Academic Year: 2025-26

Department of Costing
Class: S.Y. B. Com; Semester: IV
Subject: Costing For Decision-Making- Major 7
Chapter – II: Costing For Short-Term Decision-making

Compilation of Problems
Contents of the Chapter:
▪ Introduction to Relevant Cost Principle and Different Cost Types
▪ Make or Buy Decisions
▪ Quoting for a Special Order or Contract
▪ Expand or Contract
▪ Accepting or Rejecting an Export Order
▪ Change Vs Status Quo
▪ Retain or Replace
▪ Ideal Product-Mix with Limiting Factor
▪ Discontinue or Continue Product
▪ Shut-down or Continue Plant

Common Cost Concepts used in Short-term Decisions:

▪ Marginal Cost
▪ Out of Pocket Cost
▪ Differential Cost
▪ Sunk Cost
▪ Opportunity Cost
▪ Imputed/Notional Cost
▪ Avoidable Cost and Unavoidable Cost
▪ Relevant Cost and Irrelevant Cost
▪ Replacement Cost

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2.2] Make or Buy Decisions
Factors to be Considered: 1] Cost, 2] Quality, 3] Capacity, 4] Strategic Goals, 5] Competition, 6]
Technology, 7] Number of Suppliers, 8] Core Competency etc.
1] SY Costing Limited is an automobile company finds that while it costs to make component
- Plug, the same is available in the market at ₹575 each, with all assurance of continued supply.
The breakdown of cost per unit is as follows;
Particulars Amount
Materials ₹275
Labours ₹175
Variable Overheads ₹50
Depreciation and Other Fixed Cost ₹125
Total ₹625
Required:
A. Should the company make or buy the component?
B. What should be your decision if the supplier offered component at ₹485 each?
2] Symbi Auto Parts Limited has an annual production of 90,000 units for a motor component.
The per unit cost structure of component is as follows;
Particulars Amount
Materials ₹540
Labours (25% Fixed) ₹360
Variable Expenses ₹180
Fixed Cost ₹270
Total ₹1350
Required:
A. The Purchase Manager has an offer from a supplier who is willing to supply the
component at ₹1080. Should the component be purchased and production stopped?
B. Assume the resources now used for this components manufacture are to be used to
produce another new product for which the selling price is ₹970.
In the latter case material price will be ₹400 per unit. The same number of units of this
product can be produced at a similar cost basis, with equivalent labour and variable expenses.
Discuss whether it would be advisable to divert the resources to manufacture that new product,
on the footing that the component presently being produced would, instead of being produced,
be purchased from the market?
3] SMART-SYNEP Private Limited is currently buying a component from a local supplier at
₹45 each. The supply is tending to be irregular. Two proposals are under consideration;
1. Buy and install a Semi-automatic machine for manufacturing this component, which
would involve an annual Fixed Cost of ₹27,00,000 and a Variable Cost of ₹18 per
manufactured component.
2. Buy and install an Automatic machine for manufacturing this component, incurring an
annual Fixed Cost of ₹45,00,000 and a Variable Cost of ₹15 per manufactured
component.
Determine, with necessary computations:
A. The annual volume required, in each case, to justify a switch over from ‘Outside
Purchase’ to ‘Own Manufacture.’
B. The annual volume required to justify selection of the Automatic machine instead of
the Semi-automatic machine.

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 C. If the annual requirement of the Company for a year is expected to be 5,00,000 numbers
and the volume is expected to increase rapidly thereafter, would you recommend the
Automatic or Semi-automatic machine? Justify your recommendation.

