Decision Making

Question 1
Although the Missouri Company has the capacity to produce 16,000 units per month,
current plans call for monthly production and sales of only 10,000 units at $15 each. Costs per
unit are as follows:

Direct materials-----------------------------------------------Rs.5.00
Direct labor------------------------------------------------------ 3.00
Variable factory overhead------------------------------------- 0.75
Fixed factory overhead----------------------------------------- 1.50
Variable marketing expenses---------------------------------- 0.25
Fixed administrative expense---------------------------------- 1.00

Required:
(1) Recommendations as to whether the company should accept a special order for 4,000
units @Rs.10 each.
(2) The maximum price the Missouri Company should be willing to pay an outside supplier
who is interested in manufacturing this product.
(3) The unit cost figure the company would use in costing inventory, using the direct costing.
(4) The effect on the monthly contribution margin if the sales price were reduced to Rs.14
resulting in a 10% increase in sales volume.

Question 2

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Question 3
Howard Company sells two products with the following characteristics:
Product A Product B
Quantity sold-------------------------------------------------------100,000 units 50,000 units

Standard cost per unit Rs. Rs.

Fixed----------------------------------------------------------10 20
Variable------------------------------------------------------10 40
20 60
Sales Price per unit 30 54
Required:
(1) The profit per unit and in total for each product, assuming that the firm operates at
normal capacity and that the standard cost and the actual cost are the same.
(2) A decision as to whether the firm should continue its sales of both products, assuming
that the fixed cost (in total) will remain the same.
(3) A decision to either drop product B or add Product C, assuming that facilities presently
committed to B alternatively could be assigned to C, that the two products are mutually
exclusive and that C has the following characteristics:

Quantity sold---------------------------------------------------------------------25,000 units

Standard cost per unit: Rs.
Fixed------------------------------------------------------------------------------- 40
Variable--------------------------------------------------------------------------- 20
60
Sales price per unit------------------------------------------------------------------- 50

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 (4) The opportunity cost associated with Product B and with Product C.

Question 4
ABC Manufacturing Company selling its product on a selling price of Rs. 14.30 per unit and
makes an average profit Rs. 2.50 per unit. At present company is producing and selling 60,000
units at 60% of its normal capacity.
Cost of sales per unit is as follows:
Rs.
Direct Material 3.50
Direct Wages 1.25
Factory Overhead 6.25 (50% fixed)
Sales Overhead 0.80 (25% variable)
During the current year, Company intends to produce the same number of Units but estimates
that its fixed costs would go up by 10% while the rates of direct wages and direct materials will
increase by 8% and 6% respectively. However, selling price can not be changed for 60,000 units.

Under this situation, company received an offer for a further 20% of its normal capacity.
Required: What minimum price would you recommend for acceptance of the offer to ensure the
Company an overall profit of Rs. 167,300.
Question 5
Zoltrix Limited makes one product. Total fixed cost for one production period is Rs.10,000.
Current selling price is Rs.70 per unit and variable cost is Rs.30 per unit at present demand of
500 units. The sales manager estimates that each successive increase of Rs.10 in selling price
will result in a drop in demand by 50 units and vice versa. It is possible to charge intermediary
prices ranging from Rs.50 to Rs.90 with appropriate changes in demand as mentioned above.
Required: What should be the optimal sales price per unit?

Question 6
The XYZ Company manufactures three products (X,Y,Z) in the same factory. Revenue and cost
data for the quarter just ended are given below:

Products (complementary)
Particulars X(Rs) Y(Rs) Z(Rs) Total(Rs)

Sales revenue 60000 100000 80000 240000

Variable costs 40000 30000 24000 94000
Profit contribution 20000 70000 56000 146000
Fixed costs
Separable and discretionary 24000 26000 18000 68000
Allocated on the basis of sales revenue 12000 20000 16000 48000
Profit (loss) (16000) 24000 22000 30000

i. Advice the company whether product line X should be dropped or not.

