project note on all

des contraction Fibo PVR presently and efter the proposed increase in de teweest ise say the extent was the super PVR green a higher stare in here shton higher share a given to Product "w" sop Gluchte Contribution and Profit Analyse der alteratis - Rugular vs Substitute Materials RTPM 04 Company has a sormed and beturing cock of substante el a product per annum. The actual costs based on this 20 20 Variable Overheads Find Overheads Direct Variable Overheads Fixed Overheads 5% 15% The budget for the year envisages the following increases Director 3310 Direct Labo 10% to view of the substantial increase in Material Costs, the Company explored the possibilities of using a substitute material . The Company has been able to istortilly a cheaper source of Direct Materials, which will cost 40 per unit of output. The tests reveal that the use of cheaper Direct Material as above will make the following impact on the costs Direct Labour Cost will increase by 1 per unit of output It will lead to 5% rejection in output I will result in a final quality testing programme evaluating an additionat Fixed Cost of 4,00,000. The Selling Prices are estimated as under for different levels of sales volume for the next year Selling Price per unit() 128 144 152 Demand (in 1,000 units) 190 150 140 136 170 160 125 168 110 176 95 1. Advise whether the Company should use the regular Direct Materials or cheaper Direct Materials to maximise its profitability by producing the normal volume of output. 2. Considering the range of Selling Prices estimated at different volumes of output, determine the selling price, which will maximize the profit, if -(A) Regular Direct Materials are used, and (B) Cheaper Materials are used. 3. Calculate for the Price selected by you in (2) above, the amount of Fixed Cost at which the Company will be indifferent in choice of Direct Materials. Solution: 1. Evaluation of using Regular or Cheaper Materials Particulars Use of Regular Material Use of Cheaper Material 36 + 1/3 = (a) Direct Material * 48.00 Given 340.00 (b) Direct Labour 20+10% = * 22.00 22 + Re. 1 = 723.00 (c) Variable Overheads 20 + 5% = * 21.00 20 + 5% = 721.00 (d) Adjusin rent for Rejection (Note 1) Nil 84 x 5/95= 4.42 (e) Total Vanable Cost p.u. (a + b + C + d) 91.00 388.42 (0) Total VC =150,000 units x (e) 1,36,50,000 31,32,63,000 (9) Generel Foxed OH (see Note 2) 734,50,000 334,50,000 (h) Quality Testing Costs 4,00,000 (Total Cosas (f + g + h) 1,71,00,000 1,71,13,000 Note 1: Adjustment for rejection may also be taken as 5% of 84.00 = 4.20 p.u. Note 2: General Fixed OH = (* 20 * 1,50,000 units) + 15% thereon = 34,50,000. Decision: At the normal volume of output (1,50,000 units), it is preferable to use the Regular Direct Materials, as there is a cost savings of 1.71,13,000 ? 1,71,00,000 = ? 13,000. Note: If Adjustmeat for rejection is taken as ? 4.20 p.u, the cost savings will be * 20,000. 9.94 Sale Price p.u. Profit Sale Qtty (units) (a) = Given 1,90,000 1,70,000 1,50,000 1,40,000 1,25,000 1,10,000 95,000 CVP Analysis and Decision-Making 2. Profit Statement when Regular Direct Materials are used Contribution p.u. Total Contribution (b)=Given (c) = (b)-91 (d) = (a) x (c) (e) = (d) - 34,50,000 128 37 7 70,30,000 35,80,000 136 245 276,50,000 ? 42,00,000 144 853 79,50,000 3 45,00,000 152 361 285,40,000 50,90,000 160 7 69 7 86,25,000 351,75,000 168 77 * 84,70,000 50,20,000 176 385 380,75,000 346,25,000 Sale Price p.u. 128 3. Profit Statement when Cheaper Direct Materials are used Contribution p.u. Total Contribution Profit (b)=Given (c) = (b)- 88.42 (d) = (a) (C) (e) = (d) -338,50,000 39.58 375,20,200 36,70,200 136 47.58