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Cost Volume Profit

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Best notes of CVP

Sohail A / Sharjah

0 year of teaching experience

Qualification: M.phill Chemistry (Physical) University of the punjab Lahore M.Sc Chemistry (physical) from Punjab university lahore, B.Sc – Botany – Zoology – Chemistry and Completed B.Ed. (Bachelors of Education)

Teaches: Biology, Chemistry, Physics, Science

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  1. COST VOLUME PROFIT (CVP) and breakeven analysis ANALYSIS [this topic is on the basis of Marginal costing technique] Basic assumptions Costs are either fixed or variable (if not then we will convert them) Variable cost per unit remains constant at all level of activity (output and sale) Total Variable production cost varies with production. Total variable selling cost varies with sales Production and sale will be different if there is stock. Total fixed costs remains constant. Per unit fixed cost varies inversely with the activity level Sale price per unit remains constant for every unit of product sold Per unit contribution: sale price per unit - variable cost per unit Conclusion: if both the sale price per unit and variable cost per unit are constant then it means contribution per unit will remain constant at all levels of sale. From this discussion, we can calculate contribution / sale ratio (CS ratio) or contribution margin ratio (CM ratio) as follows: Contribution Per Unit x100 Sale Pr icePerUnif Breakeven Analysis: Breakeven Point: It is the volume of sale in a period at which there is neither profit nor loss. (Means, Revenue = cost) As we know, Total cost + Profit = Sales OR Total variable cost + Total fixed cost + Profit = Sales At breakeven point profit is zero therefore; Or Or Or Or Or T.v.c + T.F.C + O -Sales T.F.C = Sales - T.V.C T.F.C= [Sale Price/unit x units] - [Variable cost/unit x Units] T.F.C= Units x [Sale Price/unit - Variable cost/unitl T.F.C= Units x Contribution/unit Breakeven units = Total Fixed cost Contribution/unit If breakeven is to be calculated in amounts then; (Breakeven units x Sale Price/unit) Or breakeven point expressed in sales revenue (directly) Breakeven point (in revenue) = Total fixed cost CS ratio Margin of safety: [Budgeted sales — breakeven sales] (units or amount) It is the maximum amount by which actual sales can be lower than budgeted sales without incurring a loss for the period. [if budgeted sales are not given then instead use given level of sales]
  2. Margin of safety Ratio: Margin of safety x 100 Budgeted sales (Answer will be in %age of budgeted sales) Calculation can either be on the basis of units or amount. Target Profit: Management might want to know what the volume of sale will be, in order to achieve a target profit. Target Profit (units) = Total fixed cost + Target profit Contribution/unit Or Target profit expressed in sales revenue = Total fixed cost + Target profit Practice Question: Q. Unit VC/'U nit Contribution/unit Fixed cost 600,000 Break even (Units) 8 Revenue 75,000 x 20 Income statement Sales (75,000 x 20) Variable cost (75,000 x 12) Contribution Total fixed cost Net Profit CS Ratio: Contributi on it x 100 Sale% nit x 100 20 Contribution is 40% of Sales. TFC Breakeven Sales (directly) CS Ratio CIS ratio 20 (12) 8 600,000 75,000 (900,000) 600,000 (600,000) 600,000
