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Problem:

General Components Ltd generates a component ‘X’, the selling price of which is Rs 50. The unit cost structure based on the present level of production or sales of 100 000 units are:

Direct materials                     Rs 20
Direct labour                         Rs   5 
Variable Overhead                Rs   2
Fixed overhead                     Rs   8

The present level of production represents 100% of capacity working a single shift. The marketing manager estimates that at the present price the quantity sold throughout the next year could be increased by 50%.  A second shift has been proposed.  This would raise production capacity to 180 000 components per annum, fixed costs rising by Rs 550,000 per annum. A shift work premium of 20% would be payable to the direct workers engaged on the additional shift. But, if production was at least 150 000 components per annum, the entire of the direct materials employed would qualify for a discount of 10%.

Required:

Evaluate whether it would be profitable for General Components Ltd to add the second shift.

Managerial Accounting, Accounting

  • Category:- Managerial Accounting
  • Reference No.:- M97258

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