Case: Strategic Outsourcing [Make or Buy]

SKF Ltd., Pune is a manufacturing company engaged in the manufacturing of
regulators. They have been in the business for last 3 years and have been manufacturing only
one type of regulators. They started their business initially with sales of 10,000 regulators per
month and now they have grown the volume to about 50,000 regulators per month. They have
been buying all the raw material for the regulator and were doing all the manufacturing in-
house. Now they have established themselves in the market and are planning to expand and
produce different varieties of regulators. They have their plant in the main city and the total
area of the plant is 50,000 sq. ft. Now if they want to expand and continue doing all the activities
of manufacturing of all the varieties in-house, they would need another 50,000 sq. ft. of the
area. In the recent times, the land prices in the area have more than doubled in the last 3 years
and still land is available with great difficulty. Mr. Prakash is the production head of SKF Ltd.
and has been successful with the production and the level is continuously increasing. But in
recent times, he is facing the problem of quality complaints which have gone up from average
0.2 % in previous 2 years to 0.5 % this year. Also, he is finding that there is a high level of
dissatisfaction among the workers regarding workload as well as salary levels. The workers are
regularly complaining about the over work.
Although, Mr. Prakash has found that the workers have been spending lot of time on
tea breaks, lunch breaks and even in between the production, spending lot of time talking to
each other. But, due to insufficient workers and staff, he is unable to take strict action and the
workers are taking advantage of this situation. For completing the work and delivering the
products timely, he has to employ workers on overtime and his overtime cost has also increased
3 times. Mr. Prakash is worried about the new expansion plan of the management and is worried
where the new workers would come from as he is already finding shortage of workers for the
existing job. He has requested the management not to go for expansion immediately and look
at improving and consolidating the existing set up. He has sent his request to Mr. Oberoy,
Director – Operations.
Mr. Oberoy has gone through the request of Mr. Prakash and called a meeting of all the
department heads and explained the situation to all concerned. Mr. Mangesh, Marketing
Manager has expressed very bullish prospect about the company’s growth and said that the
company should take advantage of growing economy and established brand image of the
company and definitely go for expansion. Mr. Francis, Finance Manager also expressed that
this will result in economy of scale for the products and will further increase the profitability
of the products. Mr. Prakash again expressed his problems regarding availability of manpower
as well as production control and effect on quality and productivity. Mr. Mangesh asked Mr.
Prakash about the option of outsourcing. Mr. Prakash is skeptical about the outsourcing option
as he felt that the outside agency will always charge more as he will try to make his profit as
well and also is worried about the possible problems of deliveries. Mr. Oberoy asked the Mr.
Balkrishna who is the Purchase Manager about his views. He said that since the suppliers would

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also be interested in doing the business, they would not like to delay as with delay they also
incur loss. Mr. Francis said that we can look at cost comparison for buying against in-house
manufacturing.
After listening to all the views, Mr. Oberoy told Mr. Prakash to work out the cost of
production for future sales as per the forecast given by the Marketing department. He also told
Mr. Balkrishna to collect the details of the future requirements to get the purchase cost details
for few components of the regulators.
Mr. Prakash and Mr. Balkrishna have collected their data and they have presented the
data in the meeting called by Mr. Oberoy to review the plan. First the Mr. Mangesh, Marketing
Manager presented his market forecast and then Mr. Prakash presented his report and
explained the details as follows;
▪ One Supervisor with monthly salary of Rs. 5000 with expected increase of 10 % per
year.
▪ Direct Wages of worker as Rs. 4 per unit. With 10% reduction in second year, no change
in 3rd year and increase of 10 % every subsequent year.
▪ Material Cost of Rs. 14 per unit with an increase of 10 % every year.
▪ Power and Fuel Cost of Rs. 2 per unit with increase of 10 % every year.
▪ Indirect labour as 50% of Direct Labour.
▪ They will have to buy a new machine with a cost of Rs. 50 lacs with usable life of 5
years.
Mr. Balkrishna explained his details as follows:
▪ Component Price from supplier at Rs. 20 for the first 2 years with an increase of 10%
every subsequent year.
▪ Transportation Cost of Rs. 2 per unit for the first year with increase of Rs. 0.20 every
subsequent year.
▪ Inventory Cost (Storage Cost) as 5% per year of the Basic Material Cost.
The Mangesh has given the sales forecast for next 5 years as follows:
Year 1 2 3 4 5
Sales Quantity 3,00,000 5,00,000 7,00,000 9,00,000 10,00,000

Questions:
1. Based on this data, is it economical for SKF Ltd. to go for buying the product from
market or manufacturing in-house?
2. What other factors should SKF Ltd. look at for making this decision?

