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Solat Particulars See Price Coster unit Corrbuon perunt-) Votion per hour e) Cantrition per machine hour (cd) Rank (Key Factor applies) e Order Quantity b) Time required for this Quantity (9) CVP Analysis and Mag 1. Contribution Analysis Bottles Toys (made) Toys (sub contract) 30.80 30.00 30.00 012 24.00 128.00 10.48 16.00 2.00 40 Bottes 16 Top NA 19.20 896 II T 3,00.000 Bottles 40,000 Toys 7,500 hours 2,500 hours 2 Erfect of Toy Order when Bottles Order = 3,00,000 Units: As per WN 1 above, Toy Order will result in a capacity of 10,000 hours (ie. 7,500 + 2,500). Hence, there are no Opportunity costs and hence the proposal is contribution of per unit. Abo, as per Wax 2 above, the time required for the Toy Order is just within the Company's feasible. The offect on profits will be - (a) Additional Contribution from Toy Order 40,000 toys x 36 * 2,40,000 (b) Additional Fored Costs for the order = Cost of Mouid 71,00,000 (C) Additional Profit from the acceptance of the Toy Order = (a - b) 71,40,000 Effect of Toy Order when Bottles Order = 4,00,000 Units: As per WN 1 above, we find that Toys have a higher Contribution per Machine Hour. So, the first preference should be produce Toys and balance time should be used for producing Bottles. In this case, the entire Toy Order will be accepted first, and the balance time of 7,500 hours will be used for producing 3,00,000 bottles, as in previous situation. However, the Company may also consider the following other factors in this regard - () Need to build long-term sustainable relationship with existing Customers, (b) Overall improvement from Customer Account Profitability perspective in the long-run, (c) Cost of "retaining" existing customers being less than cost of "acquiring new customers, etc. 4. Indifference Point between Own Production of Toys vs Sub-Contracting Option Particulars Own Production Sub-contracting Variable Costs 324 per unit 728 per unit Nil Fixed Costs 31,00,000 Difference in Fored Costs + 1,00,000 - Nil Indifference Point = 25,000 toys. Difference in Variable Cost per Unit ( 25,000 toys > 1,562.5 hours Own Production Lower Variable Costs per unit Hence, the minimum excess machine hour capacity needed to justify the manufacturing of any portion of the Toy Order is 1,562.5 Machine Hours Alternative Method: Savings due to own production = 328 - 324 = 24 p.u, whereas specific Mould Costs 1,00,000. Elence, minimum own production required to justify recovery of Mould Costa 3 1,00,000 = 25,000 toys. If the Company does not have adequate spare capacity to produce atleast 25,000 toys (.e. equivalent to 1,562.5 Machine Hours), should sub-contract the entire Toy Order 9.35 N 10 Padhukas - Students' Handbook on Strategic Cost Management & Performance Evaluation 3. Shut-Down Point 3.1 Shut Down Point, required Variable Costs The Selling Price per unit of a product is