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 ii. Suppose that if product X dropped, the sales of product Y would decline by 10% and
those of the product Z by 20%. Will there be change in your decision you have taken as
per step (i)?

Question 7
HAFSA Limited makes two products, S1 and T1. The variable cost per unit are as follows:

S1 T1
Direct Material Rs. 6.00 Rs. 18.00
Direct Labor(Rs.12 per hour) Rs. 36.00 Rs. 18.00
Variable Overhead Rs. 6.00 Rs. 6.00
Total Variable Cost Rs. 48.00 Rs. 42.00

The selling per unit is Rs. 84.00 for S1 and Rs. 66.00 for T1. During July 2021 the available
direct labor is limited to 48,000 hours. Sales demand in July is expected to be 18,000 units for S1
and 30,000 units for T1. Fixed cost Rs. 200,000 per month.
Required: Determine the profit – maximizing production level for the products S1 & T1.

Question 8

Optimal Ltd. manufactures three products whose standard costs are as shown below:

Product A Product B Product C

Rs. Rs. Rs.
Raw Materials 30 20 10
Variable Overheads 15 5 10
Fixed Overheads 8 12 4

53 37 24
Fixed overheads are allocated on basis of variable overhead for each of the products. The current
price of the three products are:

Product A Product B Product C

Rs. 60 Rs. 41 Rs. 30

All three products pass through machine for cording, spinning and weaving. The hours required
by each product on each machine is as shown below:

Cording Spinning Weaving

Machine Machine Machine
(Hours) (Hours) (Hours)
Product A 3 6 4

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Product B 2 4 8
Product C 4 3 4

The Total machine hours available are as follows:

Machine Hours Available

Cording 26,000
Spinning 27,500
Weaving 24,000

The maximum potential sales for each of the products is as follows:

Product A 1,000 units

Product B 2,000 units
Product C 3,000 units

The total fixed overheads are Rs. 40,000 per month.

Required:
1. Identify the limiting factor
2. Production mix that maximizes profits and calculations of those profits.

Question 9
A company which produces a single product has published accounts showing a loss for the year
ending 30 September 2022. A summary of the relevant information is as follows:

Rs. 000
Sales (50,000 units) 1,000
Less
Material 250
Labour 250
Factory overheads:
Variable 180
Fixed 100
Selling and administration overheads:
Variable 160
Fixed 120
Net Loss 60

Following a meeting of the Board to consider alternative courses of action to restore profitability,
three directors have put forward their recommendations.

Production Director
To introduce an incentive scheme for all staff and re-equip the production line with computer
controlled machines.

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It is estimated that labour cost would be reduced by 20% on the factory production line and 25%
amongst other staff. Half of all variable overhead costs are staff costs. The selling price could be
rescued by Rs. 2 per item which would increase sales volume by 10%.

Marketing Director
To cut the price of the product by 20% and undertake a Rs. 50,000 advertising campaign, paying
a sales commission to sales staff of 2%.

This will have a combined effect of increasing sales by 40%.

Company Accountant
To raise the price of the product by 15% and invest in computerized selling and administration
systems.

This will reduce variable selling and administrative overheads by 50% but will increase fixed
selling and administrative overheads by Rs. 20,000 due to additional depreciation. Sales volume
will fall by 20%.

Required:
1. Evaluate all three unrelated recommendations showing the effect that each will have on
the budgeted profit.
2. State, with reason, which plans you would recommend
Question 10
The chairman of a company faces a difficult board meeting. During the last quarter the
Company lost Rs. 40,000 and his four other directors are far from happy.

Each director has a pet proposal which he thinks could overcome the difficulties. The one thing
which is known with certainty is that the required profit per quarter is Rs. 80,000.

To assist in his evaluation of the situation, the Chairman asks you, as Management accountant, to
evaluate the proposals.

You extract the following data:

(a) Current fixed cost = Rs.220,000 per quarter

(b) Variable costs per unit are:
Rs. 5 per unit upto 120,000 units
Rs. 6 per unit in excess of 120,000 units
(c) In the last quarter 90,000 units were sold.