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2.3] Quoting for a Special Order or Contract
Factors to be Considered: 1] Elements’ Cost and Availability, 2] Excess Capacity, 3] Impact on Regular
Customers, 4] Long-term implications, 5] Desired profit margin, 6] Relevant cost etc.
4] A company has prepared the following budget for the year;
Levels of Activity
Particulars
60% (₹) 80% (₹)
Raw Material 30,00,000 40,00,000
Direct Wages 18,00,000 24,00,000
Factory Overheads 32,00,000 36,00,000
Total 80,00,000 1,00,00,000
The policy of the company is to charge 25% on Variable Cost to cover profit. Raw
Material is in short supply and the company wants to utilise its available supply of raw materials
in an optimum manner. Planned operating capacity is 80%. The company has to execute a job
as per details given below; Raw Material – ₹40,000 and Direct Wages – ₹30,000
You are required to quote the price of the job in accordance with the policy of the
company.
5] A manufacturing company has excess capacity up to 1,20,000 units per month of a product.
The company has been approached by a customer ACCA to quote for three levels of monthly
O/P of 75,000, 90,000 and 1,05,000 units. The Cost Per Unit of the product is as under;
Raw Material ₹0.45
Direct Wages ₹0.18
Manufacturing Overheads – Fixed 200% of Direct Wages
Selling and Administration Overheads 100% of Direct Wages
Packing PU ₹0.15
Profit margin on Total Costs: 15.0% for 75,000 units, 12.5% for 90,000 units and
10.0% for 1,05,000 units.
The Administrative Overheads are forecast at ₹18,750 PM. If the O/P drops to 75,000
units and below, a saving in Administration Cost of ₹1500 PM will be made. If the contract
from ACCA does not materialize an Administration Overheads of ₹900 PM will be incurred.
Another customer, SCLA has also approached the company for quotation for a different
version of the product. The quantity required of this product is 90,000 units PM. The data
relating to this contract are as under;
Selling Price (PU) ₹1.80
Raw Material (PU) ₹0.60
Direct Wages (PU) ₹0.22
Packing (PU) ₹0.18
Required;
1. Calculate the unit selling prices of three levels of O/P of the contract relating to
ACCA.
2. Prepare comparative statement of profitability at different levels of O/P as
envisaged in the two contracts of ACCA and SCLA.
3. Advise which contract is acceptable to the company.

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C] Expand or Contract
Factors to be Considered: 1] Cost Analysis, 2] Market Analysis, 3] Relevant Cost Analysis etc.
6] Product X of De Costa and Company has not achieved the customer acceptance expected
and the company has excess production capacity. In search of a new product to produce with
existing facilities, the company has narrowed its study to two: Product Y and Product Z. The
relevant data is given below;
Particulars Product Y Product Z
Selling Price (₹ PU) Rs. 20.00 Rs. 2.50
Variable Cost - Direct Material 10.00 0.80
Direct Labour 3.00 0.45
Variable Factory Overhead 1.00 0.15
Variable Selling Overhead 2.00 0.50
Total Variable Cost (TVC – PU) 16.00 1.90
Fixed Selling Overhead 6,000 10,000
The current fixed Factory Overhead of Rs. 15,000 p.a. and fixed selling overhead of
Rs. 5,000 p.a. would not be affected and are not relevant. The company has sufficient excess
capacity to produce 4,000 units of Product Y or 30,000 units of Product Z. Market studies
indicate that these units may be sold at the planned market prices.
Which product should be added?
7] X Ltd. has two factories – A and B. A is running at 70% of installed capacity (Installed
capacity is 12,000 units) and B Factory supplies its requirements by working at 80% of its
installed capacity. The cost structure of the B factory is given below:
• Materials Rs. 16,800
• Labour Rs. 6,000
• Apportioned Fixed Overheads Rs. 7,500
• Variable Overheads Rs. 4,200
• Total Rs. 34,500
The production of A factory is to be increased to 80% capacity. The component produced in B
factory can be purchased from the market at Rs. 4.00 per unit. As the cost of B factory exceeds
Rs. 4 per unit, it is proposed to obtain the additional requirement from the market instead of
getting it from B factory.
Advise the management.

