Differential Cost Analysis Ex 1,2,3,4,6,7

7/28/2019 Differential Cost Analysis Ex 1,2,3,4,6,7

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Differential cost Analysis / Decision Making

Solution of Exercise No. 01

Req: 1Differential cost between 80% level of activity and 90% level of activity

Normal Capacity 90,000 units (100% level of activity)=========

At 90% Level of activity (90,000 units x 90%) 81,000 unitsAt 80% Level of activity (90,000 units x 80%) 72,000 units

Differential units 9,000 units

Differential Cost = 9,000 units x 12 variable production cost

Differential Cost = 108,000======

Req: 2

Differential cost of producing 5,000 units

Additional cost incurred in fixed cost = 10,000Variable cost (5,000 units x 12) = 60,000

Differential cost = 70,000=======

Req: 3

Per unit cost of 95,000 units

Variable cost (95,000 units x 12) = 1,140,000Fixed Cost (240,000 + 10,000) = 250,000

Total Cost incurred = 1,390,000=========

Per unit cost = 1,390,000 = 14.6395,000 units

Req: 4

Per unit differential production cost of 5,000 units

Per unit differential cost = 70,000 = 145,000 units

Solution of Ex. 2:

Required No. 1: Average annual differential Cost for the first 5 years (includingincome tax):

Cost of merchandise = 385,000Depreciation of equipment = 30,000Marketing Expenses = 10,000Differential ware house rent = 25,000

Cost excluding Income Tax = 450,000 Amount of Income Tax:

Sales revenue = 500,000Less: Cost of sales = (450,000)INCOME = 50,000

Income Tax (50,000 x 46%) = 23,000 AVERAGE ANNUAL DIFFERENTIAL COST FORTHE FIRST 5 YEARS = 473,000

========

Required No. 2: Minimum Annual net incomeMinimum Annual net income = (Investment in the proposal / 2) x rate of return

= (Rs. 150,000 / 2) = Rs. 75,000 x 11%= Rs. 8,250

=======

Required No.3: Estimated annual differential income:Differential Sales revenue = 500,000Less: Differential cost (including income tax) = 473,000

Rate of return required = 8,250 = (481,250)ESTIMATED ANNUAL DIFFERENTIAL

INCOME = 18,750=========

Required No. 4: Estimated Cash flow during third year:

Cash Inflows:Sales revenue = Rs. 500,000

Cash Outflows:Differential Cost = 473,000Less: Non Cash expenses:

Depreciation Exp. = (30,000) = Rs. 443,000ESTIMATED CASH INFLOW DURING THIRD YEAR = Rs. 57,000

===========

Solution of Ex. 3

ABC Company

Projected Income StatementFor the period ended ---

Sales (5,000 kgs. X 1.80) = 9,000

Less: Cost of goods sold:

Direct material used (0.6 + 0.01 = 0.61 x 5,000 kgs.) = 3,050

Direct Labor used (0.5 x 5000 kgs.) = 2,500

Factory Overhead – Variable Cost :

Indirect labor (0.2 x 5,000 kgs.) = 1,000Power (0.02 x 5,000 kgs.) = 100Supplies (0.02 x 5,000 kgs.) = 100Maintenance and

Repair (0.027 x 5,000 kgs.)= 135Insurance (0.007 x 5,000 kgs.) = 35

Additional Cost incurred to accept an order Additional payroll taxes = 210Depreciation on new machine(3,000 / 24 months) = 125 = 335 = 1,705

COST OF GOODS SOLD = (7,255)Gross margin to accept an order = 1,745

=======

Note: All per unit rates are calculated on the basis of 30,000 units.

Solution of Ex. 4

Req 1:

Conclusion:The company should accept a special order, because it is currently workingbelow 100% normal capacity i.e. 62.5% and from this order it will cover thevariable manufacturing cost.

