Cost Analysis for Decision Making
I. Make or Buy Decision
1. A factory is producing 4 types of articles and in condition of full capacity working and
decision has to be made as to which article shall be bought out and which article shall be
manufactured in the factory.
The cost of manufacture and bought out prices of 4 articles are as follows:
Particulars A B C D
Cost per article
Marginal cost 50 58 72 75
Fixed cost 10 20 25 70
60 78 97 145
Bought out cost 46 84 115 128
2. For the final assemble of a product in an engineering company, a certain component is
required. The company has the option either to produce the component itself or purchase it
from market. The production department can make the component which currently working
at full capacity and earning Rs.10 per hour on an order which will last for another 10 months.
Repeat orders are very likely. Variable cost of the making component is Rs.42 and it takes 1
hour per unit. Market price of the component is Rs.45 per unit.
What advice will you give to the management of the company?
3. Product A takes 5 hours to produce on a particular machine and it has selling price of
Rs.50 and variable cost of Rs.35. On the same machine, another product B can be made
on 2 hours at a marginal cost of Rs.5 per unit. Supplier price of product B is Rs.10 per
unit. Assuming that machine hours are the key factor, advice whether the product B
should be bought out or manufactured.
4. The Total Cost manufacturing a component part are as under
Particulars Rs.
Materials 250
Labour 250
Variableexpenses 50
Fixed Expenses 100
Total 500
The same component part are available in the market at Rs.450. Should the firm make it or
buy it?
5. Ride Well Company Ltd. purchased 20,000 bell per annum from an outside supplier at
Rs.5/- each. The management feels that those are manufactured and not purchased by
them. The machine costing 50,000 will require the manufacture item within the factory.
The machine has annual capacity of 30,000 units and life of 5 years.
The following additional information are available
Materials Cost per unit Rs.2
Labour cost Rs.1
Variable overheads are 100% of the labour cost
You are required to advice whether :
a. The company should continue purchase the bell from outside supplier or
b. Company should accept an order to supply 5000 bells to the market at a SP of Rs.4.50 per
unit?
c. A firm needs a component in an assembly operation. It wants to do the manufacturing
itself, it would need to buy a machine for Rs.400,000, which would last for 4 years
with no salvage value. The manufacturing cost in each of the 4 years would be
Rs.600,000, 700,000, 800,000 and 10,00,000 respectively. If the firm had to buy the
component from the supplier the component cost would be Rs.900,000, Rs.10,00,000,
Rs.11,00,000 and Rs.14,00,000 respectively in each of 4 years. However, machine
would occupy the floor space which could have been used for another machine. This
better machine could be hired at no cost to manufacturing on item, the sale of which
would produce the net in each of the 4 years of Rs.200,000, it is impossible to find
room for both the machine, and there are no external effect.
The cost of capital is 10,000 and the present value for each of the 4 year is 0.909, 0.826,
0.751 and 0.683 respectively.
Should the firm make the component or buy from the market.
Accepting or Rejecting Special Offer
1. The cost sheet of a product is given as under
Particulars Rs. Rs.
D Materials 5
D Wages 3
Factory OH
Fixed 0.50
Variable 0.50 1
Administrative Expenses 0.75
Selling and Distribution OH
Fixed 0.25
Variable 0.50 0.75
10.50
The Selling Price per unit is Rs.12/-.
a. The above figures are for an output of 50,000 units. The capacity for the firm is 65,000
units. A foreign customer is willing to buy 15000 units at a price of Rs.10 per unit.
Advice the manufacturer whether the order should be accepted or not
b. What will be your advice if the order where from local merchant?
c. What will be the factors that manufacturer needs to consider before accepting the foreign
or domestic order.
d. A firm having capacity of 65,000 units per year produces 50,000 units which are
consumed in the domestic market at a price of 12 per unit. The cost sheet of the
product is given as under.
Particulars Rs. Rs.
D Material 4
D Labour 3
Factory .Overhead:
Fixed 0.50
Variable 1.50
2.00
Administration Expenses 1.00
Sales and Distribution Expenses
Fixed 0.25
Variable 0.50
0.75
Cost per unit 10.75
A foreign customer is interested in the product but he is willing to buy 50,000 units at a price
of 10 per unit. Advice whether the order should be accepted what will be your advice if the
order is from domestic market. Give reasons.
1. A mechanical toy factory present the following information for the year
Particulars Rs.