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D] Accept or Reject an Export Order
Factors to be Considered: 1] Cost Analysis, 2] Price Analysis, 3] Capacity Utilisation Analysis, 4] Fixed Cost etc.
8] Due to industrial depression, a plant is running at present at 50% of the capacity. The
following details are available:
Particulars Cost of Production per unit [₹]
Direct Materials ₹2
Direct Labour ₹1
Variable Overhead ₹3
Fixed Overhead ₹2
Total ₹8
Additional Information:
• Production Per Month: 20,000 Units
• Total Cost of Production: ₹1,60,000
• Sale Price: ₹1,40,000
• Loss: ₹20,000
An exporter offers to buy 5000 units per month at the rate of ₹6.50 per unit and the
company is hesitant to accept the order for fear of increasing its already large operating losses.
Advise whether the company should accept or decline this offer.
9] A Co. manufacturing electric part at a price of ₹6900 each, made up as under;
Particulars Amount
Direct Material 3200
Direct Labour 400
Variable Overheads 1000
Fixed Overheads 200
Depreciation 200
Variable Selling Overheads 100
Royalty 200
Profit 1000
6300
Excise Duty 600
Selling Price Per Unit 6900
1. A foreign buyer has offered to buy 200 such electric parts at ₹5000 each. As a Cost
Accountant of the company would you advise acceptance of the offer?
2. What should the company quote for an electric part to be purchased by a co. under
the same management if it should be at cost?
10] SCAC Ltd. having an installed capacity of one lac units of a product is currently operating
at 70% utilisation. At current level of input prices, the Free-On-Board [FOB] costs per unit,
taking credit for applicable export incentive workout as follows;
Capacity Utilization 70% 80% 90% 100%
FOB Cost Per Unit 97 92 87 82
The company has received three foreign offers as under;
Source A 5000 units @ ₹55 per unit FOB
Source B 10000 units @ ₹52 per unit FOB
Source C 10000 units @ ₹51 per unit FOB
Required: Advice the company whether it should accept any or all of the export orders.

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11] A Co. currently operating at 80% capacity has the following profitability particulars:
Particulars Amount
Sales 12,80,000
Less: Cost
• Direct Materials 4,00,000
• Direct Labour 1,60,000
• Variable Overheads 80,000
• Fixed Overheads 5,20,000
Profit 1,20,000
An export order has been received that would utilise half the capacity of the factory.
The order has either to be taken in full and executed at 10% below the normal domestic prices,
or rejected totally. The alternatives available to the management are given below:
a) Reject order and Continue with the domestic sales only, as at present;
b) Accept; order, split capacity equally between overseas and domestic sales and turn
away excess domestic demand;
c) Increase capacity so as to accept the export order and maintain the present domestic
sales by:
(i) buying an equipment that will increase capacity by 10% and fixed cost by ₹40,000
and
(ii) Work overtime at one and a half the normal rate to meet balance of required
capacity. Prepare comparative statements of profitability and suggest the best.

