Q$.1$ A company manufactures cycles for both adults and children. Given below is

information about cycles made for children $-$

Fixed costs of Rs$.10,00,000$ per month under Traditional CVP analysis are those that

do not vary with respect to volume. Following an Activity Based Costing study, fixed

cost that do not vary as per volume or any other cost driver has been identified to be

Rs$.8,00,000$ per month. The study revealed a milling machine is used to cut metal

into steer support. Production of these steer support takes place in batches of $25$ units.

Once a batch for children's cycle is finished, the next batch would be that for adult

cycles. Therefore, after each batch there would be a set$-$up change. If $10,000$

children's cycles have to be produced, number of Set$-$ups required $=10,000$ steer

support$/25$ per batch $=400$ set$-$ups. Each set$-$up costs Rs$.500,$ comprising of material

costs like change of oil, jig, etc. This cost was previously pooled together with fixed

cost under traditional CVP analysis.

Required

I. Find the break$-$even per month and profit per month under the traditional CVP

method and the Activity Based CVP method.

II$.$ As a plant manager, you would like to keep the number of set$-$ups minimum since

they reduce the capacity of the machine. Suppose that at any time the miling machine

can be used to produce other type of cycles like adult cycles, sports cycles, etc.

Therefore, you propose to increase the batch size of children's steer support to $50$

units in one batch. The number of set$-$ups will reduce from $400(10,000$ units$/25$

units$)$ to $200(10,000$ units$/50$ units$).$ Due to larger batch production, additional

inventory storage area would be required to store that will cost the company Rs$.$

$50,000$ per month extra. Analyse the impact on BEP $($units per month$)$ and profits per

month.

III. When should labour cost be factored into the calculation of cost of a set$-$up$?$

Explain.

IV$.$ How can the number of set$-$ups and cost of each set$-$up impact flexibility of the

miling machine? Explain