APLICACIÓN DE LOS RESULTADOS VI PUNTOS VARIOS.

Calculate break-even point of each business

Calculate the sales volume at which each business will earn Rs.5000/- profit. State which business is likely to earn greater profit in conditions of:

Low demand for the product Briefly give your reasons.

Solution:

Marginal Cost and Contribution Statement

Particulars SVP Ltd. Rs. TRR Ltd. Rs. Sales 150000 150000 Less : 120000 100000 Contribution 30000 50000 Less : 15000 35000 Profit 15000 15000

(a) Calculation of break-even point

P/V Ratio = Contribution / Sales x 100 30000 / 150000 x 100

50000 / 150000 x 100

= 20% = 33 1/3 %

Break even point = Fixed cost / PV Ratio

15000 / 20 x 100 35000 / 33 1/3 x 100

= Rs.75,000 = Rs.1,05,000 (b) Sales required to earn profit of

Rs.5,000

Required Sales = Required Profit + Fixed cost / P/V Ratio 5000 + 15000 / 20 x 100

5000 + 35000 / 33 1/3 x 100

= Rs.1,00,000 = Rs.1,20,000 (c) (1)In condition of heavy demand, a concern with higher P/V Ratio can earn greater profits because of higher contribution. Thus TRR Ltd., is likely to earn greater profit.

(2) In conditions of low demand, a concern with lower break even point is likely to earn more profits because it will start making profits at lower level of sales. Therefore in case of low demand SVP Ltd., will make profits when its sales reach Rs.75000, whereas TRR Ltd., will start making profits only when its sales reach the level of Rs.105000.

Illustration No. 3

The following particulars are extracted from the records of a company.

Product A Product B

Sales (per unit) Rs.100 Rs.120

Consumption of material 2 Kg. 3 Kg.

Material cost Rs.10 Rs.15

Direct wages cost 15 10

Direct expenses 5 6

Machine hours used 3 2

Overhead expenses :

Fixed 5 10

Variable 15 20

Direct wages per hour is Rs.5. Comment on the profitability of each product (both use the same raw materials) when:

(i) Total sales potential in units is limited.

(ii) Production capacity (in terms of machine hours) is the limiting factor. (iii)Material is in short supply.

Sales potential in value is limited.

Solution:

Statement showing key-factor contribution

Particulars Product A Per unit – Rs. Product B per unit – Rs.

Selling Price 100 120

Less : Variable cost

10 15

15 10

5 6

15 20

Contribution per machine hour 55 / 3 69 / 2 Combination per kg. of material 55 / 2 69 / 3 23 P/V Ratio 55/100 x 100 = 55% 69/120 x 100 = 57.5%

Comments on the profitability of products ‘A’ and ‘B’ on the basis of different key-factors

When total sales potential in units is limited, product ‘B’ will be more profitable compared to ‘A’ as its ‘Contribution per unit is more by Rs.14 (69 – 55).

When production capacity in terms of machine hours is the limiting factor, product ‘B’ is more profitable as its ‘contribution per hour’ is more by Rs.16.17 (34.5 – 18.33)

When raw material is in short supply product ‘A’ is more profitable as its ‘contribution per kg’ is higher by Rs.4.5 (27.5 – 23)

When sales potential in value is the limiting factor product ‘B’ is better as its P/V Ratio is higher than that of product ‘A’.

Note: Contribution per unit can be divided with any given ‘Key Factor’ or ‘Limiting factor’ to obtain ‘Key-factor contribution’ (K.F.C.). The Product which gives higher contribution in terms of key-factor is decided to be better and more profitable

Illustration No. 4

S & Co. Ltd., has three divisions, each of which makes a different product. The budgeted data for the next year is as follows:

Divisions A (Rs.) B (Rs.) C (Rs.)

Sales 1,12,000 56,000 84,000

The management is considering closing down Division C. There is no possibility of reducing variables costs. Advise whether or not division C should be closed down.

Solution:

Divisions A (Rs.) B (Rs.) C (Rs.)

Sales 112000 56000 84000

Less : Variable Costs :

Direct Material 14000 7000 14000

Direct Labour 5600 7000 22400

Variable overhead 14000 7000 28000

33600 21000 64000

78400 35000 20000

Less : Fixed Costs 28000 14000 28000

Loss 50400 21000 8000

Since Division C is giving a positive contribution of Rs.20000/- it should not be discharged.

Test Yourself:

Discuss the role of marginal costing in taking managerial decisions. What is key factor? What is it importance?

Explain the different factors to be considered while taking a make or buy decision.

Direct Material 14,000 7,000 14,000

Direct Labour 5,600 7,000 22,400

Variable overhead 14,000 7,000 28,000

Fixed Costs 28,000 14,000 28,000

When is selling below cost is permissible or necessary? How do you decide upon the optimal sales mix?

Problems

Present the following information to management:

The managerial product cost and the contribution per unit and ii. The total contribution and profits resulting from each of the sales mixes:

Product per unit

Rs. Direct materials A 10 Direct materials B 9 Direct wages A 3 Direct wages B 2 Fixed expenses - Rs. 800

(Variable expenses are allotted to products 100% of direct wages) Sales Price - A Rs. 20

Sales Price - B Rs. 15 Sales mix:

100 units of product A and 200 of B 150 units of product B and 150 of B 200 unit of product A and 100 of B

Recommend which of the sales mixes should be adopted.

Pondicherry Trading Corporation is running its plant at 50% capacity. The management has supplied you the following details:

Cost of Production Per Unit (Rs)

Direct materials 4

Direct labour 2

Variable overheads 6

Fixed overheads (Fully absorbed) 4

--- 16 Production per month 40000 units

Total cost of production

40000 X Rs. 16 640000

Sales price 40000 X Rs. 14 560000

--- Rs. 80000 ---

An exporter offers to purchase 10000 units per month at Rs. 13 per unit and the company is hesitating in accepting the offer due to the fear that it will increase its already large operating losses.

Advise whether the company should accept or decline this offer. References

1. Dr .S. Ganeson and Tmt. S. R. Kalavathi, Management Accounting, Thirumalai Publications, Nagercoil.

2. T.S. Reddy and Y. Hari Prasad Reddy Management Accounting, Margam Publications, Chennai.

3. Barfield, Jessie, Celly A. Raiborn and Michael R. Kenney: Cost Accouting; Traditions and Innovations, South - Western College Publishing, Cincinnati, Ohio.

UNIT – IV