A company produces 30,000 units of product A and 20,000 units of a product B per annum. The sales value and costs of the two products are as follows:

Sales Value

7,60,000

Direct Material

1,40,000

Direct Labour

1,90,000

Factory Overheads

1,90,000

Administrative & Selling Overheads

1,20,000

50% of factory overheads are variable and 50% of administrative and selling overheads are fixed. The selling price of A is Rs. 12 per unit and B is Rs. 20 per unit.

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 of A and Rs. 3 per unit of B.

Due to a fall in the demand of the above products, the company has a plan to diversify and make the product C using 40% capacity. It has been estimated that for C the 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 product A. The selling price of product C is Rs. 14 per unit and the production will be 30,000 units.

Assuming that 60% capacity is used for manufacturing A and B:

  1. Calculate the present cost and profit.
  2. Calculate the costs and profit after diversification.
  3. Give your recommendation as to whether to diversify or not.