Assume that division has offer to sell 50,000 units at Rs. 25 per unit. If additional order is accepted, the variable cost per unit will remain the same. However, fixed costs would increase by Rs. 250,000. A further additional investment of Rs. 10,00,000 would also be required. Analyze the impact on residual income.
Strategic Cost Management
1. A company has a contribution/sales ratio of 50%. It maintains a MOS of 25%. If its annual fixed cost is Rs. 50 lakhs, calculate:
BE sales, MOS, Total Sales, Total Variable Cost and Profit.
2. The following information is available from the records of Alpha Ltd. For the year 2019:
Rs. | |
Sales of product A | 25.0 Lakhs |
Sales of product B | 75.0 Lakhs |
Material cost | 55% of sales |
Direct wages | 50,000 per month per worker |
Factory Overheads: | |
Indirect Labor: | |
Works Manager | 10,000.0 per month |
Foreman | 5,000.0 per month |
Stores and spares | 5.0% of sales |
Depreciation of machinery | 150,000.00 |
Light and power | 100,000.00 |
Repairs and maintenance | 150,000.00 |
Other expenses | 15% of direct wages |
Administration expenses | 200,000.0 per annum |
You are required to prepare a master budget.
3. You are a consultant hired to advise ABC Limited on ROI and help with decision making for additional order. The company has provided you following information:
Particulars | Amount (Rs.) |
Sales (2,00,000 units at Rs. 20) | 4,000,000 |
Less: Variable costs @ Rs. 15 per unit | 3,000,000 |
Contribution Margin | 1,000,000 |
Less: Fixed costs | 750,000 |
Division Profit | 250,000 |
The amount of division investment is Rs. 15,00,000 and the target rate of return on investment is 20%
a. Based on the information provided calculate ROI and Residual income of ABC Limited.
b. Assume that division has offer to sell 50,000 units at Rs. 25 per unit. If additional order is accepted, the variable cost per unit will remain the same. However, fixed costs would increase by Rs. 250,000. A further additional investment of Rs. 10,00,000 would also be required. Analyze the impact on residual income.
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