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RTP, M64 04 Gluck Como con and Prolet Analysis under different alternatives - Regular vs Substitute Materials Comary has a normal manufacturing capacity of 1,50,000 units of a product per annum. The actual costs based on this output acred during the last year were as under- Direct Materials * 36 Variable Overheads 720 Direct Labour 720 Fixed Overheads 20 The budget for the next year envisages the following increases Direct Baterials 33 1/3+% Direct Labour 10% Variable Overheads Fixed Overheads 5% 15% In view of the substantial increase in Material Costs, the Company explored the possibilities of using a substitute material. The Company has been able to identify 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. I will lead to 5% rejection in output. I will result in a final quality-testing programme evaluating an additional Fixed Cost of 4,00,000. . 128 The Selling Prices are estimated as under for different levels of sales volume for the next year - Selling Price per unit() 136 144 152 Demand (in 1,000 units) 190 170 150 140 160 125 168 110 176 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