Marginal Costing

Sensor housings: a board contribution report

Ira Precision sells one model of sensor housing. The factory can produce 16,000 housings each quarter, but the current sales forecast is 12,000. There is no opening or closing inventory. All costs below relate to the quarter and are measured within the present capacity. The variable selling cost is incurred only when a housing is sold. Fixed factory and office costs will not change unless production exceeds capacity.

The sales manager says that a 25% rise in units sold should create exactly a 25% rise in profit. The finance director wants this claim tested rather than relying on the reported cost per unit. All selling prices and cost behaviour remain unchanged in this comparison. There is no tax or interest expense.

Required:

(a) Prepare a contribution statement for the current forecast and calculate the P/V ratio and break-even units and sales. (4 marks)

(b) Calculate the margin of safety in units, sales and percentage. Find the sales quantity needed for a quarterly profit of ₹9,00,000. (3 marks)

(c) Calculate profit if sales rise by 25%, test the manager's claim and state whether the target in (b) is within current capacity. (3 marks)

Two operating reports with missing cost columns

Nivaan Safety Equipment sells a single protective component. A software fault removed the variable-cost and fixed-cost columns from two quarterly management reports. The sales and operating-profit columns were recovered from signed internal records:

The production manager confirms that selling price per unit and variable cost per unit were unchanged, total fixed costs were the same in both quarters, and the sales mix did not change because there is only one product. There was no inventory movement, overtime premium, capacity extension or unusual expense. Both quarters fell within the same relevant range.

A trainee estimates the P/V ratio by dividing the second quarter's profit by sales and proposes using that ratio to calculate break-even sales. The controller wants the estimate tested before it is used in a sales plan. The next quarter's forecast sales are ₹42,00,000. The board also wants to know how much revenue would be needed to make an operating profit of ₹7,50,000, with unchanged conditions.

Required:

(a) Reconstruct the P/V ratio, fixed costs and variable costs in each recovered report. (4 marks)

(b) Calculate break-even sales, forecast profit and forecast margin of safety in rupees and percentage. (3 marks)

(c) Calculate sales needed for the board's target and explain why profit/sales is not the P/V ratio. (3 marks)

Disposable cartridge production: cash and accounting thresholds

Saanvi Medical Components produces one type of disposable cartridge. Management is worried about the difference between a cash shortage and an accounting loss. The following annual budget applies to production and sales of up to 24,000 cartridges:

Every other fixed expense is payable in cash during the year. There are no working-capital timing differences: customer receipts and supplier payments take place in the same year as the corresponding sale or expense. There is no opening or closing inventory. Ignore income tax, loan repayments, interest and capital expenditure. Depreciation is a non-cash charge, not a cash payment.

The current forecast is 18,000 sales units. The operations head claims that an accounting break-even result means the factory generates no cash to pay for a planned maintenance reserve. The reserve needs an operating cash surplus of ₹4,00,000 during the year, before any reserve transfer.

Required:

(a) Calculate accounting break-even and cash break-even, in units and sales value. (4 marks)

(b) Prepare a profit and operating-cash-surplus reconciliation at the forecast volume. (3 marks)

(c) Find the volume required for the cash-surplus target, calculate accounting profit or loss at that volume, and comment on the operations head's claim. (3 marks)

Retailer discount proposal and the sales forecast

Veera Outdoor Products sells a standard reusable flask to retailers. Present sales are 20,000 units per year at ₹160 each. Variable manufacturing, delivery and commission costs together are ₹100 per flask. Annual fixed costs are ₹8,00,000 and there is no inventory change. Annual capacity is 30,000 units. Ignore tax.

A retailer consortium proposes a 10% reduction in the selling price for all units, not only additional units. Its forecast is that annual sales would increase to 26,000 flasks. Variable cost per unit would remain ₹100 and fixed costs would be unchanged. No additional advertising or distribution charge is required. The offer is for one year and can be rejected without affecting current sales.

The sales manager uses the present P/V ratio to estimate profit under the price cut, arguing that variable-cost behaviour has not changed. The controller wants a fresh calculation and a minimum whole-unit sales target before agreeing to the new price. Round a fractional threshold up to the next whole unit.

Required:

(a) Calculate current profit, P/V ratio and break-even units. (3 marks)

(b) Calculate new contribution, P/V ratio, break-even units and profit at 26,000 sales. (4 marks)

(c) Calculate minimum sales needed to preserve current profit, check capacity and evaluate the retailer forecast. (3 marks)

After-tax target and a capacity extension decision

Anika Laboratory Supplies sells one pack of sterile accessories for ₹350. Variable cost is ₹210 per pack. Annual fixed operating costs are ₹12,60,000 within existing capacity of 15,000 packs. There is no interest expense or inventory change. Income tax is 30% of positive operating profit, with no credits or other adjustments.