D Material cost 120,000
Labour cost 24,000
Fixed OH 120,000
Variable OH 60,000
Produce Units 12,000 units
Selling per unit Rs.50
The available capacity is a production of 20,000 units per year. The firm has an offer for the
purchase of 5,000 additional units at a price of 40 per unit. It is expected that by accepting
this offer, there will be savings of Re.1.00 per unit on Material cost on all units
manufactured. The fixed OH will increase by Rs.35,000 and the overall efficiency will drop
by 2% on all production.
State whether offer is acceptable or not. Show the necessary calculation to justify your
answer.
A company annually manufactures 10,000 units of a product at a cost of Rs.4/- per unit and there
is a home market for consuming the entire volume of product at a sales price of Rs.4.25 per
unit. In the year 2016, there is a firm in the demand for home market which can consume
10,000 units only at a sale price of Rs.3.72 per unit. The analysis of the cost per 10,000 units
is
Particulars Rs.
Materials 15,000
Wages 11,000
Fixed overheads 8,000
Variable overheads 6,000
The foreign market is explored and it is found that this market can consume 20,000 units of
the product of offered a sale price of Rs.3.55 per unit. It is also discovered that for additional
10,000 unit of product (over initial 10,000 units). The Fixed overheads will increase by
10%.Is it worth to try to capture the foreign market.?
Sales Mix/Product Mix Decision
(Without limiting factor/ key factor)
1. A company has 3 alternative choice of the product mix. It produces product X and Y.
It can produce
a. 200 units of X and 400 units of Y
b. 300 units of X and 300 units of Y
c. 400 units of X and 200 units of Y
The other details are as under
Products Amount Particulars
Product X Product Y
200 150 Selling price per unit
160 120 Variable cost per unit
Fixed Expense Rs.8,000
You have to decide the best product mix.
. Decision to Drop Product Line
1. A Manufacturing organization produces and markets 3 distinct products A, B and
C. An analysis of cost per unit of product is given below.
Elements of Cost A B C
Material 10 8 6
Labour 7 5 3
Overheads 16 12 13
Total Cost 33 25 22
Margin 12 5 3
Selling Price 45 30 25
% of profit on cost 27.5% 20% 13.64%
The management decided to close down production of the least profitable of 3 product so that
they can concentrate on the remaining 2 products. The above analysis of cost is put up with a
recommendation to discontinue product C. On calling for further information, you see that
the fixed and variable overheads of the 3 products are as below:
Product Total Overheads
Fixed Variable
A 16 8 8
B 12 6 6
C 13 8 5
Do you agree with the suggestion? Proceed on the assumption that present output is 1000,
1500 and 2000 units of Product A, B and C respectively and there is scope for doubling
product on remaining products if any one product line is discontinued.
2. X Ltd. is engaged in the production and marketing of 3 distinct product line. Their
production cost per unit and S.P. are as under.
Particulars Product A Product B Product C
Production (Units) 3000 2000 5000
Material Cost (Rs.) 18 26 30
Wages (Rs.) 7 9 10
Variable OH 2 3 3
Fixed OH 5 8 9
Total Cost 32 46 52
Selling price 40 60 61
Profit (Rs.) 8 14 9
The management intends to discontinue one product line and gives an assurance that product
and marketing in other 2 product line would rise by 50%. They intendsto discontinue the line
which produces Article ‘A’ as it is the least profitable.
a. Do you agree with the management proposal of discontinuing of product line A?
b. If not, why, provide the necessary statement and working support of your answer.
c. A company manufacturing 3 products and the respective details are furnished
below.
Particulars A B C
Capacity engaged 20% 40% 40%
Units produced 2000 5000 6000
Cost per unit
Material cost 20 32 36
Wages 10 12 16
Variable OH 7 9 11
Fixed OH 6 9 10
43 62 73
Selling price unit 40 75 83
Profit (3) 13 10
The management proposes to discontinue to product line A since from the last few years it is
showing loss. Futureprospects of the other to product line a good. So it is intended to utilize
the disengaged capacity of A and B in the lines of B and C equally.
Expected rise in prices and cost as under:
Particulars B C
Materials 10% 10%
Wages 5% 5%
Selling p 2% 5%
Fixed Overheads remains the same.
You are required to prepare a statement of project profitability and advice the management
whether scheme may be adopted.
