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Rinki (Querist)

05 December 2013 Question 1(d): Relevant Costing – Computation of Opportunity Costs (5 Marks)
A Company can produce any of its 4 Products, A, B, C and D. Only one product can be produced in a production period and
this has to be determined at the beginning of the production run. The Production Capacity is 1,000 hours. Whatever is
produced has to be sold and there is no Inventory build–up to be considered beyond the production period. The following
information is given:
Particulars A B C D
Selling Price (` per unit) 40 50 60 70
Variable Cost (` per unit) 30 20 20 30
Gurukripa’s Guideline Answers for Nov 2013 CA Final Advanced Management Accounting Exams
Nov 2013.3
Particulars A B C D
No. of units that can be sold 1,000 600 900 600
No. of production hours required per unit of product 1 hour 1 hour and 15 minutes 1 hour and 15 minutes 2 hours
What are the Opportunity Costs of A, B, C and D?
Solution: Similar to Page 4.8, Q.No.4
Particulars A B C D
1. Contribution per unit = SP pu – VC pu 40 – 30 = ` 10 50 – 20 = ` 30 60 – 20 = ` 40 70 – 30 = ` 40
2. Time Required 1 hour 1.25 hours 1.25 hours 2 hours
3. Possible Production Point Qtty = (1000 hrs ÷ 2) 1,000 units 800 units 800 units 500 units
4. Possible Sale Quantity 1,000 units 600 units 900 units 600 units
5. Sales Quantity lost due to Production Constraint
= 4 – 3, if 4 > 3. Nil NA 100 units 100 units
6. Opportunity Costs = (5 × 1) Nil Nil ` 4,000 ` 4,000
Is this solution correct...?????

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

05 December 2013 Since the constraint is the capacity hours, need to find out the idle time for each product production after producing the demand quantities and multiple by contribution per hour losing

Rinki

Rinki (Querist)

14 December 2013 thank you for reply sir....bt i doubt dis sol given in dis que....bcoz as much i knw..opportunity cost is smthing we lose bcoz of limited resourses plus n here if we are making one product then obviously we are giving dis product time n we should compare the benefit we lost from the other product n obviously the highest one..

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

14 December 2013 your understanding about the opportunity cost is perfect.

Rinki

Rinki (Querist)

29 December 2013 no sir..sorry if i made any expression lyk dat...i didn"t mean to show anythg lyk tht..

CMA Ramesh Krishnan

CMA Ramesh Krishnan (Expert)

31 December 2013 I am not getting. I meant that your understanding is correct only.

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