The Manager of a company now producing at 70% of its productive
capacity considers whether he can profitably make use of his spare
capacity by increasing his sales. The price of his product in the home
market is Rs. 100 per unit and his profit is 10% of turnover. Full costs are
Rs. 90 per unit. Of these, fixed costs are Rs. 30 per unit and Rs. 60 per
unit are costs which vary with output mainly labour and raw materials.
The manager discovered that he can sell his product at Rs. 75 per unit in
the export market. He wanted to know whether or not he should take up
the export business and therefore referred the matter to the cost
accountant of the company. The cost accountant who was a believer in full
costing made certain calculations and arrived at the following estimates :
Situation 1 ? Home market : Profit Rs. 10 per unit
Situation 2 ? Home market : Profit Rs. 19 per unit
Export market : Loss Rs. 6 per unit
His conclusion was that the export business is unprofitable and should not
be taken.
Questions :
(a) How did the cost accountant arrive at his estimates?
(b) Do you agree with the view that export business should not be taken
up?