Following data are provided by Mahi Ltd. : Particulars Product-Kau (₹) Product-Vau (₹) Direct material @ ₹ 25 per kg. 250 200 Direct labour @ ₹ 48 per hour 240 168 Selling Price 900 667 Variable overheads charged @ ₹ 30
CS Executive · Corporate and Management Accounting · PYQS · June 2019
Following data are provided by Mahi Ltd. : Particulars Product-Kau (₹) Product-Vau (₹) Direct material @ ₹ 25 per kg. 250 200 Direct labour @ ₹ 48 per hour 240 168 Selling Price 900 667 Variable overheads charged @ ₹ 30 per hour Raka, Managing Director, would like to decide which product to manufacture in the following circumstances: (1) If the monsoon is not up to the mark, in such circumstances the scarcity of raw material is expected for both products. (2) On account of e-marketing the sales volume may be a constraint. You are required to assist him in decision making, by considering both the situations in isolation.
Answer & Explanation:
Calculation of Contribution per unit and P/V Ratio Particulars Product-Kau (Rs.) Product-Vau (Rs.) Direct Material @ ₹ 25 per kg 250 200 Direct labour @ ₹ 48 per hour 240 168 Variable Overheads @ ₹ 30 per hour 150 105 Variable cost per unit 640 473 Selling price per unit 900 667 Contribution per unit 260 194 P/V Ratio (Contribution/selling price) 28.89% 29.09% Decision Making: (1) Direct material is the key factor (Scarcity of raw material) Direct material per unit for Kau = 250 / 25 = 10 kg Direct material per unit for Vau = 200 / 25 = 8 kg Contribution per kg for Kau = ₹ 260 / 10 = ₹ 26 Contribution per kg for Vau = ₹ 194 / 8 = ₹ 24.25 Since Product Kau has a higher contribution per kg (₹ 26) compared to Product Vau (₹ 24.25), Product Kau is recommended when raw material is scarce. (2) Sales volume is key factor (Sales volume constraint) Contribution per unit of Product Kau = ₹ 260 Contribution per unit of Product Vau = ₹ 194 Since the contribution per unit of Product Kau (₹ 260) is more than that of Product Vau (₹ 194), Product Kau is recommended when sales volume is a constraint.
Topics: Cost Accounting
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