  3. Q. Budgeted Sales Volume for the period Sale Price Variable Cost/ Unit Fixed Cost Breakeven Units 240,000 12 Income statement (break even) Sales (20,000 x 16) Variable Cost (20,000 x 4) Contribution Total fixed cost Net Profit Budgeted Income Statement Sales (25,000 x 16) Variable cost (25,000 x 4) Contribution Fixed Cost Net Profit or (12 x 5,000) Margin of Safety: 5,000 x 100 = of budgeted sales 25,000 Units 16 4 240,000 for the period 20,000 Units 320,000 (80,000) 240,000 240,000 400,000 (100,000) 300,000 (240,000) 60,000 25,000 20,000 5,000 25,000 Budgeted Sales Breakeven Sales Margin of Safety Q. Sale Price / Unit Variable Cost / Unit Fixed Cost 100 80 20 10 6 100,ooo (a) how many units should be sold to achieve breakeven. Sales Fixed Cost + Variable Cost + O Units x sale price / Unit Fixed Cost + Units x Variable Cost / Unit Units x 10 - 100,000 + units x 6 [Units x 10]- [Units x 6] = 100,000
  4. Units (10-6) 100,000 100,000 Units 25,000 4 Sales (25,000 x 10) 250,000 Variable cost (25,000 x 6) 150,000 Contribution 100,000 Fixed Cost (100,000) Profit (b) How many units should be sold achieve profit of 80,000. Sales = • 25) x 100 = 133,333 Sales Fixed Cost + Variable Cost + Profit Units x 10 100,000 + Units x 6 + 80,000 Units x 10- units x 6 = 180,000 180,000 Units (10-6) 45,000 4 Sales (45,000 x 10) Variable cost (45,000 x 6) Contribution Fixed Cost Profit 450,000 270,000 180,000 (100,000) 80,000 If we want to calculate largest profit revenue directly, then; Fixed cost + target profit / CS Ratio: CS Ratio 4/10 x 100 -40% 100,000 + 80,000 450,000 0.4 Conceptual exercise: Contribution/sale ratio is 25% Variable cost = 100,000 Sales = ? Profit is 25% of sales Cost = 100,000 Sales = ? Sales = 100,000/75 x 100 = 133,333 Contribution margin ratio is 30% Contribution = 30,000 Variable cost = ? Variable cost = 30,000/30 x 70 = 70,000 Margin of safety ratio = 6.25% Breakeven sales = 7500 units Margin of safety = ? units Margin of safety = 7500/93.75 x 6.25 = 500 units
  5. a Delta Limited makes Sales Costs: Direct Material Direct labor Overheads: Production Admin Total es of one e onl . The bud et for the Units 150,000 Variable Rs 600,000 450,000 300,000 1 350 000 ear is as follows: Ru ees Fixed Rs 766,000 554,000 1 320 000 Q.2 You are required to calculate; i. Contribution per unit ii. Contribution margin ratio (or Contribution sales ratio) Breakeven point in units and rupees iv. Margin of safety ratio b) Delta Limited is considering the acquisition of a new machine. This will add Rs 262,500 to fixed production overheads but will reduce the total labor cost by 50%. All other factors will remain same. You are required to answer the following: i. What will be the new breakeven point in terms of both units and rupees? ii. What level of sales will be required to earn at least same level of profit as before acquisition of new machine? [Spring 1999] Octa Electronics produces and markets a single product. Presently, the product is manufactured in a plant that relies heavily on direct labor force. Last year, the company sold 5,000 units with the following results: Sales Less: Variable expenses Contribution margin Less: Fixed expenses Net income Required: Rupees 22,500,000 13,500,000 6,300,000 2, 700,000 a) b) c) Compute the break-even point in rupees and the margin of safety. (04 Marks) What would be the contribution margin ratio and the break-even point in number of units if variable cost increases by Rs. 600 per unit? Also compute the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the previous year. (05 Marks) The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net income of Rs. 3,150,000. (03 Marks) (Autumn 2008)
