Company cost break-up and production projections

CAT 2007 Slot 1 · DILR · Medium · Data Interpretation

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Passage / data set

The following table shows the break-up of actual costs incurred by a company in last five years (year 2002 to year 2006) to produce a particular product:

Costs (Rs.)Year 2002Year 2003Year 2004Year 2005Year 2006
Volume of production and sale (units)1000900110012001200
Material50,00045,10055,20059,90060,000
Labour20,00018,00022,10024,15024,000
Consumables2,0002,2001,8001,6001,400
Rent of building1,0001,0001,1001,1001,200
Rates and taxes400400400400400
Repair and maintenance expenses800820780790800
Operating cost of machines30,00027,00033,50036,02036,000
Selling and marketing expenses5,7505,8005,8005,7505,800

The production capacity of the company is 2000 units. The selling price for the year 2006 was Rs. 125 per unit. Some costs change almost in direct proportion to the change in volume of production, while others do not follow any obvious pattern of change with respect to the volume of production and hence are considered fixed. Using the information provided for the year 2006 as the basis for projecting the figures for the year 2007, answer the following questions:

Question 1 of 4

What is the approximate cost per unit in rupees, if the company produces and sells 1400 units in the year 2007?

  1. A.

    104

  2. B.

    107

  3. C.

    110

  4. D.

    115

  5. E.

    116

Answer

B

Explanation

Variable costs in 2006 = Material (60,000) + Labour (24,000) + Operating cost (36,000) = 120,000 for 1200 units   ⟹  \implies Rs. 100/unit. Fixed costs in 2006 = 1,400 + 1,200 + 400 + 800 + 5,800 = 9,600. Total cost for 1400 units in 2007 =9,600+100(1400)=149,600= 9,600 + 100(1400) = 149,600. Cost per unit =149,6001400≈106.85≈107= \frac{149,600}{1400} \approx 106.85 \approx 107.

Question 2 of 4

What is the minimum number of units that the company needs to produce and sell to avoid any loss?

  1. A.

    313

  2. B.

    350

  3. C.

    384

  4. D.

    747

  5. E.

    928

Answer

C

Explanation

Selling price =125= 125. Break-even quantity =Fixed CostSelling Price−Variable Cost per unit=9600125−100=960025=384= \frac{\text{Fixed Cost}}{\text{Selling Price} - \text{Variable Cost per unit}} = \frac{9600}{125 - 100} = \frac{9600}{25} = 384 units.

Question 3 of 4

If the company reduces the price by 5%, it can produce and sell as many units as it desires. How many units the company should produce to maximize its profit?

  1. A.

    1400

  2. B.

    1600

  3. C.

    1800

  4. D.

    1900

  5. E.

    2000

Answer

E

Explanation

New selling price =125×0.95=118.75= 125 \times 0.95 = 118.75. Profit per unit =118.75−100=18.75>0= 118.75 - 100 = 18.75 > 0. Since margin is positive and max capacity is 2000 units, producing maximum capacity (2000 units) maximizes profit.

Question 4 of 4

Given that the company cannot sell more than 1700 units, and it will have to reduce the price by Rs.5 for all units, if it wants to sell more than 1400 units, what is the maximum profit, in rupees, that the company can earn?

  1. A.

    25,400

  2. B.

    24,400

  3. C.

    31,400

  4. D.

    32,900

  5. E.

    32,000

Answer

A

Explanation

Option 1: Sell 1400 units at Rs. 125. Profit =1400(125−100)−9600=35,000−9600=25,400= 1400(125 - 100) - 9600 = 35,000 - 9600 = 25,400. Option 2: Sell 1700 units at Rs. 120. Profit =1700(120−100)−9600=34,000−9600=24,400= 1700(120 - 100) - 9600 = 34,000 - 9600 = 24,400. Maximum profit is Rs. 25,400.

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