Question:
The company desires to maintain a cash balance of Rs.15, 000 at the end of each quarter. Cash can be borrowed or repaid in multiples of Rs.500 at an interest rate of 10% p.a. Management does not want to borrow cash more than what is necessary and wants to repay as early as possible. In any event, loans cannot be extended beyond a quarter. Interest is computed and paid when principal is repaid. Assume that borrowing takes place at the beginning and repayments are made at the end of the quarter. A manufacturing company is currently working at 50% capacity and produces 10, 000 units at a cost of Rs.180 per unit as per the following details.
Materials: Rs.100
Labor: Rs.30
Factory Overheads: Rs.30 [40% fixed]
Administrative Overheads: Rs.20 [50% fixed]
Total Cost Per Unit: Rs.180
The selling price per unit at present is Rs.200. At 60% working, material cost per unit increases by 2% and selling price per unit falls by 2%. At 80% working, material cost per unit increases by 5% and selling price per unit falls by 5%. Prepare a Flexible Budget to show the profits/losses at 50%, 60% and 80% capacity utilization.