Mahindra Co. Ltd. working at 50% capacity manufactures 10,000 units. The cost per unit is ₹180 and sales price is ₹200. The break-up of the cost is as follows:
Cost per unit (₹):
- Materials: 100
- Wages: 30
- Factory OH: 30 (40% Fixed)
- Administration OH: 30 (50% Fixed)
At 60% working capacity, raw materials cost increases by 2% and sales price falls by 2%.
At 80% working capacity, material cost increases by 5% and sales price decreases by 5%.
Prepare a statement to show profitability at 60% and 80% capacity.
Answer (1)
To analyze profitability for Mahindra Co. Ltd. at 60% and 80% working capacity, follow these steps:
First, calculate the total costs and revenues at different capacities. Start with the given costs at 50% capacity, and adjust them according to the conditions given for 60% and 80% capacity.
50% Capacity
Units Produced: 10,000
Cost per Unit: ₹180
Sales Price per Unit: ₹200
Break-up of Cost per Unit:
Materials: ₹100
Wages: ₹30
Factory Overheads (OH): ₹30 (40% Fixed, so ₹12 Fixed and ₹18 Variable)
Administration OH: ₹30 (50% Fixed, so ₹15 Fixed and ₹15 Variable)
60% Capacity
Units Produced: 12,000 (10,000 units / 50% × 60%)
Adjusted Costs:
Materials Cost per Unit: ₹102 (2% increase from ₹100)
Wages Cost per Unit: ₹30 (unchanged)
Factory OH (Fixed): ₹12 (same total fixed cost as 50%, so on more units, cost per unit changes)
Factory OH (Variable): ₹18 (same as 50%)
Administration OH (Fixed): ₹15 (same total fixed cost)
Administration OH (Variable): ₹15 (same as 50%)
Total Cost per Unit at 60%:
Total Cost per Unit = 102 + 30 + 12 + 18 + 15 + 15 = ₹192
Adjusted Sales Price:
Sales Price per Unit: ₹196 (2% decrease from ₹200)
Total Profit Calculation at 60%:
Total Revenue: 12 , 000 × ₹196 = ₹2 , 352 , 000
Total Cost: 12 , 000 × ₹192 = ₹2 , 304 , 000
Profit: ₹2 , 352 , 000 − ₹2 , 304 , 000 = ₹48 , 000
80% Capacity
Units Produced: 16,000 (10,000 units / 50% × 80%)
Adjusted Costs:
Materials Cost per Unit: ₹105 (5% increase from ₹100)
Wages Cost per Unit: ₹30 (unchanged)
Factory OH (Fixed): ₹12 (same total fixed cost)
Factory OH (Variable): ₹18 (same variable part as 50%)
Administration OH (Fixed): ₹15 (same total fixed cost)
Administration OH (Variable): ₹15 (same variable part as 50%)
Total Cost per Unit at 80%:
Total Cost per Unit = 105 + 30 + 12 + 18 + 15 + 15 = ₹195
Adjusted Sales Price:
Sales Price per Unit: ₹190 (5% decrease from ₹200)
Total Profit Calculation at 80%:
Total Revenue: 16 , 000 × ₹190 = ₹3 , 040 , 000
Total Cost: 16 , 000 × ₹195 = ₹3 , 120 , 000
Profit (or Loss): ₹3 , 040 , 000 − ₹3 , 120 , 000 = − ₹80 , 000
Conclusion
At 60% capacity, Mahindra Co. Ltd. makes a profit of ₹48,000.
At 80% capacity, the company incurs a loss of ₹80,000 due to increased costs and decreased sales price.
