Page 82 - DCOM206_COST_ACCOUNTING_II

Unit 4: Cost Volume Profit Analysis

Variable costs are allocated to products as 100% of wages. Notes
Selling price X ` 20
Y ` 16
Sales mixtures:

(a) 1,000 units of product X and 2,000 units of product Y,
(b) 1,500 units of product X and 1,500 units of product Y,
(c) 2,000 units of product X and 1,000 units of product Y.
Solution:

(i) Statement of Marginal Cost:
Type of Products
X (`) Y (`)
Materials 10 9

Wages 3 2
Variable cost (100% of wage) 3 2

Marginal Cost 16 13
Selling price 20 16
Less: Marginal cost 16 13

Contribution 4 3
(ii) Product Mix Choice:

Particulars (a) ` (b) ` (c) `
Total sales 52,000 54,000 56,000
(1)
(1)
(1)
(2)
(2)
(2)
Less : Marginal cost 42,000 43,500 45,000
Contribution 10,000 10,500 11,000
Less : Fixed cost 2,000 2,000 2,000
Profit 8,000 8,500 9,000

Therefore, sales mixture (c) will give the highest profit and as such, mixture (c) can
be adopted.
Working notes:
(1) (1,000×20 + 2,000×16) = 52,000, (1,500×20 + 1,500×16) = 54,000, and (2,000× 20 +
1,000×16) = 56,000
(2) (1,000×16 + 2,000×13) = 42,000, (1,500×16 + 1,500×13) = 43,500, and (2,000× 16 +
1,000×13) = 45,000
4. Decision to Accept a Bulk Order: Large scale purchasers may demand products at less than
the market price. A decision has to be taken now whether to accept the order or to reject it.
By reducing the normal sales price, the volume of output and the sales can be increased. If
the sales price is below the total cost, rejection of the order is aimed at.

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