Question 1: A company manufactures a product that has a selling price of Rs 14 and a variable cost of Rs 6 per unit. The company incurs annual fixed costs of Rs 24,400. Annual sales demand is 8,000 units.
New production techniques are under consideration, which would cause a 30% raise in fixed costs and a reduction of Rs 1 in the variable cost per unit. The new production techniques would outcome in a superior product and would allow the sales price to be raised to Rs 15 per unit.
Required:
a) Compute the number of units to be produced and sold annually, if the organization implements the new production techniques and wishes to achieve similar profit as that under the existing technique.
b) Compute the margin of safety as a percentage of the original budgeted annual sales, if the change in production techniques were to occur.
Question 2: Cost-Volume Profit (CVP)/breakeven analysis are a helpful method for managers as it can give simple and quick estimates. It can as well be graphically presented via breakeven charts giving details of the breakeven arithmetic. Breakeven analysis does, though, have number of limitations.
Required: Find out the limitations of the CVP analysis.
Question 3: A company manufactures a single product L. Extracts from the company’s records from the last period are as shown below:
Budgeted results
Raw material 50 kg @ 2.5 125
Direct labor 14 hrs @ 4.75 66.50
Actual results
Production 150 units
Direct material purchased 7,000 kg @ a cost of Rs 18,200
Opening stock direct materials 1,300 kg
Closing stock direct materials 850 kg
Wages paid for 2020 hrs 9898
Required:
a) Compute the total material variances and the total labor variances.
b) What use can the management of the company make of the variances computed above?