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Rs. 100 per unit. Problem 10.44 (Alternative uses of available capacity - Evaluation of export order) Vinak Electronic Ltd. produces product 'A' for which the company has an assured market. The output for 19X1 has been budgeted at 1,20,000 units at 92% capacity utilization. The cost sheet based output is as under Selling Price Direct material 21 9 Component'X Direct wages @ Rs. 5 per hour 20 Factory overheads (50% fixed) 24 Selling & distribution overheads (75% variable) 12 Administration overheads Total Costs 90 The factory overheads are applied on the basis of direct labour hours. The Board was of the view that steps should be taken to utilise the idle capacity to improve the profitability of the company. The following proposals were according put up before the Board for consideration: (i) An order has been received from abroad of 500 units of Product B per month at Rs. 120 The cost data are:" direct materials Rs. 40 per unit, direct labour 8 hours per unit, selling and distribution overheads applicable to this product order is Rs. 10 per unit and the variable factory overheads are chargeable on the basis of direct labour hours. (ii) The Company at present manufactures component 'X' one unit of which is required for each unit of Product 'A'. The cost details for 10,000 units of component 'X' are as under: Direct materials Rs. 24,000 Direct labour 30,000 Variable overheads 18.000 Fixed overheads 18,000 Total 90,000 The component 'X' however is available for purchase at the market at Rs. 8,00 each. (iii) In the event of the company deciding to purchase the component 'X' from market, the company has two alternatives for the use of the capacity so released as under: (a) Rent out the released capacity at Re. 1/per hour. (b) Manufacture component 'Y' which can be sold at Rs. 8.00 per unit. The cost data of this component for 10,000 units are: Direct materials Rs. 30,000 Direct labour 15.000 Factory variable overheads 9.000 Other variable overheads 21,000 Total 75,000 Required: (i) Prepare a statement showing the profitability of the company as originally envisaged in the budget (ii) Evaluate the export order and state whether it is acceptable or not. (ii) Make an appraised of proposal to manufacture component 'X' and state whether the X' should be manufactured in the factory or purchased from the market. Assume that no alternative use of spare capacity is available. (iv) Evaluate the alternative use of the spare capacity and state whether to manufacture or buy the component 'X' and if your decision is to buy the component X which of the two alternatives for the use of spare capacity will you prefer? component l