Page 81 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes 120 60

=  100
120
60
=  100 = 50%
120
2. Decision to Make or Buy: A business firm may make some products, parts or tools or
sometimes, it may buy the same thing from outside. The management must decide which
is more profitable to the business firm. If the marginal cost of the product is lower than the
price of buying from outside, then the business firm can make the product.
Problem 10:
A Pen Manufacturing Company finds that while it costs ` 6.25 to make each component X
2730, the same is available in the market at ` 4.85 each, with an assurance of continued
supply. The breakdown of cost is:

Raw materials ` 2.75 each pen
Direct wages ` 1.75 each pen
Other variable cost ` 0.50 each pen
Fixed cost ` 1.25 each pen

6.25 each pen
Should you make or buy?

Solution:
Variable cost of manufacturing is ` 5 (` 6.25 – 1.25), but the market price is ` 4.85. If the
fixed cost of ` 1.25 is also added, it is not profitable to make the component. Because there
is a profit of ` 0.15 even in variable cost, it is profitable to procure from outside.
3. Selection of a Profitable Product Mix: In a multi-product manufacturing organisation, a
problem is faced by the management as to which product mix or sales mix will give the
maximum profit. The product mix which gives the maximum profit must be selected.
Product mix is the ratio in which various products are produced and sold.
The marginal costing technique helps the management in taking decisions regarding
changing the ratio of product mix which gives maximum contribution or in dropping
unprofitable product line. The product which has comparatively less contribution may be
reduced or discontinued.

Problem 11:
Present the following information to show to the management: (i) the marginal cost of
product and the contribution per unit, (ii) the total contribution and profits resulting from
each of the following sales mixtures:
Type of Products Per unit (`)
Materials X 10

Y 9
Wages X 3
Y 2
Fixed cost ` 2,000.

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