The board wants an annual after-tax operating profit of ₹5,04,000. A junior analyst adds this target directly to fixed costs and divides by contribution per pack. The finance team wants the income-tax effect shown separately and thresholds expressed as minimum whole packs.

An optional extra shift would add ₹2,10,000 to annual fixed costs and increase capacity to 18,000 packs. Selling price and variable cost per pack would remain unchanged. The extra-shift cost is wholly avoidable if the extension is not chosen. Demand can reach the required target under either configuration. Compare target volumes rather than profits at arbitrary different outputs.

Required:

(a) Calculate current break-even packs and pre-tax profit needed for the after-tax target. (3 marks)

(b) Calculate minimum whole-pack target with existing capacity and check feasibility. Show the target reconciliation. (4 marks)

(c) Calculate target volume with the extra shift and explain whether it is needed solely for this objective. (3 marks)

Two packaging products sold in complete bundles

Ritika Packaging sells products L and H through a distributor. For planning, orders contain only complete bundles of 3 units of L and 2 units of H. These are unit proportions, not sales-value proportions. A bundle cannot be split when deciding the minimum break-even order.

Annual fixed costs for the common facility are ₹18,00,000. No further product-specific fixed charge exists. There is no inventory movement, and capacity and demand are sufficient for calculated volumes. Ignore tax.

The sales office plans 3,000 bundles and calls this a 60%/40% revenue mix because 3 of every 5 units are L. The controller wants revenue mix distinguished from unit mix. Management also wants a sensitivity calculation if each bundle becomes 2 units of L and 3 units of H, with prices, variable costs and fixed costs unchanged.

Required:

(a) Compute contribution and revenue per present bundle, composite P/V ratio and theoretical break-even bundles. (4 marks)

(b) Find minimum whole break-even bundles and corresponding L/H units. Calculate profit at 3,000 bundles. (3 marks)

(c) Recompute minimum break-even bundles under the alternative mix and correct the revenue-mix claim. (3 marks)

Export order within unused capacity

Mira Instruments makes a precision bracket. Annual capacity is 20,000 brackets and expected domestic sales are 14,000. Domestic price is ₹500 each. Variable manufacturing cost is ₹300 per bracket; domestic selling and delivery cost is ₹20. Annual fixed costs are ₹16,00,000 and will be incurred whether or not a proposed export order is accepted.

An overseas distributor offers to buy 5,000 brackets at ₹370 each. This is a one-time order in a separate market. No domestic sale would be displaced and domestic price would not change. Export units need the same ₹300 manufacturing cost but no domestic selling/delivery cost. Instead, they incur ₹35 each for export packing and shipping. A dedicated inspection fixture costs ₹80,000 cash and has no resale value after the order. No other cost changes.

A trainee includes the present fixed-cost allocation per unit and concludes that the export price is too low. The operations head requests an incremental decision and a whole-year profit reconciliation. Ignore tax and currency risk, but identify two commercial checks before an actual contract is signed.

Required:

(a) Check capacity and calculate incremental contribution and profit. (4 marks)

(b) Find minimum acceptable export price and annual profit before and after acceptance. (4 marks)

(c) Explain treatment of existing fixed costs and identify two commercial checks. (2 marks)

Special order replacing ordinary sales

Aarav Machine Parts has annual capacity for 15,000 units of one component. Confirmed ordinary demand is 13,500 units at ₹600 each, with variable cost ₹360 per unit including normal selling costs. Fixed annual cost ₹18,00,000 does not change with the decision. No inventory is held.

A specialist buyer requests 4,000 units at ₹520 each. Its drawing increases variable manufacture and delivery cost to ₹390 per special unit, and a one-time setup charge ₹50,000 is needed. The buyer requires the full order; partial acceptance is impossible. The plant cannot use overtime, outsource or postpone delivery. Accepting uses 1,500 unused units of capacity and displaces 2,500 ordinary units. The remaining customers accept the reduced supply without compensation, and ordinary price stays unchanged. Ignore tax.

Marketing considers only positive special-order contribution. Finance says scarce capacity requires measuring ordinary contribution sacrificed. All decision-dependent costs are future cash costs. The unchanged fixed charge appears in both total-profit statements.

Required:

(a) Calculate displaced volume and opportunity cost. (3 marks)

(b) Find incremental profit, decide acceptance at ₹520 and show total profit with and without the order. (4 marks)

(c) Find minimum special price for no reduction in total profit and explain why positive contribution is insufficient. (3 marks)

Machine-hour constraint and an explicit tie-break

Kiara Industrial Products makes components A, B and C on one finishing machine. Only 14,000 machine hours are available next month. The machine is the sole constraint; labour and material can be obtained as needed.

