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:
- Calculate the present cost and profit.
- Calculate the costs and profit after diversification.
- Give your recommendation as to whether to diversify or not.