A company produces 30, 000 units of product A and 20, 000 units of product B per annum. The sales value and costs of the two products are as follows:
Sales value Rs.7, 60, 000 Factory overheads: Rs.1, 90, 000
Direct material: Rs.1, 40, 000 Administrative and selling overheads: Rs.1, 20, 000
Direct labour: Rs1, 90, 000
50% of the factory overheads are variable and 50% of the administrative and selling overheads are fixed. The selling price of A is Rs.12 per unit and Rs.20 per unit for B.
The direct material and labour ratio for product A is 2:3 and for B is 4:5. For both the products, the selling price is 400% of direct labour. The factory overheads are charged in the ratio of direct labour and administrative and selling overheads are recovered at a flat rate of Rs.2 per unit for A and Rs.3 per unit for B.
Due to fall in demand, of the above products, the company has a plan to diversify and make product C using 40% capacity. It has been estimated that for C direct material and direct labour will be Rs.2.50 and Rs.3 per unit respectively. Other variable costs will be the same as applicable to the product A. The selling price of product C is Rs.14 per unit and production will be 30 000 units.
Assuming 60% capacity is used for manufacture of A and B, calculate,
I] Present cost and profit
II] Cost and profit after diversification
III] Give your recommendations as to whether to diversify or not.