Monthly fixed cost ₹7,00,000 is unchanged for any permitted mix. Production is in whole units and there is no stock movement. If two products have equal contribution per machine hour, meet B demand before C. No minimum-sales obligation exists. Ignore tax and setup time.

Sales wants C produced first because it has the highest contribution per unit. The planner wants scarce hours ranked by economic return. Management can rent 200 extra machine hours for ₹7,000 total cash. These hours have no other additional cost and can make C after the base plan. Demand limits are unchanged.

Required:

(a) Calculate contribution per unit and per scarce hour and rank the products. (3 marks)

(b) Prepare the optimal whole-unit plan under the tie-break, hour usage, contribution and profit. (4 marks)

(c) Evaluate the rental and explain the weakness in the sales ranking. (3 marks)

Purchased insert and alternative workshop use

Diya Engineering needs 12,000 metal inserts for its annual assembly plan. It can make them or buy an identical insert from an approved supplier. The current cost sheet shows:

Delivered supplier price is ₹92 for exactly 12,000 inserts. Buying eliminates ₹1,20,000 annual fixed supervision cost. Remaining allocated fixed cost continues. There is no inspection, quality or inventory-timing difference in this numerical analysis.

If insert production stops, the workshop can earn ₹1,80,000 annual net contribution from a repair contract, after all its extra variable costs. This contract cannot be done while inserts are made. It needs no additional fixed costs. The current ₹2,40,000 fixed allocation includes avoidable supervision cost. Ignore tax.

The buyer compares ₹92 with full cost ₹95 and concludes buying saves ₹3 per insert. Production compares ₹92 with variable cost ₹75 and concludes making is cheaper. Finance requests the costs and benefits that actually differ, including workshop opportunity cost.

Required:

(a) Identify relevant costs and compare make/buy without alternative work. (3 marks)

(b) Recalculate with the repair contract and decide. (4 marks)

(c) Find maximum delivered purchase price with the repair contract and explain why neither initial comparison is complete. (3 marks)

Production targets and inventory profit timing

Reva Pumps sells a standard valve at ₹500 per unit. Variable manufacturing cost is ₹280 per unit and variable selling cost is ₹20 for each unit sold. Fixed manufacturing overhead is ₹9,00,000 per quarter, absorbed at ₹90 per unit using normal quarterly capacity of 10,000 units. Fixed selling and administration cost is ₹3,00,000 per quarter. Actual production equals normal capacity in both quarters, so no over- or under-absorption arises.

There is no opening stock in the first quarter. First-quarter production is 10,000 and sales are 8,000 units. The second quarter opens with the first quarter's closing stock, produces 10,000 and sells 11,000 units. There is no work in progress, wastage or purchase of finished valves. Prices and all cost rates are unchanged. Use FIFO for inventory, although unchanged rates make the valuation the same under another ordinary cost-flow assumption. All stock is saleable and no write-down is required.

The production head says absorption profit measures cash earned by making extra units. The controller wants separate statements and a reconciliation before accepting that explanation. Selling expenses must not enter finished-goods inventory. Ignore tax and cash-collection timing.

Required:

(a) Find closing stock and inventory value under each method in each quarter. (2 marks)

(b) Prepare marginal and absorption profit statements for both quarters. (6 marks)

(c) Reconcile quarterly and combined profits, and assess the production head's claim. (2 marks)

Different fixed-overhead rates in opening and closing inventory

Avani Displays makes a single screen mounting kit. April opens with 1,000 units made in March. March variable manufacturing cost was ₹200 per unit and fixed factory overhead absorbed was ₹60 per unit. During April, variable manufacturing cost stays ₹200, but April fixed factory overhead is ₹4,80,000, absorbed at ₹80 per unit using normal output of 6,000. Actual April output is 6,000 units, so the current overhead is fully absorbed.

April sales are 5,500 units at ₹400 each. Apply FIFO: the 1,000 opening units are sold first, followed by 4,500 April units. Variable selling expense is ₹20 per unit sold; fixed selling and administration expense is ₹2,00,000. No stock write-down, work in progress or abnormal cost arises. Finished stock contains manufacturing costs only. Ignore income tax.

An accountant multiplies the 500-unit net increase in stock by April's ₹80 rate and forecasts a ₹40,000 absorption-profit advantage. Another accountant says the overhead rates embedded in opening and closing stock must be considered separately. Management wants the actual statements and the source of the difference, rather than an unexplained adjustment.

Required:

(a) Value opening and closing inventory under marginal and absorption methods. (3 marks)

(b) Calculate April profit under each method, including absorption cost of goods sold. (5 marks)

(c) Reconcile the difference and explain when the net-unit-change shortcut is valid. (2 marks)

Temporary closure with unavoidable and restart costs

Tara Ceramics expects a weak six-month selling season for one kiln line. If the line runs, it will sell 8,000 units at ₹400 each. Variable manufacturing and selling cost is ₹250 per unit. Fixed cost for the six months is ₹18,00,000: ₹7,00,000 of paid shift supervision and contracted services can be avoided by closing, while ₹11,00,000 of insurance, depreciation and other commitments continues under either option.