  6. Emerald Limited (EL) is engaged in the manufacture and sale of a single product. Following Q.3 statement summarizes the performance of EL for the first two quarters of the financial year 20X2: Rs in '000 Sales volume in units Sales revenue Cost of Goods sold Material Labor Factory overheads Gross Profit Selling and distribution expenses Administrative expenses Net Profit Quarter 1 580 000 493,000 (197,200) (98,600) (84,660) (380.460) 112 540 (26,500) (23,500) (50,000) Quarter 2 540 000 464,400 (183,600) (91,800) (80,580) (355.980) 108 420 (25,500) (23,500) (49,000) In the second quarter of the year EL increased the sale price, as a result of which the sales volume and net profit declined. The management wants to recover the shortfall in profit in the third quarter. In order to achieve this target, the product manager has suggested a reduction in per unit price by Rs. 15. The marketing director however, is of the opinion that if the price of the product is reduced further, the field force can sell 650,000 units in the third quarter. It is estimated that to produce more than 625,000 units the fixed factory overheads will have to be increased by Rs. 2.5 million. Required: (a) Compute the minimum number of units to be sold by EL at the reduced price in third quarter, to recover the shortfall in the second quarter profits as well as to earn the same profit as was in first quarter. (b) Determine the minimum price which could be charged to maintain the profitability calculated in (a) above, if EL wants to sell 650,000 units. Discussion of formulas with tax effect At Breakeven: Sales Variable Cost Contribution Fixed Cost Net Profit Sales Variable Cost + Fixed Cost Or Sales — Variable Cost Fixed Cost Or Contribution = Fixed Cost Or (14 marks) (Spring 2011) 500,000 (200,000) 300,000 (300,000)
  7. Units Sold x Contribution/Unit Fixed Cost Fixed Cost Unit Sold Contributi on / Unit At Target Profit Level: Sales Variable Cost Contribution Fixed Cost Net Profit Sales Variable Cost + Fixed Cost + Profit Sales — Variable Cost Fixed Cost + Profit Contribution = Fixed Cost + Profit Or Units Sold x Contribution/Unit Fixed Cost + Profit Fixed Cost + Profit Unit Sold Contribution / Unit At Target Profit Level (with involvement of tax): Sales Variable Cost Contribution Fixed Cost Profit before tax Tax@ 30% Profit after tax 500,000 200,000 + 200,000 + 30,000 + 70,000 Or Sales = Variable Cost + Fixed Cost + Tax + PAT Or Sales — Variable Cost = Fixed Cost + PBT Or Contribution Fixed Cost + PBT Or Units Sold x Contribution/Unit Fixed Cost + PBT Fixed Cost + PBT Unit Sold Contributi on / Unit 500,000 (200,000) 300,000 (200,000) 1 oo,ooo 500,000 (200,000) 300,000 (200,000) 1 oo,ooo (30,000) 70,000
  8. Q.4 Altar Limited (AL) produces and markets a single product. Following information is available from AL's records for the month of February 2013: Sales price Direct material (2 kg at Rs. 5 per kg) Direct labor Variable overheads Fixed overheads Selling expenses Administration expenses (fixed) Production (Good units) Closing inventory Additional information: Rs. 26 per unit Rs. 10 per unit Rs. 2 per unit Rs. 4 per unit Rs. 3.50 per unit Rs. 295,000 Rs. 101 ,400 175,000 units 30,000 units Inspection is performed at the end of production and defective units are estimated at 20% of the inspected units. The defective units are sold as scrap at Rs. 5 per unit. Fixed overheads per unit are calculated on the basis of good units produced. iii. As compared to last month, selling expenses in February 2013 have decreased by Rs. 42,000. In January 2()13, AL produced and sold 180,000 units. Required: Assuming there was no inventory at the beginning of February 2013; calculate break-even sales in quantity for the month of February 2013. (12 Marks) (Spring2013) Remember that: Cost is not allocated to normal loss. If it has some recovery value it is adjusted against cost of production. In CVP analysis, fixed production cost is treated as a period cost rather than a product cost Cost is allocate to abnormal loss and if it has some recovery value then it is adjusted against cost of abnormal loss and then net amount is recognized as an expense in income statement. If there is no information about loss, then assume it is normal loss.
