alternatives and Decision Making - Effect on Operating Income Ltd makes Industrial Power Drills which are made by the use of 2 components A (Electrical & Mechanical Components handen plastic Housing). The following table shows the cost of Plastic Housing separately from the cost of Electrical & Mechanical Particulars A Electrical & Mechanical Components B A&B Plastic Housing Industrial Drills ales 1,00,000 units at 100 1,00,00,000 Variable Costs: Direct Material 44,00,000 5,00,000 49,00,000 Direct Labour 4,00,000 3,00,000 7,00,000 Variable Factory Overhead 1,00,000 2,00,000 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 30,00,000 ontribution 22,20,000 4,80,000 27,00,000 Total Fixed Costs 3,00,000 Uperating Income runswer 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 3 13.50 each. Docume that it would avoid * 3,50,000 of the costs assigned to Plastic Housing if it purchases. Calculate the Operating the Sunnlier Located 9.2 Evaluation of Alternatives - Profitability Analysis CMA Exam question N01 BALA Ltd manufactures two types of herbal products, A and B. Its budget shows overall profit figures after apportioning the fixed Joint Cost of 15 Lakhs in the ratio of the number of units sold. The budget indicates - Product A B Profits/(Losses) 2,10,000 ( 30,000) Selling Price per unit 200 120 PV Ratio 40% 50% Advise the best option among the following, if the Company expects that the number of units sold would be equal. 1. Due to a change in a manufacturing process, the joint fixed cost would be reduced by 15% and the variable cost would increased by 7.5% 2 Price of A could be increased by 20% as it is expected that the Price Elasticity of Demand would be unity over the range of price 3. Simultaneous introduction of both the Options 1 and 2 above. ont Sale Quantity Book question be in the business is 3 18 Crores. The manufacturing operations of the Company comprise of four Production Departments. The M00 B D 50% 19.3 Hiring Out Spare Capacity - Evaluation of Alternatives - ROI Approach BLtd manufactures Product X'. The Company operates a single shift of 8 hours for 300 days in a year. The Capital Employed Company 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 A C 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 f 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 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 a Capital Cost of 4 Crores. Any balance surplus capacity in other Departments after meeting the increased volume to be bired out as per Alternative I. 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. RTP Analysis XYZ und is manufacturing two products X and Y, the details of which are given below - Particulars Sales Unis Product X 5,000 25% 1,000 300 250 Selling Price Direct Material Direct Viages 100 per worker-day) Product Y 10,000 40% * 1200 500 * 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. Proposal 1: Use idle capacity to produce Xkeeping present price to take care of additional sale. 2. Proposal 2. Produce Y with idle capacity with no increase in price. Efficiency may go down by 16% because of newly recruited workers