Temporary closure has a cash cost of ₹90,000 for safe storage and security beyond the continuing fixed commitments. Restarting at the end of the six months costs another ₹1,10,000. Both costs arise only if the line closes and both must be included in this decision. No alternative use of the facilities exists. The next season's sales and operating costs are identical whichever option is chosen. Closure does not create redundancy payments or lost customers under the numerical assumptions. Ignore tax and discounting.

The director wants to close because the operating statement shows a loss. The plant manager notes that avoiding a loss is not the same as improving the loss, since some expenses continue even without output. Treat the restart charge as part of the temporary-closure decision, not as a reason to exclude it because payment happens later.

Required:

(a) Calculate profit or loss from running and from closing. (4 marks)

(b) Find the sales volume at which the two options have equal financial results and compare it with accounting break-even. (4 marks)

(c) Recommend the numerical option and state two assumptions to verify in practice. (2 marks)

Sell at split-off or process the whole batch further

Rhea Fruit Products has already completed a joint production batch, incurring ₹9,00,000 joint cost. One output is 10,000 litres of concentrate. It can be sold immediately at split-off for ₹100 per litre, with no additional selling cost. Alternatively, the entire 10,000-litre batch can be processed into 9,000 litres of a premium product because 10% evaporates during processing. The other joint outputs and their revenue are unchanged whichever option is chosen.

Premium product sells for ₹150 per litre and incurs ₹10 per litre of delivery and sales commission. Further processing costs ₹2,80,000 for the batch, including all variable and batch-specific costs. A one-time product safety test costs ₹40,000 and arises only under further processing. There is no additional fixed plant cost, no capacity opportunity cost and no change in working-capital timing. Both sale prices and the full batch's demand are firm for this comparison. Ignore tax.

A supervisor divides the joint cost equally over all original litres and charges a part of it again to the further-processing alternative. Finance requests a comparison that excludes costs already incurred, recognises yield loss and measures the actual future receipts and payments that differ. If the premium buyer negotiates a new selling price, yield and all other costs remain unchanged.

Required:

(a) Compare incremental revenue and incremental costs and decide for the current premium price. (5 marks)

(b) Find the premium selling price at which the alternatives are financially equal. (3 marks)

(c) Explain treatment of joint cost and state two operational assumptions to check. (2 marks)

Manual and automated lines: a cost indifference point

Anika Packaging can use either a manual line or an automated line for the next full year. Both produce the same saleable package at the same quality, with a selling price of ₹200 per unit. Under the manual option, variable cost is ₹130 per unit and annual fixed cost ₹7,00,000. Under the automated option, variable cost is ₹100 per unit and annual fixed cost ₹13,00,000. These fixed totals include all lease, supervision and operating commitments for that option; they are alternatives, not costs to add together.

Either line can meet demand up to 40,000 units. The equipment leases can be chosen freely before the year starts, without exit fees, capital payments or residual-value effects. Production equals sales and inventory is nil. Ignore tax and financing. The normal forecast is 24,000 units, but a stress forecast is 15,000. Prices and costs are constant within capacity and the chosen line must be used for the full year.

The operations head prefers automation because it has a lower variable cost, while finance wants to know whether the saving covers the extra fixed commitment at each forecast. The board also requests the sales quantity required to earn ₹4,00,000 annual profit under each option. State quantities in whole units where necessary.

Required:

(a) Derive the indifference quantity and show profit at that quantity. (3 marks)

(b) Compare options at normal and stress forecasts and find each break-even quantity. (4 marks)

(c) Calculate target-profit quantities and explain the volume-risk trade-off. (3 marks)

Step-fixed capacity and a misleading target-profit formula

Meera Lighting sells one fitting at ₹600. Variable cost is ₹360 per unit. Annual fixed operating cost is ₹12,00,000 for sales up to 8,000 units. To produce and sell any volume from 8,001 to 12,000, the company must rent an additional production room for the full year at ₹6,00,000. The extra fixed charge is incurred in full, even if just one additional unit is sold. No other price or cost changes occur. Capacity cannot exceed 12,000 and output equals sales.

The board wants annual profit of ₹10,00,000. A trainee uses the present fixed cost to calculate target sales and concludes that 9,167 units are enough. The controller notices that this volume activates the new room. Management is also comparing sales forecasts of 8,000 and 9,000 units before choosing whether to rent. The room lease can be declined without a fee before the year starts. Ignore tax and financing.

