Prof: Ankita Rohatgi Management Accounting for Engineers

Decision Making

Q1. A Japanese profit drink company is planning to establish a subsidiary company in India
to produce mineral water.
Based on the estimated annual sales of 40,000 bottles of the mineral water, cost studies
produced the following estimates for the India subsidiary :
Particulars Total Annual Costs
Material 2,10,000
Labour 1,50,000
Factory Overheads 92,000
Administration Expenses 40,000
The Indian production will be sold by manufacturer's representative who will receive a
commission of 8% of the sale price. No portion of the Japanese office expenses is to be
allocated to the Indian Subsidiary.
Required : Compute the sale price per bottle to enable the management to realise an estimated
10% profit on sale proceeds in India.
Solution:
Computation of the Sale Price per bottle :
Commission is 8% of sales revenue.
Profit is 10% of sales revenue.
Hence Cost of Sales is 82% of sales revenue (100 - 8 - 10).
If Cost of Sales is ₹ 82 then sales revenue is ₹ 100.
Cost of Sale is ₹ 4,92,000 (2,10,000 + 1,50,000 + 92,000 + 40,000)
If Cost of Sales is ₹ 4,92,000 then sales revenue = ₹ 4,92,000 x ₹ 100 = ₹ 6,00,000
₹ 82
Total Sales Revenue = ₹ 6,00,000
Number of mineral water bottles sold = 40,000
= ₹ 6,00,000 = ₹ 15
Sales Price per bottle 40,000
Q2)Reprographics Ltd. manufactures a document reproducing machine which has a varable
cost structure as follows:
Particulars ₹`
Material 40
Labour 10
Overheads 4
The selling price per machine is ₹ 90.
Prof: Ankita Rohatgi Management Accounting for Engineers

Sales during the current year are expected to be ₹ 13,50,000 and Fixed Overheads ₹ 1,40,000.
Under a wages agreement, as increase of 10% is payable to all direct workers from the
beginning of the forthcoming year, whist Material Costs are expected by 7 ½ % Variable
Overheads Costs by 5% and Fixed Overheads Costs 3%.
You are required to calculate the new selling price if the Current Profit/ Volume Ratio is to
be maintained.
Solution :
(1) Variable Cost (Current & Next Year)
Particulars Variable Cost Cost Variable Cost
Structure of Increases Structure of
Current Year % Next Year
₹ ₹
Material 40.00 7½% 43.00
Labour 10.00 10% 11.00
Overhead 4.00 5% 4.20
54.00 58.20

(2) Selling Price (Current year) = ₹ 90.000

(3) Contribution (Current year) = ₹ 90.00 - ₹ 54.00 = ₹ 36.00
Contribution ₹ 36
(4) Profit/Volume Ratio (Current Year) = X 100 = X 100 = 40%
Sales ₹ 90
The current year’s marginal cost is 60% of the selling price, viz. ₹ 90. To maintain he current
Profit/Volume ratio of 40% in the forthcoming year, the new marginal cost should be equal to
60% of selling price, so
₹ 58.20 X 100
(5) New Selling Price = = ₹ 97.00
60
Q 3) The accounts of a company are expected to reveal a profit of ₹ 14,00,000 after charging
fixed costs of ₹ 10,00,000 for the year ended 31 st March, 2004. The selling price of the
product is ₹ 50 per unit and variable cost per unit is ₹ 20.
Market investigation suggest the following responses to the price changes:
Alternative Selling Price reduced by Quantity Sold Increased by
I 5% 10%
II 7% 20%
III 10% 25%
Evaluate these alternative and state which of the alternatives, on probability, consideration,
should be adopted for the forthcoming year.
Prof: Ankita Rohatgi Management Accounting for Engineers

Solution :
Statement for evaluating three alternatives on profitability consideration
Particulars Alternatives
I II III
₹ ₹ ₹
A. Selling price per unit (WN 1) 47.50 46.50 45.00
B. Less : Variable cost per unit 20.00 20.00 20.00
C. Contribution per unit (A – B) 27.50 26.50 25.00
D. Revised quantity of units to be sold (WN 4) 88,000 96,000 1,00,000
E. Total Contribution (C X D) 24,20,000 25,44,000 25,00,00

