N.P. Ltd. produces two products P and Q. The draft budget for the next month is as under: P Q Budgeted Production and Sales (units) 40,000 80,000…

CA Intermediate · Cost and Management Accounting · RTP · September 2025
N.P. Ltd. produces two products P and Q. The draft budget for the next month is as under: P Q Budgeted Production and Sales (units) 40,000 80,000 Selling Price ₹/ unit 25 50 Total Costs ₹/ unit 20 40 Machine Hours / unit 2 1 Maximum Sales Potential (units) 60,000 1,00,000 The fixed expenses are estimated at 9,60,000 per month. The company absorbs fixed overheads on the basis of machine hours which are fully utilised by the budgeted production and cannot be further increased. When the budget was discussed, the Managing Director stated that the product mix should be altered to yield optimum profit. The Marketing Director suggested that he would introduce a new Product-C, each unit of which will take 1.5 machine hours. However, a new machine involving a capital outlay of 2,00,000 is to be installed for processing Product-C. The additional fixed overheads relating to the new machine was estimated at 60,000 per month. The variable cost of Product- C was estimated at 21 per Unit. Required: (i) Calculate the profit as per draft budget for the next month. (ii) Revise the product mix based on data given for P and Q to yield optimum profit. (iii) The company decides to discontinue either Product- P or Q whichever is giving lower profit and proposes to substitute Product- C instead. Fix the selling price of product- C in such a way as to yield 15% return on additional capital employed besides maintaining the same overall profit as envisaged in (ii) above.

Suggested Answer and Working Notes:

(i) Profit as per Draft Budget for the Next Month: Products P Q Total Per Unit (₹) Total (₹) Per Unit (₹) Total (₹) (₹) Budgeted Production and Sales (units) 40,000 units 80,000 units 1,20,000 units Sales 25 10,00,000 50 40,00,000 50,00,000 Less: Total Costs 20 8,00,000 40 32,00,000 40,00,000 Profit 5 2,00,000 10 8,00,000 10,00,000 (ii) Revised Product Mix to Yield Optimum Profit: Basic Calculations: P Q (a) Machine Hrs. 40,000 units x 2 hrs. = 80,000 hrs. 80,000 units x 1 hr. = 80,000 hrs. (b) Total Machine Hours 1,60,000 hrs. (c) Fixed Overhead Rate per machine hr. 9,60,000 / 1,60,000 hrs. = 6 (d) Fixed Overhead per unit P: 2 hrs. x 6 = 12 Q: 1 hr. x 6 = 6 (e) Contribution per unit P:25 -20 = 5 Q:50 -40 = 10 (f) Product-wise Contribution per machine hr. P:5 / 2 hrs. = 2.50 Q:10 / 1 hr. = 10.00 Product Q has higher contribution per machine hour. Since machine hour is a limiting factor hence maximum units of product Q should be produced. However, maximum sales potentiality of Product Q is 1,00,000 units. This will take 1,00,000 machine hour. The balance 60,000 hours should be used to produce 30,000 units of P. The Revised Product Mix to Yield Optimum Profit will be as follows: Product Q (1,00,000 units × ₹ 10) = 10,00,000Product P (30,000 units × ₹ 5) = 1,50,000 Total Contribution = 11,50,000 Less: Fixed Expenses = 9,60,000 Profit = 1,90,000 (iii) Selling Price of Product- C: Product - P gives lower contribution per machine hour, hence, it will be discontinued and Product - C will be manufactured in its place. The discontinuance of Product - P will make available 60,000 machine hours to produce 40,000 units of Product - C. The computation of selling price of Product - C can be done as follows: Particulars (₹) Variable Cost (40,000 units × ₹ 21) 8,40,000 Additional Fixed Cost per month 60,000 Return on Capital (₹ 2,00,000 × 1.25%) 2,500 Present Contribution from Product P (from revised mix) 1,50,000 Total Sales Value to be recovered 10,52,500 Selling Price per unit of C (₹ 10,52,500 / 40,000 units) 26.31

Topics: Marginal Costing

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