need project report

N10 3. Shut-Down Point 31 Shut Down Point, regard Variable costs Pochukas Sets Hook on Strategic Costagem performance on Cra Expenses at 50% activity (5.000 units) will be 30,000. The Company is thinking of shutting down operations, in which case ant The Selling Price per unit of a product is 14. For the forthcoming period, the demand will be only 5,000 units. The Fixed ditional amount of 2,000 will have to be incurred for shutting down and only 20,000 of the above Fired Costs can be voided. What should be the Variable Cost per unit to recommend a shut-down? Particulars Let Variable Cost per unit be? 1 Solutions Revenue 2. Variable Cost 3 Contribution (1-2) 4. Foud Costs 5. Prof (3) Continue Operations 5,000 units x 714 - 20,000 5,000 x 70,000 -5,000 X 30,000 40,000 - 5,000 X Shutdown NN NE NI 30,000 -- 20,000 + 2,000 - 12.000 (12,000) So, M 96, N 10, N 16 For indifference between Continue and Close Down Options, the profits of the two options should be equal. 40,000 - 5,000x = - 12,000, -5,000x = -52,000 On solving, X 10.40 Desired Variable Cost p.u. Conclusion: If Variable Cost per unit is greater than 10.40, Shut-Down Option is preferable. 3.2 Shut Down Point - Basic Computations G Ltd produces and sells 95,000 units of X in a year at its 80% production capacity. The Solling Price of product is 8 per unit. The Variable Cost is 75% of Sale Price per unit. The Fixed Cost is 88,000 Avoidable Fixed Cost = 2-3 1,12,000 1,12,000 Avoidable Fixed Costs 5. Shut Down Point = 14,000 tins Contribution per Unit 8 Conclusion: Since activity level if continued is only 10,000 tins (which is below the Shut Down Point of 14,000 tins), the plant may be closed down for the quarter. Loss if continued = Contribution from 10,000 tins 80,000 minus Fixed Cost 2,00,000 = 1,20,000. Loss if shut-down = Minimum Fixed Costs = 88,000. Hence, it is better to shut-down for the quarter. N 12 5 Shut-down vs Continue - Relevant Cost Analysis Moonlite Limited operates its Plant at normal capacity it produces 2,00,000 units from the Plant 'Meghdoot'. ne unit cost of manufacturing at normal capacity is as under - Direct Material 65 30 Direct Labour 33 Variable Overhead 7 Fixed Overhead Total 135 rect Labour Cost represents the compensation to highly-skilled workers, who are permanent employees of the mpany. The Company cannot afford to lose them. One labour hour is required to complete one unit of the product. Company sells its product for 200 per unit with Variable Selling Expenses of 16 per unit. The Company estimates due to economic down turn, it will not be able to operate the plant at the normal capacity, at least during the next 7. It is evaluating the feasibility of shutting down the plant temporarily for one year. 9.37 solution fe-opening will be 1,00,000 pirert Direct Prima Fa Padhuka's - Students Handbook on Strategic Cost Management & Performance Evaluation CA Final a uniform rate throughout the year. It is also estimated that the additional cost of shutting down will be 50.000 and the cost if it shuts down the Plant, the Fixed Manufacturing Overhead will be reduced to 1,25,000. The Overhead Costs are incurred 50% of the Labour hours can be utilized in another activity, which is expected to contribute at the rate of 40 per Labour hour. The additional activity will relate to a job which will be of loaded by a Sester Company, only at the Company decided to shut down the Calculate the prinimum vol of production at which it will be economically beneficial to continue to operate the Plant neat year, if Plant. (Assume that the cost structure will remain unchanged next year. Ignore Income Tax and Time Value of Money Note: Direct Labour Cost is committed & irrelevant, since the Company cannot afford to lose the highly skilled Let required Minimum Output to justaty Operation units. Effective Contribution pu. Selling Price p.u. - Variable Costpu. Z 200-265 Material - 33 VOH - 16 SOH286 Particulars 1. Solution: 1 permanent workers. Continue Close down 50% x 2,00,000 hrs x + 10 puh 40,00.000 Benefit Contribution Qunits x 756 2. Costs (a) Foxed Overhead (b) Shut down and Re-opening Costs Net Benefit ZU 2,00.000 unts