AID13208: A company manufactures a single product in its factory utilizing 600% of its capacity. The selling price and cost details are given below

 150

SKU: 6da101abd840

Solution: Instant Downloadable

Note: You can download solution instantly after secured payment. We will activate download link manually if pay through PayTM or offline payment and it will take around one working hour.

Question: A company manufactures a single product in its factory utilizing 600% of its capacity. The selling price and cost details are given below:

  

Rs.

Sales (6,000 units)

5,40,000

Direct materials

96,000

Direct labour

1,20,000

Direct expenses

19,000

Fixed overheads:

 

Factory

2,00,000

Administration

21,000

Selling and Distribution

25,000

12.5% of factory overheads and 20% of selling and distribution overheads are variable with production and sales. Administrative overheads are wholly fixed. Since the existing product could not achieve budgeted level for two consecutive years, the Company decides to introduce a new product with marginal investment but largely using the existing plant and machinery.

The cost estimates of the new product are as follows:

Cost elements

Rs. per unit

Direct materials

16.00

Direct labour

15.00

Direct expenses

1.50

Variable factory overheads

2.00

Variable selling and distribution overheads

1.50

It is expected that 2,000 units of the new product can be sold at a price of Rs. 60 per unit. The fixed factory overheads are expected to increase by 10%, while fixed selling and distribution expenses will go up by Rs. 12,500 annually. Administrative overheads remain unchanged.

However, there will be an increase of working capital to the extent of Rs. 75,000, which would take the total cost of the project to Rs. 8.75 lakh.

The company considers that 20% pre-tax and interest return on investment is the minimum acceptable to justify any new investment.

You are required to

(a) Decide whether the new product be introduced.

(b) Make any further observation/recommendations about profitability of the company on the basis of the above data, after making assumption that the present investment is Rs. 8 lakh.

Answer: Buy Assignment single Question Answer and you can download solution instantly.

Answer Blurr Actual Answer after purchase