Jupiter Ltd, a 'Fast-Moving Consumer Goods (FMCG)' company intends to diversify the product line to achieve full utilisation of its plant capacity.…

CA Intermediate · Cost and Management Accounting · RTP · January 2026
Jupiter Ltd, a 'Fast-Moving Consumer Goods (FMCG)' company intends to diversify the product line to achieve full utilisation of its plant capacity. As a result of considerable research made, the company has been able to develop a new product called 'EXE'. 'EXE' is packed in cans of 100 ml capacity and is sold to the wholesalers in cartons of 24 cans at 120 per carton. Since the company uses its spare capacity for the manufacture of 'EXE', no additional fixed expenses will be incurred. However, accountant has allocated a share of 1,12,500 per month as fixed expenses to be absorbed by 'EXE' as a fair share of the company's present fixed costs to the new product for costing purposes. The company estimates the production and sale of 'EXE' at 1,50,000 cans per month and on this basis the following cost estimates (per carton) have been developed: ₹ Direct Materials 54 Direct Wages 36 All Overheads 27 Total Costs 117 After a detailed market survey the economy is confident that the production and sales of 'EXE' can be increased to 1,75,000 cans per month and ultimately to 2,25,000 cans per month. The company at present has a capacity for the manufacture of 1,50,000 empty cans and the cost of the empty cans if purchased from outside will result in a saving of 20% in direct material, 10% in direct wages and 10% in variable overhead costs of 'EXE'. The price at which the outside firm is willing to supply the empty cans is 0.675 per empty can. If the company desires to manufacture empty cans in excess of 1,50,000 cans, a machine involving an additional fixed overhead of 7,500 per month will have to be installed. Required: State by showing your workings whether the company should make or buy the empty cans at each of the three volumes of production of 'EXE' namely, 1,50,000, 1,75,000 and 2,25,000 cans.At what volume of sales will it be economical for the company to install the additional equipment for the manufacture of empty cans?Evaluate the profitability on the sale of 'EXE' at each of the aforesaid three levels of output based on your decision and showing the cost of empty cans as a separate element of cost.

Suggested Answer and Working Notes:

(a) Workings (1) All Overheads for one carton or 24cans - 27 Therefore, per can Overheads (27/24) ₹ 1.125 Fixed Overheads Allocated for 1,50,000 cans:1,12,500 Per can Fixed Overheads (1,12,500 / 1,50,000cans) ₹ 0.75 Variable Overheads per can (₹ 1.125 - 0.75) ₹ 0.375 (2) Direct Wage per carton - 36 Per can (36/24) ₹ 1.50 (3) Direct Materials per carton - 54 Per can (54/24) ₹ 2.25 (4) Cost of making one empty can: Cost per can of 'EXE' (₹) Cost % empty can Cost empty can (₹) Cost of per can of 'EXE' without empty can (₹) Direct Material 2.250 20 0.4500 1.8000 Direct Wages 1.500 10 0.1500 1.3500 Variable Overheads 0.375 10 0.0375 0.3375 Total 4.125 0.6375 3.4875 (5) Cost of manufacturing/buying of 1,50,000 empty cans of 'EXE': Empty can Cost (₹) If empty can made (₹) If empty can purchased (₹) Direct Material 0.4500 67,500.00 ----- Direct Wages 0.1500 22,500.00 ----- Variable Overheads 0.0375 5,625.00 ----- Purchase Price 0.6750 ----- 1,01,250.00 Total 95,625.00 1,01,250.00 The company should manufacture the empty cans for a production volume of 1,50,000 ‘EXE' cans as capacity is available and cost of manufacture is lower. (6) After the level of 1,50,000 empty cans, the company has to install a new machine involving a total additional Fixed Overheads of 7,500. The cost of making and buying the additional cans of 25,000 and 75,000 will be as follows: Cost per can (₹) 25,000 cans 75,000 cans Make (₹) Buy (₹) Make (₹) Buy (₹) Direct Material 0.4500 11,250.00 - 33,750.00 - Direct Wages 0.1500 3,750.00 - 11,250.00 - Variable Overheads 0.0375 937.50 - 2,812.50 - Additional Overheads 7,500.00 - 7,500.00 - Purchase Price 0.6750 - 16,875.00 - 50,625.00 Total 23,437.50 16,875.00 55,312.50 50,625.00 The cost of buying additional empty containers at both the levels is lower than the cost of their manufacture. (a) If the company increases production to 1,75,000 cans of 'EXE', 1,50,000 empty cans should be manufactured and additional 25,000 cans should be purchased at 16,875 [Refer W.N. 5&6] If the company increases production to 2,25,000 cans of 'EXE', 1,50,000 empty cans should be manufactured and additional 75,000 cans should be purchased at a cost of 50,625. [Refer W.N. 5&6] (b) Additional fixed overheads to be incurred on a new machine:7,500 Savings per unit if empty cans are made instead of buying:0.675 - 0.6375 = 0.0375 Minimum additional quantity of empty containers to be made to recover the additional fixed costs:7,500/0.0375 = 2,00,000 empty cans Installation of the new machine for the manufacture of empty cans will be economical at production level of 3,50,000 cans per month. (c) Evaluation of the profitability on sale of "EXE” at the three levels. Per can (₹) 1,50,000 can (₹) 1,75,000 can (₹) 2,25,000 can (₹) Sales 5.0000 7,50,000.00 8,75,000.00 11,25,000.00 Less: Direct Material 1.8000 2,70,000.00 3,15,000.00 4,05,000.00 Direct Wages 1.3500 2,02,500.00 2,36,250.00 3,03,750.00 Variable Overheads 0.3375 50,625.00 59,062.50 75,937.50 Empty can made 0.6375 95,625.00 95,625.00 95,625.00 Empty can purchases 0.6750 - 16,875.00 50,625.00 Net Gain 1,31,250.00 1,52,187.50 1,94,062.50

Topics: Marginal Costing

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