Decision Making

DECISION MAKING
1. Sound Well Music makes record players. Operating currently at annual full capacity of
10,000 units – each sold at Rs 3,000/ut.. Cost Data: RM – Rs 900/ut, DL – Rs 400/ut,
Variable Oh – Rs 300/ut, Fixed Overheads – Rs 60 lakhs.
To meet competition Sound Well has 2 alternatives:
I. To reduce selling price to Rs 2,499/ut
II. Add new features & sell at Rs 3,700/ut. This involves further costs & processing:
 Raw materials – Rs 600/ut
 Labour – Rs 300/ut
 Variable Oh – Rs 300/ut
 Additional FC – Rs 40 lakhs
What will be your recommendation to Sound Well?
2. A cycle tyre manufacturer has been approached by a large shopkeeper to buy 10,000
tyres at Rs 32 each, delivery to be made within 30 days. Production capacity is 64,000
tyres and 2,000 tyres are on hand. Expected sales at regular prices are 60,000 tyres. It is
estimated that 50% of sales lost will be recovered in next month.
Current cost data is:
SP/ut – Rs 48
Variable Production Cost/ut – Rs 24
Variable Selling Cost/ut – Rs 6
Varible selling cost on special order will be Rs 1 per tyre.
Should the order be accepted? What is the minimum price at which the special order can
be accepted without losing income?
Assume that the special order is for 8,000 tyres @ Rs 32. There is no opening inventory
and sales lost cannot be made up in the next month.
3. Baataa Shoes has a chain of shoe shops all over the country. 2 shops operate in Udupi –
Shop I is profit making while Shop II is loss making. Income statement of Shop II:
Sales 600,000
CoGS 492,000
Salesman's Commission (% of sales) 6,000
Manager's Salary 12,000
Head Office expenses 10,500
Motor Van - Fixed 6,900
Motor Van - Variable 2,400
Other 109,950
Loss (39,750)
There is a common manager for both shops – his salary is shared equally. Motor van is
common for 2 shops – fixed expenses are shared equally, running expenses apportioned
on basis of turnover. Assume 20% of turnover of Shop II will be gained by Shop I at no
additional cost.
Should Shop II be closed?
4. A company manufactures 3 products. Details are as follows;

A B C
Capacity used % 20 40 40
Units produced 2,000 5,000 6,000
Costs/unit:
Material 20 32 36
Wages 10 12 16
Variable Overheads 7 9 11
Fixed Overheads 6 9 10
Selling Price/unit 40 75 85
Management proposes to discontinue product A as it was incurring losses for last few
years and use free capacity for B & C equally.
Expected per cent rise in costs for the upcoming year is:
B C
Materials 10 10
Wages 5 5
Selling Price 2 5
Advise management.
5. BJ Electrix manufactures many parts & components. Data for 2 components is as
follows:
X Y
Direct Material 0.80 16.00
Direct Labour 2.00 9.40
Overheads 8.00 4.00
Units needed per year 6,000 8,000
Machine hours/unit 2 1
Purchase Price/unit (if purchased) 10.00 30.00
BJE was manufacturing all its required components. Henceforth only 14,000 machine
hours will be available to manufacture components. Some components may have to be
purchased from outside.
Overhead is applied at Rs 4 per machine hour. Fixed costs which will not be altered by
make or buy decision represent 70% of applied overhead.
Compute number of units that BJ electricals should produce if it allocates machine hours
on basis of cost savings.
6. In a factory same material is used for 2 different products. Availability of material is a

constraint - material worth Rs 1,20,000 only is available.
Costs per unit A B

Materials 15 10
Wages 6 4.50
Overheads - Variable 2 1
Overheads - Fixed 6 4.5
SP/ut 35 24.5
Demand is 10,000 and 8000 units respectively. It is also considered desirable that the
firm should be willing to meet atleast 50% of demand for each product.
7. AL operates at full capacity of 200,000 units/annum. Manufacturing costs at capacity are:

Materials 7.80
Wages 2.10
Overheads - Variable 2.50
Overheads - Fixed 4.00
SP 21.00
During the next 3 months only 10,000 units can be sold. Management plans to shut down
the plant estimating that Fixed Overheads can be reduced to Rs 74000/- for the quarter
when the plant is not operating. (Fixed costs are incurred evenly throughout the year). Plant
shutdown costs are estimated at Rs 14,000. Should the plant be shut down? What is the
shutdown point?

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DECISION MAKING

Varible selling cost on special order will be Rs 1 per tyre.

4. A company manufactures 3 products. Details are as follows;

6. In a factory same material is used for 2 different products. Availability of material is a

Costs per unit A B

7. AL operates at full capacity of 200,000 units/annum. Manufacturing costs at capacity are:

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