# Differential loss in scrap value rs total loss

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Differential loss in scrap value Rs. Total loss (differential) Rs. 2 20000 50000 70000 3 30000 20000 50000 4 30000 30000 60000 5 40000 20000 60000 The above table shows that in case the machine is replaced at the end of third year the total loss is minimum at Rs.50000. hence, the machine should be replaced at the end of the third year. 12.3.4 KEY FACTORS A key factor is defined as the factor in the activities of an undertaking which, at a particular point of time or over a period, will limit the volume of output. . If a factor of production is in short supply, then the best-paying product becomes that which yields the highest contribution per unit of limiting factor. Profitability= Contribution/ Key Factor Thus, Contribution per unit of key factor may be ascertained & maximized according to priority (ranking). Some examples of key factors are: a. Materials-Scarce Raw Material; Restrictions by licenses, etc. b. Labour-General Shortage; Shortage of a particular type of labour. c. Plant-Imbalance; Insufficient capacity due to shortage of capital, supply, etc. d. Management-Shortage of efficient staff; policy decisions. e. Capital-Shortage of capital; insufficient research activity f. Sales-Market demand; insufficient advertisement. 12.4 REVISION POINT Profit planning Profit planning is the planning of future operations to attain maximum profit. Under the technique of marginal costing, the contribution ratio, i.e., the ratio of marginal contribution to sales, indicates the relative profitability of the different products of the business whenever there is any change in volume of sales, marginal cost per unit, total fixed costs, selling price, and sales-mix etc. Hence marginal costing is an useful tool in planning profits as it ensures sufficient return on capital employed. Pricing of Products: Sometimes pricing decisions have to be taken to cater to a recessionary market or to utilise spare capacity where only marginal cost is recovered. For export market, sometimes full cost is loaded to the sale price to remain competitive. Sometimes special prices are to be offered with expansion in mind, fixation of price below cost can be made on a short-term basis.

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164 product mix The most-profitable product mix can be determined by applying marginal costing technique. Fixed cost remaining constant, the most profitable product-mix is determined on the basis of contribution only. That product-mix which gives maximum contribution is to be considered as best product mix. Key factor A key factor is a factor which limits the volume of production and profit of business. It may be scarcity of any factor of production such as material labour, capital, plant capacity etc. Usually, when there is no key or limiting factor, the product is selected on the basis of highest P/V ratio of the product. But with key factor the selection of product will be on the basis of contribution per unit of limiting/key factor of production.
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