DETERMINING OPTIMUM LEVEL OF OPERATIONS - Accounts and Finance for Managers

Under this method, the level has to be found out which is having lesser selling price, cost of operations and greater profits known as optimum level of operations.

Illustration

A factory engaged in manufacturing plastic buckets is working at 40% capacity and produces 10,000 buckets per annum.

The present cost break up for bucket is as under
Material Rs.10
Labour Rs.3
Overheads Rs.5(60% fixed)
The selling price is Rs 20 per bucket

If it is decided to work the factory at 50% capacity, the selling price falls by 3%. At 90 % capacity the selling price falls by 5% accompanied by a similar fall in the prices of material. You are required to calculate the profit at 50% and 90% capacities and also calculate break even point for the same capacity productions.

The very first step is to compute number of units at every level of capacity i.e. 50% and 90%.
But in this problem, 40 % capacity utilization given which amounted 10,000 units.

For 50%=
10,000*50
40
=12,500 units
For 90%=
10,000*90
40
=22,500 units


The important information is that the changes taken place in the selling price of the product.
Selling price = Rs.20 @ 40% i.e., 10,000 units
Selling price @ 50% i.e. 12,500 units = Rs.20–3% on Rs.20 = Rs.19.40
Selling price @90% i.e. 22,500 units=Rs.20–5% on Rs.20 = Rs.19

While preparing the marginal costing statement, the fixed cost portion should not be included for the computation of the contribution.

The next step is to prepare the marginal costing statement.

marginal costing statement

marginal costing statement


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