A large customer might lift demand beyond current capacity, but management does not want to assume that the first extra unit automatically improves profit. All volumes are whole units and the room cannot be rented for only a fraction of the year.

Required:

(a) Test the trainee's target and find the feasible whole-unit target quantity. (4 marks)

(b) Calculate profit at both forecasts and find the first higher-capacity volume that earns at least the profit at 8,000 units. (4 marks)

(c) Explain how a step-fixed cost changes the usual CVP assumption. (2 marks)

Same revenue, different revenue-weighted product mix

Naina Foods sells products A and B. A sells at ₹400 per unit with variable cost ₹240; B sells at ₹250 with variable cost ₹200. There is no scarce resource or inventory. Annual fixed cost is ₹9,60,000 regardless of the mix. The sales plan totals ₹40,00,000 revenue, with A providing 60% of revenue and B 40%. These percentages are revenue shares, not unit shares.

The marketing team proposes keeping total revenue at ₹40,00,000 but changing revenue shares to 40% A and 60% B. Product prices and variable costs are unchanged. Demand can support both stated plans; no campaign cost or fixed-cost change occurs. For break-even and target-profit planning, each proposed mix is assumed to remain constant as revenue changes. Ignore tax. When the question asks revenue rather than units, use the continuous revenue model and state that actual whole-unit planning needs a feasible mix.

Marketing says equal total revenue must mean equal profit. Finance asks for both contributions, a weighted P/V ratio and the revenue needed to make ₹4,80,000 under each mix. Management also wants the margin of safety at planned revenue, so it can compare mix risk as well as the immediate profit effect.

Required:

(a) Calculate product P/V ratios, weighted ratios and planned profits. (4 marks)

(b) Find break-even revenue, planned margin of safety and target-profit revenue under each mix. (4 marks)

(c) Explain why revenue and unit weights must not be confused. (2 marks)

Material already in store: replacement or resale value

Ishani Repairs is considering a one-time order of 1,000 repaired assemblies at ₹500 each. It needs 2 kg of material M per assembly. Exactly 2,000 kg is already in store and was bought earlier at ₹100/kg. This original purchase is paid and cannot be reversed. Present resale value is ₹70/kg and current replacement purchase price is ₹130/kg.

The repair order additionally needs ₹1,80,000 of variable labour and ₹40,000 of other variable expense. A special tool costs ₹30,000, with no later use or resale value. All these cash expenses arise only if the order is accepted. Existing fixed cost ₹2,00,000 continues under either decision. Labour and equipment have spare capacity and no alternative contribution is displaced. Ignore tax.

Compare two independent situations. In Situation A, M is not used in any regular job and would be sold immediately if the special order is refused. In Situation B, M is continuously needed for confirmed normal work; using these stores for the order means buying exactly 2,000 kg of replacement material at the current price. Normal work proceeds unchanged. The situations are alternatives, not simultaneous events.

Required:

(a) Identify relevant material cost in each situation and calculate incremental profit. (5 marks)

(b) Find the minimum order price per assembly in each situation. (3 marks)

(c) Explain why original purchase cost and existing fixed cost do not drive either decision. (2 marks)

Extra units that require overtime and a new supervisor

Kavya Motors normally sells 10,000 component sets at ₹700 each. Current annual capacity is 10,000. Ordinary variable cost is ₹420 per set, comprising material ₹240, direct labour ₹120 and variable overhead ₹60. Existing annual fixed cost ₹20,00,000 continues unchanged. No opening or closing stock exists.

A separate buyer offers ₹650 each for 2,000 additional sets and requires the complete order. Ordinary sales are protected and must not be displaced. A permitted overtime shift can make the extra units only. Material remains ₹240 each, but labour for extra units is paid at a 50% premium on the ordinary ₹120 rate. Variable overhead rises to ₹80 per extra unit. A dedicated temporary supervisor costs ₹1,80,000 for the order and cannot be shared with normal production. No other cost changes. There is no idle ordinary capacity, but this specific overtime plan provides the needed additional output. Ignore tax.

The commercial team prices the order using ordinary contribution and says it adds ₹4,60,000 before fixed costs. Finance wants the extra units measured using their own relevant cost rates and the one-time supervisory commitment. The temporary supervisor is a fixed cost of this order, not part of the unchanged ₹20,00,000.

Required:

(a) Calculate relevant cost per extra unit and incremental profit, then recommend accept or reject. (4 marks)

(b) Find the minimum special-order price and reconcile total annual profit before and after. (4 marks)

(c) Explain why the ordinary variable-cost rate is unsuitable for the extra shift. (2 marks)

Supplier disruption and the value of scarce skilled hours

Lina Electronics makes diagnostic modules P and Q. A temporary supplier disruption leaves only 9,000 skilled assembly hours available this month. Hours are the only constraint and there is no opening inventory. Product data are:

Fixed monthly cost is ₹9,00,000 for either mix. Both products earn ₹150 contribution per assembly hour. The firm gives P priority where contributions per hour are equal, because its customers have a longer-standing service relationship. There are no minimum obligations or penalties. Work is in whole units; production equals sales.

