Alternative Methods of Production
Sometimes the management has to choose from among the alternative methods of production. For example, the same product may be produced either by Machine A or Machine B. In such circumstances, CVP analysis is applied and the method, which gives the highest contribution, can be adopted.
Illustration
Product P can be produced by using Machine X or Machine Y. The cost record gives you the following information.
|
|
Machine
|
Machine
|
|
|
X
|
Y
|
|
Production per hour
|
15
|
20
|
|
Per unit selling price (Rs.)
|
150
|
150
|
|
Material (Rs.)
|
60
|
60
|
|
Labor (Rs.)
|
25
|
25
|
|
Variable expenses (Rs.)
|
40
|
35
|
You are required to determine which machine is profitable to produce the product P.
Solution
|
Particulars
|
Machine X
|
Machine Y
|
|
Production per hour
|
15
|
20
|
|
Per unit selling price (Rs.)
|
150
|
150
|
|
Variable cost
Material (Rs.)
Labor (Rs.)
Variable overhead (Rs.)
|
60
25
40
|
60
25
35
|
|
Total marginal cost (Rs.)
|
125
|
120
|
|
Contribution (Rs.)
|
25
|
30
|
|
Contribution per hour (Rs.)
|
15 x 25 = 375
|
30 x 20 = 600
|
Machine Y gives a higher contribution so it should be used for producing the product.
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