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E] Change Vs. Status Quo
Factors to be Considered: 1] Status Quo Bias, 2] Benefit Evaluation, 3] Cost Analysis, 4]
Magnitude of potential cost savings, 5] Implementation costs, 6] Risk of disruption etc.
11] A Company has decided to open a Branch sales Office. Clerical Work connected with filing
orders and billing customers will be done in this office and the company is studying various
possible methods for accomplishing this work in order to find the most economical one. The
following two methods are for consideration:
Particulars Method - A Method - B
Cost of Equipment (A- Manual; B-Automatic) ₹2,000 ₹15000
Life (Years) 10 10
Repairs and Maintenance Per Annum ₹50 ₹100
No. of Clerks Required 03 02
Annual Salaries of Each Clerk/Machines Operator ₹3,000 ₹3,500
In case of Method A, any increase in the present volume of work will require an
additional clerk. The cost of supplies is Rs. 100 p.a. In case of Method B, two clerks can handle
double the present volume of work and the only added expenses will be for additional paper,
forms and similar supplies. Rate of interest is 8% on the average amount invested in the
equipment during its expected life.
12] A review made by the top management of Extra-Curious SY Ltd., which makes only one
product, of the result of the first quarter of the year revealed the following;
Particulars Amount
Sale (In Units) 10,000
Loss ₹10,000
Fixed Cost (for the year ₹1,20,000) ₹30,000
Variable Cost Per Unit ₹8
The Finance Manager who feels perturbed suggests that the company should at least
break-even the second quarter with a drive for increased sales. Towards this, the company
should introduce a better packing which will increase the cost by ₹0.75 per unit.
The Sales Manager has an alternative proposal. For the second quarter additional sales
promotion expenses can be increased to the extent of ₹5000 and a profit of ₹5000 can be aimed
at during the period with increased sales.
The Production Manager feels otherwise. To improve the demand, the selling price per
unit has to be reduced by 3%. As a result, the sales volume can be increased to attain a profit
level of ₹4000 for the quarter.
The Managing Director asks you as a Cost Accountant to evaluate the three
proposals in order to help him to take a decision regarding change in strategy or continue
the same.
13] Symbi Ltd. manufactures and markets hot plates. During the first five years of operations,
the company has experienced a gradual increase in sales volume, and the current annual growth
in sales of 5% is expected to continue in the foreseeable future. The plant is now producing at
its full capacity of one lakh hot plates.

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 At the monthly Management Advisory Committee Meeting, amongst other things, the
plan of action for next year was discussed. Managing Director proposed two alternatives. First,
operations could be continued at full capacity and with the existing facilities, an output of one
lakh hot plates at a selling price of ₹100 per plate per unit could be maintained. Secondly,
production and sales could be increased by 5% to take advantage of the rate of expansion in
demand for the product. But this could increase cost, as to achieve the output, the company
will have to resort to weekend and over time workings. However, a policy of steady growth
was preferable to maintaining status quo.
In view of the company’s competitors having a substantial share of the market, the
Works Director was of the view that it was not enough for the company to maintain merely the
present share of the total market. A large share of the total market should be obtained. For that,
the company should increase production by 10% through a modest expansion of the plant
capacity. In order to sell the output of 1,10,000 units the selling price could be reduced to ₹95
per unit.
Thinking on the same lines, the Marketing Director put forth a more radical proposal.
The strategy should be to seize the competitive leadership in the market with regard to both
price and volume. With this end in view, he suggested that the company should straightaway
embark on an expensive modernisation programme, which will initially increase volume by
20%. The entire output of 1,20,000 hot plates could be easily sold at a price of ₹90 per unit.
At this juncture, the Managing Director expressed concern about the probable
behaviour of the company’s competitors. They might also expand in order to produce more and
sell at lower prices. Suppose this happened, he wanted also the financial effects of the proposals
of the Works Director and Marketing Director, if in these proposals, the expected increase in
sales were to be only half of that predicted.
As a Cost Accountant of the company, you are required to critically evaluate the six
alternatives along with your recommendations and circulate the same to the Directors. In this
connection, you have gathered the following details:
1. If next year’s production was maintained at the current year’s level, variable cost would
remain at ₹50 per unit. Fixed cost would remain unchanged at ₹30 lakhs.
2. The week-end and overtime working would increase with the variable and fixed costs.
Variable cost would rise to ₹55 per unit while fixed cost would increase to ₹30,25,000.
3. In the proposal of the Works Director, the ratio of variable costs to sales would continue
to be 50%. Fixed costs would rise to ₹32,25,000.
4. In the proposal of Marketing Director, as a result of increased production, efficiency and
some savings from purchase of materials, it is estimated that the ratio of variable cost of
sales would decrease to 48% and the fixed costs would increase by ₹5,16,000.
Your answer should contain:
a. A tabular statement of comparative figures pertaining to total turnover, total contribution,
Percentage of Profit to Sales and Breakeven units as regard to each of the six proposals.
b. Comments on the relative risk involved.
c. Consideration of the short-term and long-term implications of the Managing Director’s
proposals.
d. Comment on financial implications of the expansion scheme.

