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Day 5

Application of CVP Relationship


Close or Continue
Additional Order
Limiting Factor
Make or Buy
Operating Leverage
Contribution/ Profit
1 2
Sales 200000 200000

Variable Cost 120000 160000


FC 60000 20000
TC 180000 180000
Profit 20000 20000
3
200000 Operating Leverage

20000 C/P
160000 increase in Sales
180000 profit will
20000
A B C Total
Revenue 250,000 150,000 450,000 850,000
Total Cost 270,000 100,000 370,000 740,000
-20,000 50,000 80,000 110,000

TC consists of the following


Fixed 60%
Variable 40%

Should A be Closed?
Additional Order_Accept or Reject

Capacity Operation 40%


Units 1000
Direct Material 20
Direct Labour 50
Manufacturing Overhead
Fixed 80
Variable 30
Totlal Cost 180
Sales 200

Additional Order
quantity 600
Price 125

new capactity to be created

Capacity Operation 100%


units 1000
Direct Material 20
Direct Labour 50
Manufacturing Overhead
Fixed 80
Variable 30
Totlal Cost 180
Sales 200

Additional Order
quantity 600
Price 125
Present new Total

Present new Total


1000 600 1600
Sales 200000 75000 275000
less
Variable Cost
DM 0 12000 12000
DL 0 30000 30000
VMO 30000 18000 48000
Total Variable Cost 30000 60000 90000
Contribution 170000 15000 185000
less
Fixed Cost
FMO 80000 30000 110000
Profit 90000 -15000 75000
A B C
SP 25 40 100
VC 15 25 70
Labour hours per unit 1 3 4
Demand 10000 8000 5000
Fixed Cost 150000
Total Time Available (hours) 42000
Make or Buy

A is the manufacturer of an electronic product. The selling price of the product is 5


per unit and contribution to sales ratio is 25%. At present most of the components
main product are being manufactured within the same plant.

Recently the company received an offer from M ltd for one of the components: SA

10,000 units of SAT-12 @ 25 (one month's requirement)

Store manager suggested that the company should go for purchase as it will save R
unit (total cost = 28)

Before placing the order the purchase manager wanted to examine the cost of ma
same.
5 Following is the cost of making one unit of SAT-12

Direct material: 5
Direct Labour: 10
Variable Manufacturing overheads:5
Fixed Manufacaturing overhead: 8 (depreciation of the factory building)

He wanted to know what is the operational effect of not producing the


product( alternative use of released cost)
Released capacity can be used to manufature additional 50 units of main product.
e selling price of the product is 5000
present most of the components of the
ame plant.

for one of the components: SAT-12.

ment)

go for purchase as it will save Rs. 3 per

anted to examine the cost of making the

the factory building)

of not producing the

tional 50 units of main product.


Relevant Data and All Data

Revenue 25,000 units

Selling Price 2,500 per unit


Material 500 per unit
labour
workers 20
hour 2,000 per worker
rate 140 per hour

manufacturing overhead 750,000


Markeing overhead 500,000
Restructure proposal
Increase the wage by 20
it will reduce the number of worker 15
Additional expense for improving
Working condition 350,000
All Data Relevant Data
Present with change Differential Cost
Revenue 0 Revenue
less 0 less
Cost 0 Cost
Material 0 Material
labour 0 labour
mo 0 mo
mkt o 0 mkt o
Reorg 0 Reorg
0
0
profit 0 profit
0
Change in profit 0
Relevant Data
No change Change
0 0

0 0
0 0
0 0
0 0
0
0 0

0 0

0
Sunk Cost
New manager proposed that the company
should shift to Cloud based accounting
services and dispose off the existing
accounting package

software Cloud
Accounting Software 100000
Life 5 Sunk cost
Four years old
Staff cost
Accountants' salary 20000 5000 Relevant
Annual cloud Charge 12000

if sold at the beginning of the year 18000


if sold at the end of the year 5000
Continue Go to Cloud Differential
Amortisation 20000 0 20000
Write off 20000 -20000
Staff cost 20000 5000 15000
Cloud Charge 0 12000 -12000
Sale proceeds -5000 -18000 13000
35000 19000 16000

###

Sunk Cost are cost that have


already been incurred. They do
not affect any future cost and
cannot be changed by any
current or future action.