A qualified temporary crew can provide exactly 600 additional assembly hours for a ₹75,000 fixed fee. This fee is additional to the product variable costs above and covers all extra crew charges; no other expense changes. The extra hours can be used to make Q after the base plan, and the stated Q demand limit still applies. The crew has no effect on P quality or ordinary capacity. Ignore tax.

The sales director says every optimal mix must consist of only one product because the contribution per hour is equal. Finance asks for a feasible optimum that respects demand and the priority rule, followed by an incremental test of the crew fee. Also find the highest fee that would leave monthly profit unchanged compared with the base plan.

Required:

(a) Prepare the base production plan and calculate contribution and profit. (4 marks)

(b) Evaluate the temporary crew and calculate revised profit and maximum acceptable fee. (4 marks)

(c) Explain the tie and the role of demand limits. (2 marks)

Unabsorbed factory overhead and the inventory bridge

Neha Controls makes a standard relay. It uses normal capacity of 10,000 units to absorb quarterly fixed factory overhead of ₹8,00,000 at ₹80 per unit. Actual production this quarter is only 8,000 units, and sales are 7,000. There is no opening inventory. Variable manufacturing cost is ₹200 per relay; selling price ₹400; variable selling cost ₹20 per relay sold. Fixed selling and administration expense is ₹2,00,000. Actual fixed factory expense equals the ₹8,00,000 budget.

For the absorption statement, charge all under-absorbed fixed factory overhead to this quarter's profit statement. Do not inflate the stock cost by replacing normal-capacity absorption with actual-output allocation. Closing stock is fully saleable, no work in progress exists, and no abnormal material loss occurred. Ignore tax. Production and sales rates are otherwise unchanged.

The assistant accountant charges only absorbed factory overhead and says profit is ₹5,00,000. The controller asks for the missing absorption adjustment, a marginal statement and a stock-based reconciliation after that adjustment. The board also wants to understand why the fixed-cost allocation rate must not be treated as a variable cash cost when considering an extra sale within available capacity.

Required:

(a) Calculate closing stock values, absorbed overhead and under-absorption. (3 marks)

(b) Prepare marginal and adjusted absorption profit statements. (5 marks)

(c) Reconcile the adjusted profits and explain the extra-sale point. (2 marks)

Relevant skilled labour with an alternative job

Anaya Fabrication is offered ₹6,00,000 for a complete special assembly job. It needs materials costing ₹1,80,000 at current prices, 800 skilled hours and ₹40,000 additional variable machine expense. A dedicated drawing costs ₹30,000 and has no later use. Existing fixed costs remain unchanged. The order can be refused without a penalty and does not affect normal selling prices. Ignore tax.

Compare two independent staffing situations. In A, the 800 hours come from idle permanent employees whose full wages will be paid whether the order is accepted or refused. There is no alternative work and no overtime. In B, all regular skilled time is occupied. Taking employees off another confirmed job frees exactly 800 hours but sacrifices ₹1,60,000 contribution, measured after the regular wages and all that job's variable costs. The employees' wages are unchanged under either choice. No replacement staff can be hired in B.

The project manager proposes charging the historical hourly wage rate of ₹150 in both situations. Finance asks for labour's actual incremental or opportunity cost, warning that the other job's lost contribution is already a net contribution figure. Do not add unchanged payroll again to that lost contribution. There is no equipment bottleneck or additional fixed expense in either situation.

Required:

(a) Calculate relevant labour cost and incremental order profit in A and B. (5 marks)

(b) Find the minimum contract price in each situation. (3 marks)

(c) Explain why the same payroll rate can give different decision costs. (2 marks)

Buying a constrained component to release capacity

Devika Assemblies needs 5,000 units each of components X and Y. Both can be made internally or bought in the required quantities from a reliable supplier. The following rates apply:

Only 8,000 machine hours are available. If all 10,000 components were made, 15,000 hours would be required. Existing fixed factory cost ₹5,00,000 continues regardless of make/buy quantities. No fixed cost is avoidable. There is no other use for the machine, no minimum internal-production requirement and no delivery or quality difference. Purchase prices include freight and inspection. All components are whole units and final assembly revenue is the same for any feasible sourcing plan. Ignore tax.

The purchasing manager wants to make Y first because its saving per unit is ₹80 against ₹60 on X. The controller says the scarce resource is hours rather than units. The supplier can meet whatever balance is bought. To help management understand the value of an extra hour, also evaluate an offer to rent 1,000 additional machine hours for ₹35,000 total; these hours have the same variable production costs and no other fee.