Recommendation : An evaluation of the above three alternative on profitability

consideration clearly shows that alternative II is the best as it gives maximum contribution
and hence profitability; therefore, this alternative should be adopted.
Working Notes :
(1) Selling Price Per Unit :
I : ₹ 50 – 5% of 50 = ₹ 47.50
II : ₹ 50 – 7% of 50 = ₹ 46.50
III : ₹ 50 – 10% of 50 = ₹ 45.00
(2) Contribution Per Unit :
= Selling price per unit – Variable cost per unit = ₹ 50 - ₹ 20 = ₹ 30.
(3) Expected quality of units of be sold :
₹
Profit 14,00,000
Add: Fixed Cost 10,00,000
Total Contribution 24,00,000
Total Contribution ₹ 2400000
Quantity of units sold = = = 80,000 units.
Contribution Per Unit ₹ 30
(4) Revised quantity of units to be sold :
Alternative Units to be sold
80,000 units + 10% of 80,000 units = 88,000 units
80,000 units + 20% of 80,000 units = 96,000 units
80,000 units + 25% of 80,000 units = 1,00,000 units
Prof: Ankita Rohatgi Management Accounting for Engineers

Q4) A company, which manufacturers and sells three products, furnishes the following
details for a month:
Products A B C
No. of units budgeted 1,00,000 38,000 46,000
Selling Price per unit ₹ 50 80 60
Variable Costs per unit ₹ 34 52 24
In has been produced that an intensive advertisement campaign involving an expenditure of ₹
1,20,000 per month and reduction of selling prices will increase that sales of production C as
under:
1) If the selling price is reduced to ₹ 55 per unit, the sales will increase to 59,000 units
per moth.
2) If the selling price is reduced to 51 per unit, the sales will increase to ₹ 65,000 units
per month.
The fixed costs of the company amount to ₹ 34,20,000 per month.
Required:
1) Calculate the current monthly break-even sales value of the company.
2) Evaluate the two proposals and advise which of the proposals should be
implemented.
Solution :
(1) Current monthly break-even sales value of the company [WN 1]
Fixed Costs of the Company 34,20,000
= = = ₹ 8550,000
P/V Ratio 40%
(2) (a) Evaluation of Proposal (i) :
Particulars ₹
Total contribution of Product C (59,000 units X ₹ 31) [WN 2 (a)] 18,29,000
Contribution of Product A and B [WN 1 : 16,00,000 + 10,64,000] 26,64,000
Total Contribution 44,93,000
Less : Advertisement Cost 1,20,000
Net Contribution 43,73,000

(b) Evaluation of Proposal (ii) :

Particulars ₹
Total contribution of Product C (65,000 units X ₹ 27) [WN 2 (b)] 17,55,000
Contribution of Product A and B [WN 1 : 16,00,000 + 10,64,000] 26,64,000
Total Contribution 44,19,000
Less : Advertisement Cost 1,20,000
Net Contribution 42,99,000
 Prof: Ankita Rohatgi Management Accounting for Engineers

Decision : Proposal (i), to reduce selling rice to 55 is better as it increases the net contribution
by ₹ 74,000 (₹ 43,73,000 - ₹ 42,99,000).
Woking Notes :
(1) Statement of Total Contribution, Sales Revenue and P/V Ratio
Products A B C Total
A. Units 1,00,000 38,000 46,000
B. Selling Price per unit (₹) 50 80 60
C. Variable Costs per unit (₹) 34 52 24
D. Contribution per unit (₹) (B – C) 16 28 36
E. Total Contribution (₹) (A X D) 16,00,000 10,64,000 16,56,000 43,20,000
F. Sales Revenues (₹) (A X B) 50,00,000 30,40,000 27,60,000 1,08,00,000

