Cost analysis and control

Chap 11
Product X 3,000 units 10 20 25 40 95 115

Prof. Mayur shah

Product Y 2000 units 20 20 15 25 80 95

(1) ABC ltd. operating 75 % level of activity produces and sells two products X and Y. the cost sheets of these two products are as under:(Rs. p.u) (Rs. p.u)
Units produced and sold Direct materials Direct labor Factory overheads (40% fixed) Administration & Selling overheads (60% fixed) Total cost per unit Selling price per unit

Factory overheads are absorbed on the basis of machine hours. Machine hour is a limiting factor. The machine hour rate is Rs. 10 per hour. The company receives an offer from Japan for the purchase of product X at a price of Rs. 87.5 per unit. Alternatively the company has another offer from Bangkok for the purchase of product Y at a price of Rs. 77.5 per unit. In both the cases, a special packing charge of Rs. 2.5 per unit has to be borne by the company. The company can accept either of the two export orders by utilizing the balance of 25% of its capacity. Advise the company with detailed working as to which proposal should be accepted and prepare a statement showing the overall profitability of the company after incorporating the export proposal suggested by you. (2) Adani engineering company has received a one export order for its sole product that would require the use of half of the facorys total capacity, which is estimated at 4,00,000 units p.a. the condition of export order is that it has to be accepted in full. The factory is currently operating at 60 % of level to meet the demand of its domestic customers. As against its current price of Rs. 6 p.u, export order offer is Rs. 4.7 p.u. The cost breakdown is given below: Rs. per unit Direct material 2.50 Direct labor 1.00 Variable expenses 0.50 Fixed overhead 1.00 __________ Total Cost 5.00 The company has following options. (a) Accept the export order and cut back domestic sales as necessary. (b) Remove the capacity constraint by installing necessary balancing equipment and also by working overtime to meet both domestic and export demand. This will increase factory overhead by Rs. 15,000 and cost of overtime work will amount to Rs. 40,000 for the year. Prepare the statement of cost and profits for each of above options. (3) VIP ltd has been manufacturing track suits for athletes. Currently, its output is around 70 per cent of its total capacity of 19,000 units per annum. One exporter has approved the sample and has offered to buy 5,000 units at a special price of Rs.150 per suit. At present, the company had been selling the track suit at Rs. 210. the standard cost per unit is as under: Cloth and other materials Rs. 82 Labor Rs. 25 Fixed cost Rs. 42 Admin variable cost Rs. 11 ______ Total cost Rs. 160 (a) Should the accept the offer? (b) What would be your advice if the exporter offers to buy 10,000 units instead of 5000 units.