  9. MULTI-PRODUCT ANALYSIS (mixed break even) In some situations, businesses may be producing and selling more than one product. However, in this discussion it is assumed that more than one products are sold in a certain constant mix (percentage) The following budgeted information refers to two products of a company: Sale price per unit Variable cost per unit Contribution per unit Budgeted sale volume Sales Mix Fixed cost = Rs. 315,000 x 100 25 15,000 3 120 (111) 9 5,000 Break-even point in Batches: Fixed Cost Contribution/Batch Contribution per batch = 25x3 +9 x 1 = 84/batch = 315,000 + 84 = 3,750 Batches x 11,250 Units (3,750 x 3) Break-even in rupees x 11,250 x 100 Y = 3,750 x 120 Calculation of Break even in rupees directly 3, 750 Units (3,750 x 1) -450,000 T = 15,000 Units Total 1,575,000 = Fixed Cost + CS Ratio per batch CIS ratio per batch: Contribution per batch = 84 Revenue per batch C/S ratio per batch Breakeven revenue = 315,000 + 0.2 X (Revenue) (3,750 x3 x 100) = 420 (3 x 100) + (120 x 1) = (84/420) x 100 = 20 % of sales = 1,575,000 +420 -3,750 batches OR (300 + 420 x 1,575,000) Y (Revenue) (3750 x 1 x120 ) OR (120 + 420 x 1,575,000) -450,000
  10. Margin of safety: [Budgeted Level Budgeted Activity Level (Given) Break-even point Margin of safety Margin of safety ratio Target Profit Break-even level] Batches 5,000 (20,000+4) 3 750 1,250 25% Units 20,000 (15,000+5,000) 15 000 5,000 25% Revenue 2,100,000 (15,000x 100) + (5,000 x 120) 1 575 000 525,000 25% Q.5 Suppose in the above scenario; company wishes to make a profit of Rs 189,000. Fixed cost + Target Profit - - 315 000 + 189 000 = 6,000 batches Contribution/batch 84 Or Fixed cost + Target Profit - - 315 000 + 189 000 = 2,520,000 C/S ratio/batch 20% Hydra Electronics assembles and sells three products —W, X and Y. The variable cost per unit for each product is as follows: Direct materials Direct labor Variable overheads Rupees 4,880 4,000 1,360 Rupees 1,600 2,000 480 Rupees 1,000 700 348 Total fixed production overheads are estimated to be 133,230,000 The fixed selling and administrative costs are expected to be Rs. 71,270,400. Management estimates that the ratio of sales quantities of W, X and Y shall be and selling price per unit shall be Rs. 12,800; Rs. 6,000 and Rs. 3,600 respectively. Required: (a) Calculate the number of units of W, X and Y to be sold in order to achieve break even. (b) Calculate the break even sales in terms of Rupees. (16 Marks) (Autumn2007)
  11. Q.6 Cost analyst assumed the following situation for a company's three major products. The per unit No. of No. of information is as follows: ales rice ariable cost ontribution margin Total fixed cost is Rs. 200,000. Required: 10.00 6.00 4.00 Product 8.00 5.00 3.00 11.00 9.00 2.00 1. The break-even point (in total and for each product) if the three products are sold in the ratio of 4:3:7 units. 2. The new break-even point (in total and for each product) if management decides to concentrate its sales efforts on Product A with its higher contribution margin, resulting in a new sales ratio of units. Q. 7 KPK Dairies Limited (KDL) is planning to introduce three energy flavored milk from 1 July 2015. In this respect, following projections have been made: lanned roduction ales roduction cost er irect material irect labour ariable overheads ixed overheads acket: ackets ackets cket: Ilin and distribution cost ariable overheads ixed overheads otal cost per packet C-Plus 540 000 425 000 100 15 23 25 12 5 180 I-Plus 275 000 255,000 — Rupees — 98 13 19 22 8 5 165 V-Plus 185 000 170 000 97 12 16 20 10 5 160 KDL will sell its products through a distributor at a commiss•on of 5% of sale price and expects to earn a contribution margin of 40% of net sales i.e. sales minus distributor's commission. Required: Compute break even sales in packets and rupees, assuming that ratio of quantities sold would be as per projections. (17)
  12. Another scenario: Q. 8 KPK Dairies Limited (KDL) is planning to introduce three energy flavoured milk from 1 July 2015. In this respect, following projections have been made: Planned Production (No. of packets) Sales (No. of packets) Production Cost per Packet Direct material Direct labour Variable overheads Fixed over heads Selling and distribution cost per Variable overheads Fixed overheads Total cost per packet cket c-Plus 400,000 380,000 100 15 23 25 12 5 180 I-Pius 475,000 380,000 Rs. 98 13 19 22 8 5 165 V-Plus 285,000 190,000 Rs. 97 12 16 20 10 5 160 KDL will sell its products through a distributor at a commission of 8% of sale price and expects to earn a contribution margin of 20% of net sales i.e. sales minus distributor's commission. Required: (a) Compute break even sales in packets and rupees, assuming that ratio of quantities sold would be as per projections. (b) Prepare income statement for the period at projected level. Q.9 Solvent Limited has two divisions each of which makes a different product. The budgeted data for the next year is as under: irect material irect labour acto overheads rice per unit Product A Product B Ru ees 20 25 Details of factory overheads are as follows: Product A is stored in a rented warehouse whose rent is Rs. 0.25 million per month. Product B is required to be stored under special conditions. It is stored in a third party warehouse and the company has to pay rent on the basis of space utilized. The rent has been budgeted at Rs. O. 12 million per month. Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed. Depreciation for assets pertaining to product A and B is Rs. 6.0 million and Rs. 2.0 million respectively. of the cost of electricity and fuel varies in accordance with the production in units and the total cost has been budgeted at Rs. 4.0 million. All other overheads are fixed. Required: Compute the break-even sales assuming that the ratio of quantities sold would remain the same, as has been budgeted above.
