PPP Ltd. is currently operating at 80% of its capacity producing 80,000 units. For the past two years, the production is increasing by 10% of its…

Budget for 90% capacity level for the next year Budgeted production (units) 90,000 Per Unit (₹) Amount (₹) Direct Material (note 2) 22 19,80,000 Direct Labour (note 3) 12 10,80,000 Variable factory overhead (note 4) 2.10 1,89,000 Variable selling overhead (note 5) 4.40 3,96,000 Variable cost 40.50 36,45,000 Fixed factory overhead (note 4) 2,20,000 Fixed selling overhead (note 5) 1,15,000 Administrative overhead (note 6) 1,84,000 Fixed cost 5,19,000 Total cost 41,64,000 Add: Profit 25% on total cost 10,41,000 Sales 52,05,000 Contribution (Sales – Variable cost) 15,60,000 Working Notes: 1. Capacity Levels: At 80% level of capacity (current year), the production is 80,000 units.Thus, total level of capacity is 1,00,000 units.Therefore, Year 2 is at 70% capacity and Year 3 is at 60% capacity as the production is increasing by 10% of its capacity consistently. 2. Direct Material (₹) (₹) 80% Capacity 16,00,000 70% Capacity 14,00,000 70% Capacity 14,00,000 60% Capacity 12,00,000 10% change in capacity 2,00,000 10% change in capacity 2,00,000 For 10% increase in capacity, the total direct material cost regularly changes by - 2,00,000Thus, Direct material cost (variable) = 2,00,000 ÷ 10,000 = 20After 10% increase in price, direct material cost per unit = 20 × 1.10 = 22Direct material cost at 90,000 budgeted units = 90,000 × ₹ 22 = 19,80,000 3. Direct labour: (₹) (₹) 80% Capacity 8,00,000 70% Capacity 7,00,000 70% Capacity 7,00,000 60% Capacity 6,00,000 10% change in capacity 1,00,000 10% change in capacity 1,00,000 For 10% increase in capacity, direct labour cost regularly changes by - 1,00,000.Direct labour cost per unit = 1,00,000 ÷ 10,000 = 10After 20% increase in price, direct labour cost per unit = 10 × 1.20 = 12Direct labour for 90,000 units = 90,000 units × 12 = 10,80,000. 4. Factory overheads are semi-variable overheads: (₹) (₹) 80% Capacity 3,60,000 70% Capacity 3,40,000 70% Capacity 3,40,000 60% Capacity 3,20,000 10% change in capacity 20,000 10% change in capacity 20,000 Variable factory overhead = 20,000 ÷ 10,000 units = 2Variable factory overhead for 80,000 units = 80,000 × ₹ 2 = 1,60,000Fixed factory overhead = 3,60,000 - 1,60,000 = 2,00,000.Variable factory overhead after 5% increase = 2 × 1.05 = 2.10Fixed factory overhead after 10% increase = 2,00,000 × 1.10 = 2,20,000. 5. Selling overhead is semi-variable overhead: (₹) (₹) 80% Capacity 4,20,000 70% Capacity 3,80,000 70% Capacity 3,80,000 60% Capacity 3,40,000 10% change in capacity 40,000 10% change in capacity 40,000 Variable selling overhead = 40,000 ÷ 10,000 units = 4Variable selling overhead for 80,000 units = 80,000 × ₹ 4 = 3,20,000.Fixed selling overhead = 4,20,000 - 3,20,000 = 1,00,000Variable selling overhead after 10% increase = 4 × 1.10 = 4.40Fixed selling overhead after 15% increase = 1,00,000 × 1.15 = 1,15,000 6. Administrative overhead is fixed: After 15% increase = 1,60,000 × 1.15 = 1,84,000