The proposals are:

Director A: Improve packaging at the expanse of an extra 50 paisa per unit in terms of variable
cost to increase sales. What is the percentage increase in sales required?

Director B: Spend Rs. 20,000 on advertising. What is the percentage increase in sales required?

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Director C: Drop the selling price by 60 paisa per unit. What is the percentage increase in sales
required?

Director D: Buy a more efficient machine which will cut variable cost by Rs. 1.50 per unit at all
levels of production. Sales are to remain at present levels. What is the maximum increase in
fixed machine costs per quarter to justify the proposal?

Required:
Evaluate the above proposal of the Directors.

Question 11
C plc is a company which produces four different plastic moulded products for the building
industry. Central to the production process is a high-pressure moulding machine. The machine is
highly capital-intensive with a limited capacity and therefore the factory’s production capacity
cannot increase in the short term.

The machine is operated by a team of four and the direct labour cost of the operation is Rs. 20
per hour. The machine’s hours of operation are limited to 2500 per year. Budgeted details for the
year ending 31 August 2007 are:

PRODUCTS

Tubing Piping Guttering Facing panels

Annual demand (units) 600 600 600 600

Units details Rs Rs Rs Rs
Selling price 125 116 87 180
Variable cost:
Material 40 40 30 50
Labour 30 30 20 40
Overheads 25 25 22 56

The budgeted fixed overhead for the period is Rs. 30,000

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Required:
(a) Rank the product in the order in which they should be produced so as to maximize the
budgeted profit.
(b) Using the ranking that you have calculated in (a), prepare the budgeted profit
statement for the year ending 31 August 2007.
(c) Explain any concern that you have about C plc using the best product mix calculated
in (a) above.

Question 12
BBQ limited manufactures two types of barbecue –the deluxe and the standard, undergo similar
production process and use similar materials and types of labour; however, a shortage of direct
labour has been identified and this is limiting the company’s ability to produce the inquired
number of barbecues for the year ending 31 May 2022. Labour capacity is limited to 235,000
labour hours for year ending 31 may 2022 and this is the insufficient to meet total sales demand.
BBQ limited has stated that the standard selling price and standard prime cost for each barbecue
for the forthcoming year are as follows:

Deluxe bhq Standard bhq

Selling price Rs. 100 Rs. 50
Direct material Rs. 50 Rs. 11
Direct labour Rs. 25 Rs. 20
Estimates sales (units) 10,000 50,000
It has been company policy to absorb production overheads n a labour hour basis. The budgeted
information for the year ending 31 May 2022 is as follows:

Fixed production over head Rs. 188,000

Variable production overhead Rs. 2 per direct labour hour
Non-production costs for the year ending 31 may 2022 are estimated to be:
Selling and distribution overhead
Variable 10 percent
Fixed Rs. 35000
Administration overhead Fixed Rs. 50,000

Required:
a) Calculate the production plan that will maximize the profit for the year ending 31
May 2022.
b) Based on the production plan that you have recommended in part (a) present a profit
statement for the year ending 31 May 2022 in a marginal costing format.
c) Discuss two problems that may arise as a result of your recommended production
plan.
d) Explain why the contribution concept is used in limiting factor decision.

Question 13
A newly incorporated company plans to introduce a new product. Sales volumes, along with
selling prices and variable costs per unit have been estimated as follows:

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 Sales(in units) Selling Price(Rs) Variable Costs(Rs)
2500 9.50 6.000
5000 9.00 5.750
7500 8.50 5.625
10,000 8.00 5.000
12500 7.00 4.875
15000 6.00 4.875
17500 5.00 4.875
20000 4.0 4.875

The volumes indicated are limits for their respective prices and variable costs. That is, any sales
above each volume would have to be made at the next lower price and variable costs.

Fixed costs directly traceable to the new product are expected to be Rs.20,000 for any volume up
to and including 10000 units. Above that volume, fixed costs would increase to Rs.30,000.

Required:
You are required to ascertain the price at which the company should introduce this new product
if it wished to maximize its short run profit on the product.