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MARGINAL COSTING DECISION MAKING

Meaning: Marginal Costing is a technique where only the variable costs are considered while computing the cost of a product. The fixed costs are met against the total fund arising out of the excess of selling price over total variable cost. This figure is known as Contribution in marginal costing.

Make vs Buy Decision 1. Auto Parts Ltd. has an annual production of 90000 units for a motor component. The components cost structure is as below: Material Labour (25% fixed) Expenses: Variable Fixed Total Rs. 90 per unit Rs. 135 per unit Rs. 675 per unit Rs. 270 per unit Rs. 180 per unit

(a) The purchase manager has an offer from a supplier who is willing to supply the component at Rs. 540. Should the component be purchased and production stopped? (b) Assume the resources now used for this components manufacture are to be used to produce another new product for which the selling price is Rs.485.

In the latter case, the material price will be Rs. 200 per unit. 90000 units of this product can be produced, at the same cost basis as above for labour & expenses. Discuss whether it would be advisable to divert the resources to manufacture that new product, on the footing that the component presently being produced, would instead of being produced, be purchased from the market.

2. A machine manufactures 10,000 units of a part at a total cost of Rs. 21 of which Rs. 18 is variable. This part is readily available in the market at Rs. 19 per unit. If the part is purchased from the market then the machine can either be utilized to manufacture a component in same quantity contributing Rs. 2 per component or it can be hired out at Rs. 21,000. Recommend which of the alternative is possible.

Export Order

3. Indo-Thai company has a capacity to produce 5,000 articles but actually produces only 2,000 articles for home market at the following cost.

Materials Wages Factory Overheads: Fixed Variable Administrative Overheads (Fixed) Selling & Distribution overheads: Fixed Variable Total Cost

Rs. 40,000 36,000 12,000 20,000 18,000

10,000 16,000 1,52,0 00

The home market can consume only 2,000 articles at a selling price of Rs. 80 per article. An additional order for the supply of 3,000 articles is received from a foreign country at Rs. 65 per article. Should this order be accepted, if execution of this order entails an additional packing cost of Rs. 8,000?

4. A company producing 24,000 units provides you the following information: Rs. 1,20,0 00 84,000 48,000 28,000 80,000 3,60,0 00

Direct Material Direct wages Variable overheads Semi-variable overheads Fixed overheads Total cost The product is sold at Rs. 20 per unit

The management proposes to increase the production by 3,000 units for sales in the foreign market. It is estimated that the semi variable overheads will increase by Rs. 1,ooo, but the product will be sold at Rs. 14 per unit in the foreign market. However, no additional capital expenditure will be incurred. The management seeks your advice as a cost accountant. What will you advice them?

Operate vs shut down decision 5. Universe Ltd. manufactures 20,000 units of X in a year at its normal production capacity. The unit cost as to variable and fixed costs at this level are Rs. 13 and 4 respectively. Selling price per unit is Rs. 20.

Due to trade depression, it is expected that only 2,000 units of X can be sold during the next year. The management plans to shut down the plant. The fixed cost for the next year then is expected to be reduced to Rs. 33,000. If the plant is shut down, plant maintenance would cost Rs. 8,000 and on reopening of the factory, cost of overhauling the plant and cost of training and engagement of new personnel would amount to Rs. 3,000 and Rs. 1,000 respectively. Should the plant to be shut-down? What is the shut down point? 6. X Ltd. provides you the following information: Production and Sales at present Sales at present P/V ratio Fixed cost at present Fixed cost when plant is shut down Required: (a) (b) Advice the company whether the plant should shut down & calculate the shut down point. If existing sales (in units) are reduced by 5%, shall your decision be changed? 25,000 units Rs. 6,25,000 p.a. 20% Rs. 4,80,000 p.a. Rs. 3,60,000 p.a.