Per unit 3 Direct Material 2.75 Direct Labour 1.75 Other Variables 0.50 Marginal Cost 5.00 (a) Since the marginal cost per unit of 5 is lower than the market price of 5.75, it is recommended to manufacture the component in the factory. (b) Since the purchase price of 4.85 is lower than the marginal cost, the component should be bought from outside supplier provided proper quality and regular supply are guaranteed. p2 4. Diversification of Production Sometimes a manufacturer may intend to add a new product to the existing product or products to utilize the idle capacity, to capture a new market or for some other purpose. In such a case, the manufacturer or management is interested in knowing the profitability of the new product before its production can be undertaken. It is advisable e to undertake the production of the new product if it is capable of contributing something towards fixed costs and profit after meeting out its variable Cost of sales. Fixed costs are not to be considered on the assumption that the new product can be manufactured by existing resources without incurring any additional fixed costs. But if the introduction of a new product involves some specific or identifiable fixed costs (which arise due to the new product). these should be deducted from the contribution of the new product before making any decision. But if the introduction of a new product involves some specific or identifiable fixed costs (which arise due to the new product), these should be deducted from the contribution of the new product before making any decision. Illustration 5 The following data are available in respect of product 'A' manufactured by Pankaj Ltd.: 3 Sales 2.50.000 Direct materials 1,00,000 Direct wages 50.000 Variable overhead 25,000 Fixed overhead 50.000 The company now proposes to introduce a new product 'B' so that sales may be increased by 50,000. There will be no increase in fixed costs and the estimated variable costs of the product 'B' are: Direct materials 24,000 Direct wages 11,000 Overhead 7,000 Advise whether product B will be profitable or not