Page 138 - DCAP601_SIMULATION_AND_MODELING

Simulation and Modelling

Notes Table 4

The income and expenditure details are given in Table 4.

The managing director wishes to expand the operation for the year 2003-04 and has asked
you to prepare Flexible Budgets on capacity utilisation levels of 80 per cent, 90 per cent
and 100 per cent based on the following estimate:
1. Price (`/kg of yarn) at 80 per cent level — ` 210; at 90 per cent level — ` 200; at 100
per cent — ` 195
Whatever produced during the year is expected to be sold within the
year.

2. Increase in variable cost components: materials at 12 per cent; labour at
10 per cent; factory overheads at 15 per cent; and marketing overheads at 20 per cent.
3. Inflation rate applicable to fixed cost is 15 per cent. Additionally, if the capacity
utilisation exceeds 80 per cent, fixed cost is expected to increase by 10 per cent up to
100 per cent capacity utilisation.
Comment on this plan of sub-contracting with a view to maximising the profit of the
company.
Table 5

Contd...

132 LOVELY PROFESSIONAL UNIVERSITY