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100 RTP,M 04 1.40.500 1.25.000 The increase in .Scp Calubation 8.7 Contribution and Profit Analysis under different alternatives - Regular vs Substitute Materials A Company has a normal manufacturing capacity of 1,50,000 units of a product per annum. The actual costs based on this output achieved during the last year were as under - Direct Materials 36 Variable Overheads Direct Labour 20 Fixed Overheads 320 20 95,000 Sale Qtty (units) The budget for the next year envisages the following increases - Direct Materials 33 1/30% Variable Overheads Direct Labour 10% Fixed Overheads 5% 15% In view of the substantial increase in Material Costs, the Company explored the possibilities of using a substitute material . The Company has been able to identify a cheaper source of Direct Materials, which will cost * 40 per unit of output. The tests reveal that the use of cheaper Direct Material as above will make the following impact on the costs - Direct Labour Cost will increase by 1 per unit of output. It will lead to 5 % rejection in output. It will result in a final quality testing programme evaluating an additional Fixed Cost of 4,00,000. (a) = Given 1,90,000 1,70,000 1,50.000 1,40,000 1,25,000 1,10,000 95,000 Observation Direct Materi 136 160 125 The Selling Prices are estimateci as under for different levels of sales volume for the next year - Selling Price per unit ( ) 128 144 152 Demand (in 1,000 units) 190 170 150 140 168 110 176 95 Differ Henc the whe 1. Advise whether the Company should use the regular Direct Materials or cheaper Direct Materials to maximise its profitability by producing the normal volume of output. 2. Considering the range of Selling Prices estimated at different volumes of output, determine the selling price, which will maximize the profit, if - (A) Regular Direct Materials are used, and (B) Cheaper Materials are used, 3. Calculate for the Price selected by you in (2) above, the amount of Fixed Cost at which the Company will be indifferent in choice of Direct Materials. 1

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