Contribution ₹ 43,20,000
P/V Ratio (%) = X 100 = X 100 = 40%
Sales ₹ 1,08,00,000
(2) (a) Contribution per unit of product C under proposal (i)
Contribution per unit of product C will be ₹ 31 when its selling price is ₹ 55 and
variable cost per unit is ₹ 24.\
(b) Contribution per unit of product C under proposal (ii)
Contribution per unit of product C will be ₹ 27, when its selling price is ₹ 51 and
variable cost per unit is 24.
Q5. Vinay Ltd. which produced three products furnishes you the following data for 2003-04:
Particulars Products
A B C
Selling Price per unit (₹) 100 75 50
Profit Volume ration (%) 10 30 40
Maximum sales potential (Units) 40,000 25,000 10,000
Raw Material content as percentage of variable costs (%) 50 50 50

The fixed expenses are estimated at 6,80,000. The company uses a single raw material in all
the three products. Raw material is in short supply and the company has a quota foe the
supply of raw materials of the value of ₹ 18,00,000 for the year 2003-04 for the manufacture
of its products to meet its sales demand.
You are required:
(1) Set a product mix which will give a maximum overall profit keeping the short supply of
raw materials in view.
(2) Compute that maximum profit.
Solution: (1)
 Prof: Ankita Rohatgi Management Accounting for Engineers

Produc Selling PV Variable Cost Material Contribut Contribution Rank

t Price Unit Ratio % of sales per Content @ 50% ion per as % material
₹ price % Unit of V.C. ₹ / unit unit content %
A 100 10 90 90 45 10 22.2* 3
B 75 20 80 60 30 15 50.0 2
C 50 40 60 30 15 20 133.3 1

Particulars Materials Units Total Amount

Cost/Unit Material Available for
₹ Cost ₹ Material ₹
A 15 10,000 1,50,000 18,00,000
B 30 25,000 7,50,000 16,50,000
C 45 20,000 9,00,000 9,00,000

(2) Computation of maximum profit:

Particulars Unit Selling Contribution Total
Price/Unit ₹ per unit ₹ Contribution ₹
A 20,000 100 10 2,00,000
B 25,000 75 25 3,75,000
C 10,000 25 20 2,00,000
7,75,000
Less: Fixed Expenses 6,80,000
Profit 95,000
Contribution as percentage of material content.
10 15 20
A: x 100 = 22.2%, B: x 100 = 50%; C: x 100 = 133.33%
45 30 15
Q6. The following information in respect of Product X and Y of ABC Co. Ltd. is obtained.
Particulars Products
X Y
Sale Price ₹ 1,000 640
Direct Material ₹ 400 400
Direct Labour Hour (₹ 5 per hour) 20 hours 40 Hours
Variable Overheads 100% of Direct Wages 100% Direct Wages
Fixed overheads are ₹ 30,000.
You are required to :
a) Calculate and present the marginal product costs and contribution per unit and
b) State which of the following alternative sales mixes you would recommend ? and
Why?
i. 100 units of product X and 50 units of Y
ii. 50 units of product X and 100 units of Y
iii. 150 units of product X only
iv. 150 units of product Y only
Prof: Ankita Rohatgi Management Accounting for Engineers

Solution :
Products Product X Product Y
₹ ₹
Sales Price (A) 1,000 640
Variable Cost
Direct Material 400 400
Direct Labour @ 5 Per hour 100 200
Variable O/H 100% of Wages 100 200
Marginal Cost (B) 600 800
Marginal Contribution Per Unit = (A) – (B) 400 (160)

Case 1 :
100 units of Product X and 50 of Y
Contribution from 100 units of X = 100 X 400 40,000
Contribution from 50 units of Y = 50 X (160) (8,000)
Total Contribution 32,000
Less : Fixed Cost (30,000)
Profit 2,000

Case 2 :
50 units of X and 100 Units of Y
50 units of X = 50 X 400 20,000
100 Units of Y = 100 X (160) (16,000)
Total Contribution 4,000
Less : Fixed Cost (30,000)
Loss (26,000)

Case 3 :
150 units of Product X only
Contribution = 150 units X 400 60,000
Less : Fixed Cost (30,000)
Profit 30,000

Case 4 :
150 units of Product Y only
Contribution = 150 units X (160) (24,000)
Less : Fixed Cost (30,000)
Profit (54,000)
Hence case 3 is the most profitable. Case 3 i.e. 150 units of Product X only is suitable.