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F] Retain Vs. Replace
Factors to be Considered: 1] Relevant Costs, 2] Differential Analysis, 3] Remaining Useful
Life of the Current Asset, 4] Technological Advancements, 5] Impact on Production Quality, 6]
Environmental Impact Etc.
14] A company owns a machine which was purchased three years ago for ₹18,000.
Depreciation based on useful life of six years with no salvage value has been recorded each
year. The present written down value of equipment is ₹9000. Management is considering
replacing this machine with a new machine which will reduce the variable operating costs. The
new machine will cost ₹7000 and will have expected life of three years with no scrap value.
The variable operating costs are ₹0.30 per unit of output for the old machine and ₹0.20 per unit
for the new machine. It is expected that both the machines will be operated at their maximum
capacity of 20,000 units p.a. The current disposal or sale value of the old machinery is ₹4000.
Should the company retain or replace? Assume (exclusively for simplicity) that ₹1
of cash inflow or outflow in year 1 is equal to ₹1 of each outflow in say year 3.
15] CostSym Ltd. is considering replacing an old machine with a new one. Details about the
old machine and the new machine are as follows:
Old Machine
Original Cost ₹10,00,000
Depreciated Amount ₹8,00,000
Remaining Useful Life 3 years
Current Disposal Value ₹10,000
Disposal Value After 3 Years Nil
New Machine
Current Purchase Cost ₹3,00,000
Useful Life 3 years
Disposal Value After 3 Years ₹60,000
The new machine can reduce operating costs by ₹80,000 per annum.
Should the company retain or replace?
16] The following facts related to two machines of Symbiosis Costing Ltd.:
Particulars Current Machine New Machine
Capital Cost ₹10,00,000 ₹40,00,000
Marginal Cost Per Unit ₹60 ₹52
Selling Price Per Unit ₹120 ₹120
Fixed Expenses ₹1,00,000 ₹4,00,000
Annual Output (Units) 20,000 40,000
Life Of Machines (Years) 10 10
The existing machine has worked for 5 years. Its present resale value is ₹4,00,000. The scrap
value of the machine may be taken as nil.
Advise whether new machine should be installed if rate of interest is 10 %.

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17] SYMCOST Corporation has just today paid for and installed a special machine for
polishing cars at one of its prestigious outlets. It is the first day of the company’s fiscal year.
The machine costs ₹20,000. Its annual operating costs total ₹15,000 exclusive of depreciation.
The machine will have a four-year useful life and a zero terminal disposal value.
After the machine has been used for one day, a machine salesman walks in. He offers a
different machine that promises to do the same job at a yearly operating cost of ₹9,000,
exclusive of depreciation. The new machine will cost ₹24,000 in cash, duly installed. The “old”
machine is unique and can be sold outright for only ₹10,000 minus ₹2,000 removal costs. The
new machine, like the old one, will have a four-year useful life and zero terminal disposal
value.
Sales, all in cash, will be ₹1,50,000 annually and other cash costs will be ₹1,10,000
annually, regardless of this decision.
For simplicity, ignore income taxes, interest and present considerations.
Required:
1. Prepare a statement of Cash Receipts and Disbursements for each of the four years under
both alternatives. What is the cumulative difference in cash flows for the four years taken
together?
2. Prepare Income Statements for each of the four years under both alternatives. Assume
straight-line depreciation. What is the cumulative difference in operating income for the
four years taken together?

