Question

Case Study:

ABC factory produces 24,000 units. The cost sheet gives the following information:
Direct Materials Rs. 1,20,000
Direct Labour Rs. 84,000
Variable overheads Rs. 48,000
Semi variable overheads Rs. 28,000
Fixed overheads Rs. 80,000
Total Cost
Rs. 3,60,000
Presently the product is sold at Rs. 20 per unit.
The management proposes to increase production by 3,000 units for sales in the foreign market. It is estimated that semi-variable overheads wil
1,000. But the product will be sold at Rs. 14 per unit in the foreign market. However, no additional capital expenditure will be incurred.
O

Answer 1

Current Cost = Rs 360000

24000 units sold at rs 20 per unit

Turnover = 24000 * 20 = Rs 480000

Present Profit = 480000 - 360000 = Rs 120000

Profit per unit = 120000/24000 = 5 rs per unit

cost increased for increasing 3000 Production

Direct Material cost increase = (120000/24000) * 3000 = Rs 15000

Direct Labour cost increase = (84000/24000) * 3000 = Rs 10500

Variable overhead increase = (48000/24000) * 3000 = Rs 6000

Semi variable cost increased = Rs 1000

Cost Increased = 15000 + 10500 + 6000 + 1000 = 32500

Price per unit = Rs 14

Turnover from 3000 units = 14 * 3000 = Rs 42000

Proposed Profit from 3000 units = 42000 -32500 = Rs 9500

Proposed Profit per unit = 9500/3000 = Rs 3.17

Decision Depends upon management as Profit is there in a new market but per unit profit is lesser than current profit

Explanation:

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