  13. Break Even Charts: Break-even int can also be found b usin a r No. of Units 250,000 500,000 750,000 Y-Axis 5,000 4,000 3,000 2,000 1,000 O Sales @ 4/unit Variable cost @ 2.4/unit 600,000 Profit hicala roach; for exam le. Fixed cost Total cost Sales Line Total Cost Line Variable Cost Line Profit/(Loss) (800,000) (400,000) 400,000 Break-even point 250 500 750 1,000 1,250 Variable cost area Fixed Cost Area Fixed Cost Area X-Axis (No. of Units) How to plot the graph: Total cost line will start from fixed cost point Variable cost and sale line will start from zero. Difference between variable cost line and the total cost line will remain constant and represents fixed cost. Break even point will be that point where sales line intersects with total cost line.
  14. Profit/Volume Chart (PIV Chart) It is an alternate to a breakeven chart for presenting CVP information. It is a chart that shows the profit or loss at all levels of sales. Profit Amount 1,600,000 1,200,000 800,000 400,000 400,000 800,000 1,200,000 1,600,000 How to plot a graph: 250 500 Profit Line 1250 (Units) sold or (amount) of sale Break-even point In this case graph will start from below zero. With every additional unit, profit will increase. The point on x axis where profit line intersects with it represents the break even point. Extra Questions of Graphs Q. Sales Zero 200 400 600 800 1 ,ooo Contribution @ 42% 84 168 252 336 420 Fixed Cost 297.8 297.8 297.8 297.8 297.8 297.8 Rs.OOO Profit (297.8) (213.8) (129.8) (45.8) 38.2 122.2 Required: prepare a profit volume chart
  15. Q. Sales Zero 200 400 600 800 1 ,ooo 1 ,200 Contribution @ 37.7% 75.4 150.8 226.2 301.6 377.7 452.4 Fixed Cost 309.8 309.8 309.8 309.8 309.8 309.8 309.8 Rs. 000 Profit (309.8) (234.4) (159) (83.6) (8.2) 67.9 142.6 Required: prepare a profit volume chart Practice Question (Using Graph) You are a management accountant for a business that develops specialist computers. You are consulted to investigate the viability of marketing a new type of hand-held computer. With the help of the manager of research and development, the production manager, the buyer and the sales manager, you have made the following estimates of annual sales and profitability: Sales Units 12,000 15,000 18,000 Profit / loss) Rs. (30,000) 150,000 330,000 The selling price will be Rs. 150 / unit. Required: (a) Prepare a traditional break-even chart using the information given above. (Breakeven Chart). (b) Calculate the margin of safety if annual sales are expected to be 1 5,000 units and its percentage.
