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Author Topic: need help to solve this case study.....  (Read 2510 times)

sun1

  • Guest
need help to solve this case study.....
« on: April 02, 2010, 09:30 AM »
The Manager of a company now producing at 70% of its productive
capacity considers whether he can profitably make use of his spare
capacity by increasing his sales. The price of his product in the home
market is Rs. 100 per unit and his profit is 10% of turnover. Full costs are
Rs. 90 per unit. Of these, fixed costs are Rs. 30 per unit and Rs. 60 per
unit are costs which vary with output mainly labour and raw materials.
The manager discovered that he can sell his product at Rs. 75 per unit in
the export market. He wanted to know whether or not he should take up
the export business and therefore referred the matter to the cost
accountant of the company. The cost accountant who was a believer in full
costing made certain calculations and arrived at the following estimates :
Situation 1 . Home market : Profit Rs. 10 per unit
Situation 2 . Home market : Profit Rs. 19 per unit
Export market : Loss Rs. 6 per unit
His conclusion was that the export business is unprofitable and should not
be taken.
Questions :
(a) How did the cost accountant arrive at his estimates?
(b) Do you agree with the view that export business should not be taken
up?
 

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sun1

  • Guest
need help to solve this case study.....
« Reply #1 on: April 06, 2010, 09:00 AM »
The Manager of a company now producing at 70% of its productive
capacity considers whether he can profitably make use of his spare
capacity by increasing his sales. The price of his product in the home
market is Rs. 100 per unit and his profit is 10% of turnover. Full costs are
Rs. 90 per unit. Of these, fixed costs are Rs. 30 per unit and Rs. 60 per
unit are costs which vary with output mainly labour and raw materials.
The manager discovered that he can sell his product at Rs. 75 per unit in
the export market. He wanted to know whether or not he should take up
the export business and therefore referred the matter to the cost
accountant of the company. The cost accountant who was a believer in full
costing made certain calculations and arrived at the following estimates :
Situation 1 . Home market : Profit Rs. 10 per unit
Situation 2 . Home market : Profit Rs. 19 per unit
Export market : Loss Rs. 6 per unit
His conclusion was that the export business is unprofitable and should not
be taken.
Questions :
(a) How did the cost accountant arrive at his estimates?
(b) Do you agree with the view that export business should not be taken
up?
 

Offline anurag08

Re: need help to solve this case study.....
« Reply #2 on: April 06, 2010, 09:41 PM »
sun1, here is the explanation:

1) The Estimates:
Currently the manager is making Rs10 profit per unit. Thats Situation 1, evident from the given data that the cost is
Total Cost = Fixed cost + Variable Cost
Total Cost = 30 + 60
Total Cost = Rs90 per unit,
Profit = 100 - 90 = Rs10 per unit

Since, the total productive capacity is not being utilized, there is a scope of increasing it.
Now, lets say the Manager has increased the productive capacity to 100%,
Thus, the fixed cost per unit decreases

Calculation
Let the Total Production Capacity was "Y"
Original Production = 0.7*Y ( Producing at 70%)
Total Fixed cost = 30 * 0.7*Y
                          = 21Y

Now take the Case of Full Production. ( The fixed cost remains same )

Total Fixed Cost = 21Y
Fixed cost per unit = 21Y / Y
                              = Rs 21
Thus, the Fixed cost per unit has decreased from Rs 30 to Rs 21

Total Cost = Fixed Cost + Variable Cost
Total Cost = 21 + 60 = Rs 81

Profit = 100 - 81
         = Rs 19 ( Situation 2)


2) Yes, the Export business should not be taken up as even after producing at full capacity, the selling price is Rs 6 less than the Cost of Rs 81.
Liked the Post??
Please say thanks ....
 

sun1

  • Guest
Re: need help to solve this case study.....
« Reply #3 on: April 06, 2010, 11:19 PM »
Thanx a ton to Mr.Anurag for solving my case study.

 

Offline anurag08

Re: need help to solve this case study.....
« Reply #4 on: April 07, 2010, 01:37 AM »
You're Welcome :)
Liked the Post??
Please say thanks ....
 

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