Question

Paste Corporation has established new plant for the production of new product called “Diazinon”. There are two different manufacturing methods available to produce Diazinon. Either by using a process or an order base method. The assembling technique won't influence the quality or deals of the item. The evaluated manufacturing expenses of the two strategies are as per the following:

                                                                              Process base       Order base

Variable manufacturing cost per unit..................... Rs14.00         Rs.17.60

Fixed manufacturing cost per year ......................Rs. 2,440,000 Rs. 1,320,000

The organization's statistical surveying office has suggested an initial selling cost of Rs.35 per unit for     Diazinon. The yearly fixed selling and admin costs of the Diazinon are Rs.500, 000. The variable selling and regulatory costs are Rs. 2 per unit.

Required:

1. CM ratio and variable expenses ratio. If Paste Corporation uses the:

1. Process base manufacturing method.

2. Order base manufacturing method.

   II.      Break-even point in units and amount by formula method. If Paste Corporation uses the:

                        1. Process base manufacturing method.

                        2. Order base manufacturing method.

3. Margin of safety. Assuming 250,000 units are actual sales for.

1. Process base manufacturing method.

2. Order base manufacturing method.

4. Degree or operating leverage at actual sales level for.

1. Process base manufacturing method.

2. Order base manufacturing method.

                                                                                                                                                      

Answer 1

CM ratio/ Contribution margin ratio=Contribution/ Sales

Contribution=Sales-Variable cost

CM ratio= (Sale-variable expenses)/sales

Process base manufacturing method

Sales=35

Variable expense=14+2=16

Contribution=Sales -Variable expense=35-16=19

Contribution Margin ratio = 19/35= .54 or 54%

Order base manufacturing method

Sales=35

Variable cost=17.60+2=19.60

Contribution=35-19.60=15.4

Contribution margin ratio=15.4/35=.44 or 44%

Break even point in units=Fixed cost / contribution per units

Break even point in value= Fixed cost/ contribution margin ratio

Process base manufacturing method

Fixed cost=2440000+500000

=2940000

Contribution per unit=19

Break even point=154736.8 or 154736 units

Breakeven point in value= 2940000/54%

=5444444.44

Order based manufacturing method

Fixed cost=1320000+500000

=1820000

Contribution per unit=15.4

break even point

In units=118181.8 /118181 units

In sales value=1820000/44%

=4136363.63

Margin of safety= (Sales- break even point)

Sales=250000

Process base manufacturing method

Margin of safety=250000-154736

=95264units

Order based manufacturing method

Margin of safety=250000-118181

=131819 units

Degree of operating leverage=Contribution margin/operating profit

At sales 250000 degree of operating leverage

Process base manufacturing method

Contribution margin at sales 250000 units =Contribution*sales unit

=19*250000

=4750000

Operating profit=Contribution margin- Fixed cost

=4750000-2940000=1810000

Degree of operating leverage=2.6

Order base Manufacturing method

Contribution margin at sales 250000 units =Contribution*sales unit

=15.4*250000

=3850000

Operating profit=Contribution margin- Fixed cost

=3850000-1820000

=2030000

Degree of operating leverage=1.89