Required:

(a) Calculate savings per unit and per machine hour and rank internal manufacture. (3 marks)

(b) Find the lowest-cost base sourcing plan and its total relevant cost. (4 marks)

(c) Evaluate the rental and explain the purchasing manager's mistake. (3 marks)

Advertising campaign: volume growth versus lower margin

Aditi Homeware sells a single organiser. Current price is ₹800 and variable manufacturing and selling cost ₹480 per unit. Annual sales are 6,000 units. Fixed operating expense is ₹12,00,000 and production capacity is 10,000 units. Inventory is nil and all sales are collected normally. Ignore tax.

Marketing proposes a full-year campaign costing ₹3,00,000, a decision-specific fixed expense. It forecasts 8,000 sales if the selling price is reduced to ₹720. Variable cost remains ₹480 per unit. Existing fixed expense stays ₹12,00,000 and capacity can meet the forecast without expansion. The campaign and price cut must be accepted together; they cannot be split. There are no other promotional, commission or financing costs.

A trainee says the extra 2,000 units contribute the current ₹320 each, so the campaign is clearly attractive. Finance asks for a whole-plan comparison, including the lost margin on units that would have sold at the old price. The board wants the minimum whole-unit volume under the revised plan that preserves current profit and the volume required for ₹8,00,000 profit. The proposed price applies to all revised-plan units, not only the extra sales.

Required:

(a) Compare current and campaign contribution and profit at the forecasts. (4 marks)

(b) Calculate the revised-plan quantities for current-profit preservation and the target profit. Check capacity. (4 marks)

(c) Explain why evaluating only extra units at current margin is wrong. (2 marks)

A profit ratio target is not a fixed rupee target

Shreya Devices sells one adapter for ₹500 per unit. Variable cost is ₹300, so contribution is ₹200 per adapter. Annual fixed cost is ₹12,00,000. The business can make and sell at most 20,000 adapters per year, with no step-fixed expansion. There is no stock movement and all stated prices and cost rates hold throughout this capacity range. Ignore tax, interest and financing.

The board asks for operating profit equal to 15% of sales revenue. A trainee interprets this as 15% of contribution and uses a different sales target. The controller wants an equation using sales revenue as the specified base and a numerical check of the resulting profit margin. The current forecast is 8,000 adapters. The board also asks whether profit equal to 30% of sales can be achieved within capacity, and what maximum operating-profit percentage is possible at the capacity limit.

Use whole units for any operational target. A target ratio means profit divided by sales, not profit divided by cost or contribution. Keep fixed cost in the profit equation before solving; it does not become a percentage merely because the target is written as one. No other income or expense should be inserted.

Required:

(a) Solve for the 15%-of-sales profit target and verify it. (4 marks)

(b) Calculate forecast profit percentage and test feasibility of the 30% target. (4 marks)

(c) Calculate the maximum percentage at capacity and explain the denominator mistake. (2 marks)

Minimum customer commitments before ranking spare labour

Esha Furniture has 10,000 skilled labour hours for the coming month. It makes stools S and benches B. There is no other resource constraint, no inventory and no setup cost. Current unit economics are:

A customer service contract requires at least 2,000 stools to be delivered. This minimum is binding and must be honoured. No minimum applies to benches. Monthly fixed cost is ₹7,00,000 regardless of the mix. The contract creates no separate penalty because the question requires compliance rather than treating breach as an available alternative. All output must be whole units. Ignore tax.

Sales proposes ranking all hours by contribution per hour, then leaving the stool commitment until the end. Operations asks finance to reserve the compulsory production first, then optimise the remaining hours. A temporary worker can provide 200 extra skilled hours for ₹19,000 total, additional to all product variable costs. After the base plan these hours can make stools, whose remaining demand is sufficient. No other fixed expense changes.

Required:

(a) Calculate contribution per hour and reserve the contractual production. (3 marks)

(b) Prepare an optimal compliant plan and calculate total contribution and profit. (4 marks)

(c) Evaluate the extra hours and explain why a high-return ranking cannot override the minimum. (3 marks)

Two scarce resources and the limits of a single ranking

Prisha Tools can sell all output of products A and B up to 100 units each. A sells for ₹120 and has variable cost ₹90; B sells for ₹150 and has variable cost ₹110. Manufacturing A requires 2 machine hours and 1 skilled labour hour per unit. B requires 1 machine hour and 2 skilled labour hours. Next week's available capacity is 100 machine hours and 80 skilled labour hours. Both constraints must be met at once. Fixed weekly expense ₹1,000 is unchanged.

There are no minimum orders, setup charges, overtime or stock movements. Products are made only in whole units. Material is freely available and its cost is already in variable cost. Ignore tax. The planner ranks B first by contribution per machine hour and produces 40 B, using all labour, then says that this must be optimal. Finance asks for a comparison that also respects labour scarcity.

