Q1 Answer:

Lets arrange the data available.

A B C D
Sales price 100 100 100 100
Ex-factory 80 80 80 80
Transport 10 8 6 4
Contribution 10 12 14 16

First lets compute the area wise contribution per unit

A B C D
Sales price 100 100 100 100
Ex-factory 80 80 80 80
Transport 10 8 6 4
Contribution 10 12 14 16

Additional Information
Machnie
Utilization -
Max 10000 10000 10000 10000
Fixed Cost per
person 8000 8000 8000 8000

lets utilize the machinery evenly. So 50,000 is apportioned among 5 locations.

Lets calculate variations in the aforesaid data according to the number of sales man and market penetrati

Machnie
Utilization - Max 10000 10000 10000
Fixed Cost per
person 8000 8000 8000
Martket
Pentration
SalesPerson Expected (%) Contribution Contribution Contribution
5 50 50000 60000 70000
6 58 58000 69600 81200
7 65 65000 78000 91000
8 71 71000 85200 99400
9 76 76000 91200 106400
 10 78 78000 93600 109200
11 80 80000 96000 112000

Total Contribution = Market Penetration according to sales person x Maximum Machine capacity x Contrib

In the question it is given that, the minimum sales person required are 5 in each area and no area shall can

So considering that, we shall select an appropriate mix from the table which is more beneficial to the com

This approach is a logical approach,

1. We should appoint maximum number of people at the area where there is higher contribution. Howe
2. Distributing the sales person evenly at first will give a general idea of mix. i.e 35/5 = 7 person each at l
3. Now keeping the median value 7 at the location where we have median contribution i.e , we shall shift

This is the highest contribution achievable from this Mix

i.e.

Location A B C D
Sales Person 5 6 7 8
Contribution 50000 69600 91000 113600

Logical approach to appoint sales person according to contribution.

1. Highest possible contribution as per last step

Location A B C D
Sales Person 5 6 7 8
Contribution 50000 69600 91000 113600

2. Increasing the sales force will provide additional contribution.

Martket
Pentration
SalesPerson Expected (%) Contribution Contribution Contribution
5 50 50000 60000 70000
6 58 58000 69600 81200
7 65 65000 78000 91000
8 71 71000 85200 99400
9 76 76000 91200 106400
10 78 78000 93600 109200
11 80 80000 96000 112000
Adding more workforce and appointing 11 person to each location will bring in higher contribution. but co
cannot gain more profit from it, as fixed expenses will be increased.

Table showing fixed expenses impact on profit

Contribution as per sales person - (no.of sales person x 8000)

Martket
Pentration
SalesPerson Expected (%) Profit Profit Profit
A B C
5 50 10000 20000 30000
6 58 10000 21600 33200
7 65 9000 22000 35000
8 71 7000 21200 35400
9 76 4000 19200 34400
10 78 -2000 13600 29200
11 80 -8000 8000 24000

Best mix for maximum profit is

Location A B C D
Sales Person 5 6 7 8
Contribution 10000 22000 35400 49600
 E
100
80
2
18

E Total
100 500
80 400
2 30
18 70

10000

8000

sales man and market penetration

10000 10000

8000 8000

Contribution Contribution
80000 90000
92800 104400
104000 117000
113600 127800
121600 136800
 124800 140400
128000 144000

mum Machine capacity x Contribution per unit

n each area and no area shall can have sales person less than 5 person.

ch is more beneficial to the company.

ere is higher contribution. However no place shall have less than 5 person.
mix. i.e 35/5 = 7 person each at locations
an contribution i.e , we shall shift the number upwards to locations with maximum contribution and downwards to locations wi

E Total
9 35
136800 461000

E Total
9 35
136800 461000

Contribution Contribution
80000 90000
92800 104400
104000 117000
113600 127800
121600 136800
124800 140400
128000 144000
ng in higher contribution. but company

Profit Profit Total

D E
40000 50000 150000
44800 56400 166000
48000 61000 175000
49600 63800 177000
49600 64800 172000
44800 60400 146000
40000 56000 120000

E Total
9 35
64800 181800
wnwards to locations with least contribution.
Q2 Answer

A) Statement of Profitability of Second shift and Overtime

Standard hours = 100,000
Total hours used = 140,000
Overtime hours = 140,000-100,000 = 40,000

Overtime premium paid

Second shift cost

Factory Supervisor
Security and administration costs
Night shift allowance
Total Second shift cost

Excess of Overtime premium

Excess of Overtime premium over costs of Second shift $45,500

B) Capacity level at which it would be advantageous to change from Overtime Working to Second Shift.

Let x be the capacity level over 100,000 hours at which overtime premium and second shift costs are equa

Overtime Premium = x*$3.5

Second shift = 30,000+40,000+$0.6*x
x×3.5=30,000+40,500+.6×x3.5x−.6x=70,500x=70,5002.9x=24,310.34
100,000+24,311= 124,311
124,311 direct labor hours and above would be advantageous to company to change from
overtime working to second shift.

C) Income Statement for the Current Year

Total hours = 140,000 hours*840000/700000

Standard hours = 100,000 hours

Overtime hours = 168,000-100,000

Sales(840000*2.75)
Less:Variable expenses
Direct material (840000*0.42)
Direct Labor
Overtime Premium(68000 hrs*$3.8)
Miscellaneous
Contribution margin
Fixed expense
Net Income

Workings:
Selling price = $2.5+($2.5*10%) = $2.75
Direct material = ($280,000/700,000)+5% = $0.42
Direct labor = (140000 hrs*840000/700000)*$3.8 = 638,400
Miscellaneous = $210000*840000/700000 = $252,000

Computation of saving in cost if second shift is introduced

Cost saving = Overtime premium-Second shift cost
Cost saving = $2,58400-$115,380 = $1,43,020

Overtime premium paid

Second shift cost
Factory Supervisor
Security and administration costs
Night shift allowance
Total Second shift cost
 $140,000 (40000*$3.5)

$30,000
$40,500
$24,000 (40000*$0.6)
$94,500

=$140000-$94500 $45,500
00

m Overtime Working to Second Shift.

me premium and second shift costs are equal.

to company to change from

1680000

68000

$2,310,000
$352,800
$638,400
$258,400
$252,000
$808,400
$530,000
$278,400

0.42
638400
252000

$258,400 68000*$3.8

$30,000
$40,500
$44,880 68000*$.66
$115,380