Normal capacity of a company is 2,40,000 machine hours, but at present the company utilizes 40% of its capacity. In this situation, the monthly performance of the company is as follows:

Rs. in Lakhs

Sales

30.00

Consumption of Materials

15.00

Wages (including Rs. 1 lakh for security guards)

6.00

Factory Overheads (60% fixed)

5.00

Other Overheads (10% variable)

3.50

Net Profit

0.50

The following two alternative proposals are under consideration of the company:

  1. The factory will utilize about 50% of the unutilized capacity by accepting the contract work, by charging Rs. 3.50 per machine hour.
  2. Discontinue the own production completely and lease out the entire facility on a monthly rental of Rs. 6.85 lakhs.

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