ABC Ltd. is a well-known company for producing baby care products. The company produces and sells two variants of organic shampoo for children:…

CA Intermediate · Cost and Management Accounting · PYQS · September 2024
ABC Ltd. is a well-known company for producing baby care products. The company produces and sells two variants of organic shampoo for children: "Baby Rose" and "Baby Lily". The sales and cost data for both products are provided below: Particulars Baby Rose Baby Lily Current demand and Sales (Number of bottles) 4,000 3,000 Production Capacity (Number of bottles) 7,500 6,000 Selling Price per bottle (₹) 600 750 Variable Costs per bottle: Direct Materials (20 Per litre) 160 200 Other Variable Costs 270 350 The fixed costs amount to 5,00,000 and - 4,50,000 for Baby Rose and Baby Lily respectively. The Production Manager has informed that 1,00,000 litres of material is available for production. A dealer has approached the company and proposed to purchase both products at the existing selling prices, which are to be produced by utilizing the remaining unused material. However, he has insisted that all the bottles must be packed with eco-friendly packaging, which will result in an additional cost of 10 per bottle for the company. Presently, the company is not using eco-friendly material for packing of bottles. Required: Prepare a detailed statement showing the overall contribution and profit of the company after acceptance of the dealer's proposal.

Suggested Answer and Working Notes:

Statement showing the Overall contribution and profit of the company Particulars Baby Rose Baby Lily Total (₹) (₹) (₹) Selling price per bottle 600 750 - Less: Direct Materials 160 200 - Other variable costs 270 350 - Contribution per bottle Before additional packaging 170 200 - Contribution per bottle per unit of raw material Before additional packaging 21.25 20 Ranking on the basis of Contribution per bottle per unit of raw material I II WN1 Baby Rose Baby Lily Raw Material used per unit of bottle (a) 8 litres (160/20) 10 litres (200/20) Current Demand and Sales (b) 4,000 bottles 3,000 bottles Total Raw Material used (c = a x b) 32,000 litres 30,000 litres WN2 Raw Material available after current sales = 1,00,000 litres – 62,000 litres = 38,000 litres Since the contribution per unit of Baby Rose is higher than Baby Lily, the company will produce and sale Baby Rose shampoo to the dealer. Number of units that can be produced in 38,000 litres = 38,000 litres/8 litres = 4,750 bottles However, the Production capacity of Baby Rose is 7,500 bottles, only 3,500 bottles can be produced. Raw materials used in 3,500 bottles = 8 litres x 3,500 bottles = 28,000 litres Remaining material = 10,000 litres Number of Baby Lily that can be produced in 10,000 litres = 10,000 litres/10 litres = 1,000 bottles Alternatively, Solution can also be presented in following way: Statement showing the Overall contribution and profit of the company Particulars Baby Rose Baby Lily Total (₹) (₹) (₹) Selling price per bottle 600 750 - Less: Direct Materials 160 200 - Other variable costs 270 350 - Contribution per bottle Before additional packaging 170 200 - Contribution per bottle per unit of raw material Before additional packaging 21.25 20 Ranking on the basis of Contribution per bottle per unit of raw material I II Particulars Current Sales (WN2) Additional Sales of Baby Rose (3,500 bottles) Additional Sales of Baby Lily (1,000 bottles) Total (₹) (₹) (₹) (₹) Selling price per bottle - 600 750 - Less: Direct Materials - 160 200 - Other variable costs - 270 350 - Additional packaging - 10 10 - Contribution per unit - 160 190 - Total Contribution 12,80,000 5,60,000 1,90,000 20,30,000 Less: Fixed Cost 9,50,000 9,50,000 Profit 3,30,000 5,60,000 1,90,000 10,80,000 WN1 Baby Rose Baby Lily Raw Material used per unit of bottle (a) 8 litres (160/20) 10 litres (200/20) Current Demand and Sales (b) 4,000 bottles 3,000 bottles Total Raw Material used (c = a x b) 32,000 litres 30,000 litres WN2 Statement showing the current contribution and profit of the company Particulars Baby Rose (₹) Baby Lily (₹) Total (₹) Selling price per bottle 600 750 Less: Direct Materials 160 200 - Other variable costs 270 350 - Contribution per bottle Before additional packaging 170 200 - Contribution per bottle per unit of raw material Before additional packaging 21.25 20 Total Contribution Before additional packaging 6,80,000 6,00,000 12,80,000 Less: Fixed Cost 5,00,000 4,50,000 9,50,000 Profit 1,80,000 1,50,000 3,30,000

Topics: Marginal Costing

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