Shiplon Product Ltd., manufactures three different products. The relevant data of these products are as under:
|
Name of the Product
|
Cream
|
Pomade
|
Jelly
|
|
Production capacity (unit)
|
5,000
|
7,000
|
8,100
|
|
Machine hours per unit
|
1
|
3
|
4
|
|
Variable cost per unit Rs
|
3
|
2.5
|
3.5
|
|
Selling price -Rs./unit Rs.
|
4
|
5.5
|
6
|
The total fixed overheads at current capacity level are Rs. 40,000 per annum. The company has various alternatives for improving profitability as given below:
(a) To stop the production of Jelly and use the released capacity for producing pomades. The machines for both the products are common. However, cream is produced on a special purpose machine.
(b) To export the total production of Jelly at current price. On export the following additional revenue is expected.
(i) 8% duly drawback on export price
(ii) 12% cash compensatory support against an export scheme of government.
(iii) 5% replenishment license which can be sold in market at a premium of 80%.
(c) To replace the conventional machine used for Jelly by a special purpose machine, which will reduce the production time from 4 hours to 3 hours per unit. Due to this change the variable cost of Jelly will be reduced by Re.0.50 per unit. The released machine will be used for producing pomade. This proposal will entail an additional burden of fixed cost to the tune of Rs. 32,000 per annum.
Please advise the management about the right choice of an alternative so as to maximize profits.
Theoretical Question:-
Write short notes on any of the following:
a) Target Costing
b) Activity-based Costing
c) Zero-based Budgeting