Working No. 1Sales price per unit = Rs. 10.00

Less: Variable Manufacturing costDirect Material = 5.00Direct Labor = 3.00Variable FOH cost = 0.75 = (Rs. 8.75)

Gross contribution margin = Rs. 1.25=========

Working No. 2 Contribution margin = Rs. 1.25Less: Variable marketing expenses = (Rs. 0.25)

Net contribution margin = Re. 01=========

Req 2:The company will pay at most Rs. 8.75 to outside supplier because it covers thevariable manufacturing cost.

Req 3:

Where direct costing is involved the unit cost will be Rs. 8.75 because it isvariable cost of manufacturing a product.

Req 4:

Contribution margin at present level of activity:Sales price = Rs. 15Variable cost = Rs. 09Contribution margin = Rs. 6 x 10,000 units = Rs. 60,000

Contribution margin at increase level of activity 10%:Sales price = Rs. 14Variable cost = Rs. 09Contribution margin = Rs. 5 x 11,000 units = Rs. 55,000

Reduction on contribution margin = Rs. 5,000=========

Solution of Ex. 7

Req 1:

Relevant cost per unit Part A4 Part B5

Direct Material 0.40 8.00Direct Labor 1.00 4.70Variable Factory overhead (40%) 1.60 0.80

Relevant Cost per unit 3.00 13.50 === ====

Req 2:

Part A4 Part B5

Purchase price per unit 5.00 15.00Relevant unit cost (3.00) (13.50)Potential saving per unit on production 2.00 1.50Machine hour required for production 4 hours 2 hours

Potential saving per unit per machine hour 2 / 4 = 0.5 1.5 / 2 = 0.75

Available Idle machine hours = 30,000 hoursUsed in production Part B5 (8,000 units x 2 hours per unit) = 16,000 hours

Available hours for the production of Part A4 = 14,000 hours============

Units required of Part A4 = 6,000 units.Per unit required machine hours = 4 hours

Available hours = 14,000 hours Available hours used in production of Part A4

(14,000 hours / 4 hours per unit) = 3,500 units

Total units needed = 6,000 unitsUnits produced for available hours = 3,500 units

Purchase from outsider = 2,500 units==========

Solution of Exercise No. 10:

ALTERNATIVE “A”

Ex Present Variable Cost:Variable Cost to manufacture= Rs. 285,000Variable Cost of Expenses = Rs. 270,000 = Rs 555,000

Ex Proposed Variable Cost: (52% of Sales revenue)Sales Revenue = Rs. 925,000New Variable Cost ===========

(Rs. 925,000 x 52%) = (Rs. 481,000)REDUCTION IN VARIABLE COST = Rs. 74,000

Ex Present Fixed Cost:Fixed Cost to manufacture = Rs. 304,200Fixed Cost of Expenses = Rs. 125,800 = Rs 430,000

New Fixed Cost = Rs. 480,000

INCREASE IN FIXED COST = Rs. 50,000ADVANTAGE IN ALTERNATIVE A = Rs. 24,000

==========ALTERNATIVE “B”

Zee revenue increase by 50%, which also increase the Zee variable cost by50%

Incremental Zee Revenue (Rs. 575,000 x 50%) = Rs. 287,500Less: Incremental Zee Variable cost

Variable Cost (Rs. 150,000+Rs. 80,000)= Rs. 230,000 x 50% = Rs. 115,000

ZEE Incremental Contribution Margin = Rs. 172,500Add: Rental income from space used for Ex product = Rs. 157,500

Reduction in fixed cost due to discontinuation = Rs. 30,000BENEFIT IN PRODUCTION OF ZEE = Rs. 360,000

Reduction in Ex revenue due discontinuation = Rs. 925,000Less: Ex Variable Cost = Rs. (555,000)

Reduction in Ex- Contribution margin = Rs. 370,000DISADVANTAGE IN ALTERNATIVE “B” = Rs. 10,000

============

Differential Cost Analysis Ex 1,2,3,4,6,7

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