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CVP Analysis and Decision-Making Product Y Proposal 3: A new product Z may be manufactured which requires 3 worker-days per unit and the estimated Selling Price, direct material per unit will be 1,350, 400 and 315 respectively. Variable Overheads will be 100% of Direct Wagos, Selling & Distribution Expenses and other Fixed Costs are expected to go up by 2 6.50 Lakhs. Considering the rise in cost, you are required to examine the above three proposals and compare with the profitability of the next year with normal production of current year. Solution: 1. Profit Statement for Next Year with Normal Production and Cost Changes Total Particulars Product X a) Selling Price per unit 1,000+ 6% = 1,060.00 1,200 + 4% = 1,248.00 (b) Variable Costs p.u. Direct Material 300 + 5% = 315.00 500 + 5% = 525.00 Direct Wages 250 + 5% = 262.50 200 + 5% = 210.00 Variable OH 100% of Wages = 262.50 100% of Wages = 210.00 Total Variable Cost per unit 840.00 3945.00 (c) Contribution per unit (a - b) 3220 7303 d) Sales Quantity 5,000 units 10,000 units se) Total Contribution (c x d) * 11,00,000 30,30,000 41,30,000 ( Fixed Overheads (given) 320,00,000 (19) Profit for Next Year at above level (e-) 721,30,000 g) Worker-Days required per unit = Direct * 250 pu 200 pu = 2.5 = 2.0 Wages Cost : 100 per Worker-Day * 100 per day 100 per day h) Total Worker-Days reqd for prodn (dxg) 20,000 32,500 12,500 40% 65% 25% Capacity (given) 32,500 Since 65% of Capacity is 32,500 worker-days, Idle Capacity (i.e. 35%) = x 35% = 17,500 worker-days. 65% 2. Evaluation of Options 1. Produce X and retain 2. Produce Y with Old Particulars / Option 3. Produce Z old Price Price & lower efficiency a) Additional Qtty of product to 17,500 17,500 17,500 = 7,000 units = 8,750 units = 5,833 units be produced with idle capacity 2.5 2 3 X: as above = 220 X: 1,000 - 840= 160 X: as above = 220 Lb) Contribution per unit (Note) Y: as above = 303 Y: as above = 303 Y: