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CVP Analysis and Decision-Making Decision: Maximum Contribution is obtained from Product WYE. So, WYE should be manufactured by using sub- contracting facility as specified above. Maximum Profit = Contribution 50,07,327 - Fixed POH 15,00,000 = 35,07,327. 11.14 Key Factor-Own Production vs Sub-Contracting M14 following details are available for a production period: Particulars Selling Price Material Cost Labour Cost: Assembly Department at 10 per hour Machine Department at T 12 per hour Variable Overhead at 4 per Labour in Assembly Department Maximum Extemal Demand (units) A 100 40 15 18 6 40,000 B 109 42 20 24 8 55,000 121 46 15 36 6 36,000 D 124 40 20 30 8 30,000 Total Fixed Cost is dependent on the output level and is tabulated below at different levels of output: Production units (any combination of one or more of any of A, B, C or D) Zero to 1,00,000 units 1,00,001 to 1,50,000 units 1,50,001 to 2,00,000 units Total Fixed Cost (in) 8,43,000 12,50,000 16,00,000 Production Facilities can be inter-changeably used among the Products. Labour availability in the Assembly Department is limited to 2,20,000 hours for the production period. A local Firm has offered to make any quantity of any of the products on a sub-contract basis at the following rates: Product Sub-Contract Price lunit) 101 A B D 85 95 100 Required: Advise the Management on how many units of each Product are to be manufactured or sub-contracted to fulfill maximum Market Demand. What would be the corresponding Profits? () What is the minimum number of units to be produced to achieve Break-Even Point? (ii) What would you advise as the best Strategy to maximize profits, if Assembly Labour is not a limiting factor and if there is no compulsion to fulfill Market Demand? (Only relevant figures need to be discussed. A detailed profitability Statement is not required). C) B) 95 D) 100 101 42 46 40 Solution: 1. Contribution Analysis Particulars A) 1 Sub-Contractor's Price p.u. (Buying Cost) 85 2 Own Variable Cost of Production (Making Cost) (a) Material 40 (6) Labour Cost - Assembly Department 15 - Machine Department 18 (c) Variable Overheads 6 Sub - Total of Variable Cost 79 3. Savings p.u. if made [1 -2] 6 4. Preference / Decision Make 15 = 1.50 5. Assembly Hours required p.u. (in hours) 10 20 24 15 36 6 20 30 8 98 8 94 103 1 2 Make 20 = 2.00 10 (2) Buy 15 = 1.50 10 Make 20 = 2.00 10 1 NA 4 0.50 (4) 6. Savings per Hour if made = (6) 7 Rank for Production 11 NA I III 9.137 2010 . 10.000 30,000 Not Totto in above 100.000 relating 0.000 00002 Sub - Total Contribution on Subcontract to slab of Med Cost 0,43,000 Profit Statement Contribution on Production 000 10,000 70.000 30,000 115 30.000 0.000 30,000 120 23, 70.000 Sub Total Contribution on Sub Contract 5.00014 70.000 25,000 14 36.000 x 20 -7.20,000 C 16,000 x 20 Sub - Total 2,90,000 Sub - Total Total Contribution 31,60,000 Total Contribution Cost 12,50.000 Less Fixed Cost Profit 19,10,000 Profit Conclusion from the above, Scenario 2 is preferable due to higher profits. 1,10,000 4,50,000 7,80,000 20,70,000 -3,50,000 -7,20,000 10,70,000 31,40,000 3,43,000 22,97,000 (a) I Foxed Cost is 3. Computation of Break-Even Point (6) Contribution earned from Product A (I Rank) [See Note] 8,43,000 12,50,000 716,00,00 40,000 units x 21 p.u. 28,40,000 28,40,000 78,40,00 (5) hence, Balance Contribution required to achieve BEP (a - b) 33,000 () So, Required Quantity of D (Il Rank) to recover the above Fixed 34,10,000 27,60,00 Cost = (C) = 26 116 units 15,770 units 29,231 ur (e) Total Break-even Quantity = A: 40,000 + D (as per above) 40,116 units 55,770 units 69,231 un Alternatively, since the question considers "minimum" quantity for BEP, the Ranking may be based on the Contribu per unit of Own Production, accordingly, BEP will be as under - a) If Foxed Cost is 28,43,000 12,50,000 7 16,00 b) Contribution earned from Product D = 30,000 units x ? 