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F] Ideal Product-Mix with Limiting Factor
Factors to be Considered: 1] Contribution Margin Analysis, 2] Prioritizing Production, 3]
Identify the Limiting Factor, 4] Market Demand, 5] Qualitative Factors etc.
18] SYMBCOM Ltd is manufacturing three household products – A, B and C and selling them
in a competitive market. Details of current demand, selling price and cost structure are given
below.
Particulars A B C
Expected Demand [Units] 10,000 12,000 20,000
Selling Price Per Unit - ₹ 20 16 10
Variable Costs Per Unit
• Direct Materials - ₹10 per k.g. 6 4 2
• Direct Labour - ₹15/hr. 3 3 1.5
• Variable Overheads - ₹ 2 1 1
Fixed Overheads Per Unit - ₹ 5 4 2
The company is frequently affected by acute scarcity of raw material and high labour
turnover. During the next period, it is expected to have one of the following situations:
A) Raw material available will be only 12,100 kg.
B) Direct labour hours available will be only 5000 hours.
C) It may be possible to increase sales of any one product by 25% without any additional
fixed cost, but by spending ₹20,000 on advertisement. There will be no shortage of
materials or labour.
Suggest the best production plan in each case and the resultant profit that the company
would earn according to your suggestion.
19] A company manufacture three products. The budgeted quantity, selling prices and unit cost
are as under:
Particulars Product - A Product - B Product - C
Raw Materials [₹20 Per K.g.] ₹80 ₹40 ₹20
Direct Wages [₹5 Per Hr.] ₹5 ₹15 ₹10
Variable Overheads ₹10 ₹30 ₹20
Fixed Overheads ₹9 ₹22 ₹18
Budgeted Production [Units] 6400 3200 2400
Selling Price Per Unit ₹140 ₹120 ₹90
Required:
1. Present statement of profit.
2. Set optimal Product Mix and determine the profit if the supply of raw materials is
restricted to 18,400 k.g.

20] The Cost Accountant of a company running an orchard with an adequate supply of labour,
presents the following data and request you to advise about the area to be allotted for the
cultivation of various types of fruits, which would result in maximisation of profits. The
company contemplates growing Apples, Lemons, Oranges and Peaches.

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 Particulars Apples Lemons Oranges Peaches
Selling Price Per Box 15₹ 15₹ 30₹ 45₹
Season’s Yield In Boxes Per Acre 500 150 100 200
Cost: Material Per Acre 270₹ 105₹ 90₹ 150₹
Labour: 1] Growing Per Acre 300₹ 225₹ 150₹ 195₹
2] Picking and Packing Per Box 1.5₹ 1.5₹ 3₹ 4.5₹
Transport Per Box 3₹ 3₹ 1.5₹ 4.5₹
The total fixed cost in each season would be ₹2,10,000. The following limitations are also
placed before you:
1. The area available is 450 acres, but out of this 300 acres are suitable for growing only
oranges and lemons. The balance of 150 acres is suitable for growing any of the four
fruits.
2. As the produce may be hypothecated to banks, area allotted for any fruit should be
demarcated in complete acres and not in fractions of an acre.
3. The marketing strategy of the company requires the compulsory production of all the
four types of fruits in a season and the minimum quantity of one type to be 18,000
boxes.
Calculate the total profit that would you if your advice is followed

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G] Discontinue or Continue Product
Factors to be Considered: 1] Relevant Cost, 2] Contribution Margin, 3] Impact on other
Products, 4] Opportunity Cost, 5] Impact on Customer, 6] Market Conditions, 7] Strategic
Considerations etc.