Evaluate the continuous intersection of the two resource constraints, check whether it is a feasible whole-unit plan, and compare it with the two single-product endpoints. Because both resource inequalities are binding candidates, a ranking using just one resource is not a sufficient general rule. The objective is total contribution; fixed cost is then charged to report profit.

Required:

(a) Write the contribution objective and resource constraints. (3 marks)

(b) Find the best plan by comparing the feasible corner points, and calculate profit. (5 marks)

(c) Explain why the machine-only ranking fails here. (2 marks)

Supplier inflation and a compensating selling price

Vaidehi Filters forecasts annual sales of 12,000 filters at ₹600 each. Variable cost is ₹360 per unit and fixed cost ₹18,00,000. Capacity is 16,000, there is no inventory movement, and all prices and cost behaviour are constant within this range. Ignore tax.

A supplier announces that variable cost will rise by 10% next year to ₹396. Fixed cost will remain ₹18,00,000. The sales team first proposes retaining the ₹600 price and volume forecast. It then asks what new selling price would preserve the present annual profit at 12,000 units. A separate option raises price only to ₹620; at this price demand is still 12,000, but management wants to know what whole-unit sales would be needed to preserve present profit if further demand could be obtained without changing cost rates.

The sales director applies the 10% cost rise to the whole selling price and proposes ₹660. Finance asks for a price bridge based on the rupee increase in variable cost rather than a blanket inflation percentage. For the price and volume alternatives, verify that the contribution equation uses the revised variable cost. No new fixed cost, commission or demand penalty arises in the numerical alternatives.

Required:

(a) Calculate present profit and revised profit at unchanged price and volume. (3 marks)

(b) Find the price that preserves present profit at 12,000 units and target volume at ₹620. (4 marks)

(c) Calculate break-even units at unchanged and compensating prices and assess the blanket percentage proposal. (3 marks)

Equipment replacement with book value separated from cash

Tanvi Components owns an old machine with book value ₹4,00,000. It can be sold today for ₹1,50,000. If retained, it has no scrap proceeds at the end of the coming two years. A new machine costs ₹6,00,000 cash today and will have ₹1,00,000 cash resale value at the end of those two years. It makes the same product at the same quality and capacity. All 20,000 units of forecast annual demand will be made and sold under either option.

Old-machine variable cost is ₹90 per unit; new-machine variable cost is ₹80. The new machine also needs ₹20,000 additional cash maintenance annually compared with the old machine. All other cash fixed costs, working capital, prices and revenue are identical and cancel. The two-year horizon is binding; ignore tax, interest and the time value of money. Do not charge depreciation as a cash outflow after already including machine purchase and resale cash flows.

The production manager argues that writing off the old book value makes replacement uneconomic. Finance requests a two-year incremental cash comparison, including sale proceeds sacrificed or received, and the annual volume at which replacement gives exactly the same undiscounted cash result as keeping. Volume is the same in both years, and any required whole-unit threshold must be rounded up.

Required:

(a) Calculate net capital cash cost and net two-year operating savings. (4 marks)

(b) Decide replacement and find the equal-result annual volume. (4 marks)

(c) Explain treatment of book value and limitations of this cash comparison. (2 marks)

Commission as a percentage of revenue and CVP assumptions

Mahi Audio sells a speaker at ₹1,000 per unit. Variable manufacturing cost is ₹550 and freight is ₹50 per unit. Sales agents receive commission equal to 5% of actual sales revenue. Annual fixed cost is ₹14,00,000. Current forecast is 6,000 units. Capacity is 8,000 with no fixed-cost step, production equals sales and there is no inventory. Ignore tax and financing.

A retailer proposes a 10% selling-price cut to ₹900 on all sales next year and forecasts 7,000 units. Commission remains 5% of revised actual revenue, while manufacturing and freight costs stay at ₹550 and ₹50 per unit. No separate campaign fee or additional fixed cost occurs. Management wants to preserve current profit if possible. Assume the revised price applies to every unit, not only units beyond current sales.

A trainee keeps commission at ₹50 per unit after the price cut and calculates a different contribution. Finance asks for a corrected cost build, a revised-plan target volume and a comment on the assumptions needed before any linear CVP forecast is treated as reliable. The proposal's 7,000-unit demand forecast and physical capacity are distinct checks: a feasible factory quantity does not prove that customers will buy it.

Required:

(a) Calculate current contribution, profit and break-even units. (3 marks)

(b) Calculate revised contribution and profit, and the whole-unit quantity needed to preserve current profit. Check capacity and forecast demand. (5 marks)

(c) Explain the commission error and state two CVP assumptions requiring evidence. (2 marks)