3. The management of F and C Ltd. is considering a proposal to discontinue a
manufacture of Product x from its list of product x, y, z. The details of which are given
below.
Particulars x y z
Capacity in actual production 20% 40$ 40%
Units manufactured 4000 10,000 12,000
Cost per unit Rs. Rs. Rs.
Material 25 20 40
Labour 15 10 20
Fixed OH 4 4 5
Variable OH 4 3 5
Total cost 48 37 70
Profit or loss per unit (4) 13 10
Selling price 44 50 80
Product x having persistently shown a loss for a number of years due to saturation of demand
and the future prospect of other two products being is decided to discontinue product line x.
The disengaged capacity of product x will be transferred equally product y and z. Moreover,
the nature of product such that the transfer disengaged capacity from product x to the other
two would bring accretion of 30% and 50% more in the number units manufactured of
production y and z respectively without any additional fixed cost.
The anticipated increase in structure of cost and selling price as under
Particulars Rs. Rs.
Materials 5% 5%
Labour 10% 10%
Selling price 10% 5%
You are requested to
a. Prepare a statement of projected profitability.
b. Advice the management as to whether the proposal may be accepted for implementation
c. A limited company manufactures 3 different products and following information
has been collected from the books of account
Products
Particulars S T Y
Sales Mix 35% 35% 30%
Selling price (Rs.) 30 40 20
Variable cost 15 20 12
Total Fixed Cost Rs.180,000
Total Sales Rs.600,000
The company is thinking of discontinuing the manufacture of Product Y and replaces it with
Product ‘M’ when the following results are anticipating
Products
Particulars S T Y
Sales Mix 50% 25% 25%
Selling price (Rs.) 30 40 20
Variable cost 15 20 15
Total Fixed Cost Rs.180,000
Total Sales Rs.640,000
Will you advice the company to change over the product of ‘M’. Give reasons.
1. The following are the present cost and output data of a manufacture
Product Price per unit (Rs.) Variable Cost (Rs.) % of sales
Ceiling Fans 360 240 50%
Exhaust Fans 600 360 30%
Industrial Fans 800 480 20%
Total Fixed Cost per year = Rs.150,000
Volume of sales last year = Rs.500,000
The manufacture is considering whether to drop industrial fans with heat converted. If this
drop-add decision is taken, the cost and output data would be as follows:
Product Price per unit Variable Cost % of Sales
(Rs.)
Ceiling fans 360 240 50%
Exhaust fans 600 360 20%
Heat converter 850 450 30%
Is the change worth undertaking?
2. The management of company is thinking whether it should drop one item from list of
its product line and replace it with new product. Given below are present cost and
output data.
Price per unit Variable cost per
Product % of Sales
(Rs.) unit (Rs.)
Book shelf 60 40 30%
Table 100 60 20%
Bed 200 120 50%
Total Fixed Cost per year Rs.750,000/-
Sales Rs.25,00,000/-
The change under consideration consist in dropping the line of tables and ADDING the line
of cabinets. If this change is made, the manufacturer forecast the following cost and output
data.
Price per unit Variable cost per
Product % of Sales
(Rs.) unit (Rs.)
Book shelf 60 40 50%
Cabinet 160 60 10%
Bed 200 120 40%
Total Fixed Cost per year Rs.750,000/-
Sales Rs.2600,000/-
Should this propose be accepted? Comment.
3. From cost and sales of the three products manufactured by it.
Particulars X Y Z
Sales Mix (% of S.V.) 40% 30% 30%
Sales price per unit (Rs.) 400 250 200
Variable cost per unit (Rs.) 200 100 120
Fixed cost per unit (Rs.) 100 50 40
Total Sales: Rs. 100,00,000
The current level of production absorbs the entire fixed cost of the company. The
management of the company wants to discontinue Z and introduce to improve the
profitability. The revised data are as follows of production and sales.
Particulars X Y W
Sales Mix (% of S.V.) 50% 30% 20%
Sales price per unit (Rs.) 400 350 320
Variable cost per unit (Rs.) 200 100 180
Total Sales: Rs.100,00,000
You are required to determine
a. Fixed Cost of the company PER ANNUM.
b. Profit currently earned and profit likely to be earned after the introduction of W.
c. Current BREAK EVEN SALES and Break even sales after the introduction of W.
d. If it is possible to increase the sale of any one of sales x, y or w by 20% by keeping what
alternate mix would suggest for higher profit.
