If Moonlite Limited operates its plant at normal capacity it produces 2,00,000 units from the plant...

 

Transcribed Image Text:

If Moonlite Limited operates its plant at normal capacity it produces 2,00,000 units from the plant 'Meghdoot'. The unit cost of manufacturing at normal capacity is as under: Direct material Direct labour Variable overhead Fixed overhead 65 30 33 7 135 Direct labour cost represents the compensation to highly-skilled workers, who are permanent employees of the company. The company cannot afford to lose them. One labour hour is required to complete one unit of the product. The company sells its product for 200 per unit with variable selling expenses of ₹ 16 per unit. The company estimates that due to economic down turn, it will not be able to operate the plant at the normal capacity, at least during the next year. It is evaluating the feasibility of shutting down the plant temporarily for one year. If it shuts down the plant, the fixed manufacturing overhead will be reduced to 1,25,000. The overhead costs are incurred at a uniform rate throughout the year. It is also estimated that the additional cost of shutting down will be 50,000 and the cost of re-opening will be ₹1,00,000. Required: Calculate the minimum level of production at which it will be economically beneficial to continue to operate the plant next year if 50% of the labour hours can be utilized in another activity, which is expected to contribute at the rate of 40 per labour hour. The additional activity will relate to a job which will be off-loaded by a sister company only if the company decided to shutdown the plant. If Moonlite Limited operates its plant at normal capacity it produces 2,00,000 units from the plant 'Meghdoot'. The unit cost of manufacturing at normal capacity is as under: Direct material Direct labour Variable overhead Fixed overhead 65 30 33 7 135 Direct labour cost represents the compensation to highly-skilled workers, who are permanent employees of the company. The company cannot afford to lose them. One labour hour is required to complete one unit of the product. The company sells its product for 200 per unit with variable selling expenses of ₹ 16 per unit. The company estimates that due to economic down turn, it will not be able to operate the plant at the normal capacity, at least during the next year. It is evaluating the feasibility of shutting down the plant temporarily for one year. If it shuts down the plant, the fixed manufacturing overhead will be reduced to 1,25,000. The overhead costs are incurred at a uniform rate throughout the year. It is also estimated that the additional cost of shutting down will be 50,000 and the cost of re-opening will be ₹1,00,000. Required: Calculate the minimum level of production at which it will be economically beneficial to continue to operate the plant next year if 50% of the labour hours can be utilized in another activity, which is expected to contribute at the rate of 40 per labour hour. The additional activity will relate to a job which will be off-loaded by a sister company only if the company decided to shutdown the plant.

Answer rating: 100% (QA)

To determine the minimum level of production at which it will be economically beneficial to continue ... View the full answer