21] Honours Corporation wants to evaluate the potential elimination of Division C. The basic
information regarding costs and revenue is given below;
Particulars Div. A & B Div. C Total Company
Sales 90000 10000 100000
Variable Exp. 35000 5000 40000
Contribution 55000 5000 60000
zTraceable Fixed Costs 37000 11000 48000
Divisional Income (Loss) 18000 (6000) 12000
Unallocated Fixed Cost 8000
Income Before Tax 4000
Required:
1. What will be the increase or decrease in profit by eliminating Division C if all costs
traceable to division C are avoidable? Should the company eliminate?
2. Assume that executives and supervisory personnel in Division C will be reassigned
to other divisions, if division is eliminated. Included in ₹11000 of traceable fixed
costs of Division C are ₹8000 of salaries for these personnel. What is the effect of
eliminating division C with this assumption?
22] Next years forecasted trading results for Caribee Ltd. a small company manufacturing three
different types of product, are shown below.
Particulars Product A Product B Product C Total
Selling Price (₹ Per Unit) 10 12 8
Sales (₹`000) 100 96 32 228
Variable Cost of Sales (₹`000)
Prime Cost 40 38 13 91
Variable Overhead 20 18 11 49
Share of General Fixed Overheads 30 27 10 67
Profit/(Loss) 10 13 (2) 21
Required:
a. Explain how the company’s forecasted profits would be affected if product C were
discontinued. It should be assumed that sales of the remaining products would not
be affected; any other assumptions made should be included with your explanation.
b. Additional advertising for product B would cost ₹8000 next year; this amount is
not included in the forecasts shown above. Calculate the minimum extra sales, in
units, or product B required to cover this additional cost.
c. Calculate the increase in sales volume of product A necessary to compensate for a
10% reduction in the selling price of the product. Carefully explain why the
increase in volume is proportionately greater than the reduction in selling price.

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H] Shut-down or Continue Plant
Factors to be Considered: 1] Relevant Cost, 2] Shutdown Point, 3] Market Conditions, 4]
Short-Term Vs. Long-Term Considerations, 5] Restart Costs etc.
23] Paints Ltd. manufactures 2, 00,000 tins of paint at normal capacity. It incurs the following
manufacturing costs per unit:
Direct Material 7.80
Direct Labour 2.10
Variable Overhead 2.50
Fixed Overhead 4.00
Production Cost/Unit 16.40
Each unit is sold for ₹21, with an additional variable selling overhead incurred at Rs. 0.60 per
unit.
During the next quarter, only 10,000 units can be produced and sold. Management plans to shut
down the plant estimating that the fixed manufacturing cost can be reduced to ₹74,000 for the
quarter. When the plant is operating, the fixed overheads are incurred at a uniform rate
throughout the year.
Additional cost of plant shut down for the quarter are estimated at ₹14,000.
You are required:
1. To advise whether it is more economical to shut down the plant during the quarter rather
than operate the plant.
2. Calculate the shutdown point for the quarter in terms of numbering units.

24] Universe Ltd. manufactures 20,000 units of product X in year at its normal production
capacity. The unit cost as to variable cost and fixed cost at this level are ₹13 and ₹4 respectively.
Selling price per unit is ₹20. Due to trade depression, it is expected that only 2000 units of
product X can be sold during the next year. The management plans to shut down the plant. The
fixed cost for the next year then is expected to be reduced to ₹33, 000. If the plant is shut down,
plant maintenance would cost ₹8000 and on reopening of the factory, cost of overhauling the
plant and cost of training and engagement of new personnel would amount to ₹3000 and ₹1000
respectively.
Should the plant to be shut down? What is the shut-down point?

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