26 p.u. 27,80,000 87,80,000 7,80 Hence, Balance Contribution required to achieve BEP (a - b) 263,000 74,70,000 38,24 So, Read Qty of A to recover the above Fixed Cost = (c) : 21 3,000 units 22,381 units 39,048 Total Break-even Quantity = D: 30,000 + A (as per above) 33,000 units 52,381 units 69,048 4. Best Strategy if Assembly Labour is not a Limiting Factor and no compulsion to fulfill Market Dema Note: Assuming Sub-Contracting Prices remain as given, and hence it is beneficial to buy "C" than make sembly Labour is not a Key Factor, dedsions are based on Contribution p.u. as per Point 10 and 11 of WN 1 e, the two possible scenarios are evaluated as under ve Analysis and Making Santos 250.000 i subject to demand) 90,000 36 700.000 A 40,000 340.000 (ote) 54,000 15 0.25.000 30.000 Cob-cont) 16,000 30 7,20,000 31.40 000 Sub Total 31,65,000 842.000 Fwd Co 12,50.000 22.97.000 Pront 19,15,000 Obec s ben the limit of 1,00,000 units, after production of 30,000 units wote : See the Company was in the Second Stab of red costs, it will achieve full output of 8. ceout of and the entire output of will be sub-contracted Note: In bees beneficial to boy can make. Hence, will be bought in sest Strategy Scerro I will be preferred in this case due to higher pronts. Case Study Questions for Practice Service Sector-Fare per Passenger Km and Effect of Regulated Price SREST Transport la is parming to run a lieet of 15 buses in Cityx on a fixed route. BEST has estimated a total of 2,51 85.000 passenger kilometers pa. Each Bus has a Purchase Price of 4400,000 and Disposal Value at the end of 5 years Wie is 5,50.000 Seating Capacity of each bus excluding a Driver's Seat is 42. Al buses will have 100% Load Factor. Each Bus can give a mileage of 5 Kompage Cost of Fuel is 66 per liter. Cast of Lubricants & Sundries per 1,000 km would be * 3,300. BEST will pay 2 27,500 per mont Driver and two attendants for each Bus. Der annual charges per bus: Insurance + 55,000. Garage Charges 33,000, Repairs & Maintenance 55,000. Route Permit Charges po 20.000 km i 5.500 and 2.200 for every additional 5,000 km or part thereof. Required: Cassily the various costs given above into Fixed, Variable and Semi-Variable, based on the given data. What should be the fare per Passenger/Km to have Markup on cost @20% to cover General Overheads, Interest and Profit? 2. Suppose the Govemment has fixed the fare at 1.35 for next 2 years. Examine and comment on two year's profitability considering Infation Rate of 8%. Assume that Route Permit Charges are not subject to inflation 2 Service Sector-Effect of Regulations, Ethical Aspects Super Speciality Hospitals Ltd (SSH) is a leading integrated Healthcare Delivery Provider Company, operating in a competitive environment Very recently, the Ministry of Health has come out with various Regulations govering Health Care Centres to prevent daging of orbitant fees from their patients. The Regulations include the Maximum Fees that can be charged from Patients for various services, the percentage of Patients who have to be treated on free basis to ensure that the Health Care Centre enjoys certain Government concessions, the Price at which medicines can be sold" to Patients during their stay in the Health Care Centre, etc. Due to the zoove Regulations and the competitive environment, SSH is facing margin pressures and it is difficult to increase the patient numbers also. So, SSH's Management Consultant (Kapil) has come out with some plan for cost control and reduction. SSH provides treatment under a package system where Fees is charged irrespective of the days a patient stays in the Hospital. Kapil estimates 250 Patient Days per patient. He wants to reduce it to 2 days. By this, Kapil estimates that the general variable cost of 3 500 per patient day will get reduced. Annually 15,000 patients visit to the hospital for treatment. SSH's Chief Medical Superintendent (Vasudha) has some concerns with that of Kapil's plan. According to her, reducing the patient sta would be detrimental to the full recovery of patient. They would come again for admission thereby increasing current re-admission ral from 3% to 5%, it means re-admitting 300 additional patients. SSH has to spend