  16. A. 750,000 - WORKINGS: Difference (2,700,000) (2,370,000) 18,000 Sales Units 18,000 12 000 6.000 Sales Sales (at Rs. 150) Rs. 1 800 000 900.000 Profit Rs. 330,000 (30,000) An increase in sales from 12,000 units to 18,000 units results in an increase of Rs. 900,000 in revenue and Rs. 360,000 in contribution and profit. (because fixed cost will remain same). From this, we can calculate that the contribution is Rs. 60 per unit (Rs. and the C/S ratio is 0.40 (Rs. 360,000/Rs. 900,000). Variable costs are therefore 0.6 or 60% of sales. To draw a break-even chart, we need to know the fixed costs. Substitute in high or low equation When sales are: Sales (at Rs. 1 50 each) Variable cost (sales x 60%) Contribution (sales x 40%) Profit Therefore fixed costs When Sales are: (b) Fixed cost Variable cost (see above) Total cost 18,000 units (330,000) 750,000 18,000 units 750,000 12,000 units 720,000 30,000 750,000 12,000 units 750,000
  17. Breakeven Point Margin of Safety Margin of Safety Fixed Cost / CS Ratio 750,000 / 1 + 150 12,500 units 15,000 - 12,500 2,500 units 15,000 - 12,500 x 100 16.67% of sales. 15,000 Q 10 ABC Limited deals in manufacturing and marketing of perfumes. The company has three brands to cater for different classes of customers. The selling prices and contribution margins for the year 2013 were as follows: ale rice ontribution mar in 10,000 5 000 -Rs. per unit- 8,000 3,000 5 000 2 000 Total sale for the year 2013 was Rs. 15,600 million and sales volume ratio for A, B and C was respectively. The following estimates pertain to the year ending 31 December 2014: The average sale prices and variable costs for the next year are expected to increase by 14% and 8% respectively. The normal market growth is estimated at 5% per annum. However, the company plans to launch an aggressive marketing campaign for which additional advertising budget of Rs. 250 million has been approved. With increased advertisement, increase in sales volume for A, B and C has been forecasted at 15%, 12% and 10% respectively. Required: Compute the projected contribution margin for the year 2014 and the impact of advertising on profit of the company. Americano and Macchiato [Spring-20141 Q 11 Orient Stores Limited (OSL) operates retail outlets at various petrol pumps across the city. The average monthly performance of these outlets is as under: ales Rent expense ther fixed costs Rs. in '000 1,500 50 150 OSL earns contribution margin of 15% on items on which retail prices are printed. These items constitute 40% of the total sales. All other items are sold at the contribution margin of 25%. Sohaib Enterprises (SE) has offered OSL to establish an outlet at one of its petrol pumps located in a posh area of the city. OSL's planning department estimates that: At the proposed location, the sales volumes would be 20% lower than average. Being a posh area, OSL would be able to charge 10% higher prices on items on which retail prices are not printed. Other fixed costs would be the same as the average of the existing outlets.
  18. Required: (a) Determine the break-even sales under the assumptions that SE would monthly charge: Option l: rent of Rs. 75,000 Option Il: rent of Rs. 50,000 plus 5% commission on total sales: (b) Which of the above options would you recommend and why? Note: increase in volume results into increase in variable cost and vice versa. (Spring 2014) Increase will sale price will not necessarily result into increase in variable cost. Introduction of a new product Sales Variable Cost Contribution Fixed Cost Profit Suppose a company has following results for the year ended 31-12-2009 500,000 200,000 300,000 200,000 100,000 It is planning to launch a new product. It is expected that there will be no additional fixed cost as the company will use all existing facilities. How much units should be sold to earn incremental profit of 50,000. Assume that sale price / unit of new product will be 8 and variable cost / unit will be 6. [we need to consider incremental increase in fixed cost and profit]. 50,000 +2 25,000 units Income statement sales (25,000 x 8) Variable cost (25,000 x 6) Contribution Fixed cost Incremental profit 200,000 1502000 50.000 If suppose additional fixed cost to be incurred is 25,000. Calculate the nunber of units to be sold to earn profit after tax of Rs. 50,000. Tax x @ 20% 50,000 Target profit *100 62,500 80 25,000 + 62,500 43,750 2 Income statement sales (43,750 x 8) Variable cost (43,750 x 6) Contribution Fixed Cost Profit before tax Tax @ 20% Profit after tax 350,000 262 500 87.500 25.000 62.500 12.500 50 000
  19. Q.12 Naseem (Private) Limited (NPL) is a manufacturer of industrial goods and is launching a new product. The production will be carried out using existing facilities. However, the capacity of a machine would have to be increased at a cost of Rs. 3.0 million. The budgeted costs per unit are as under: Imported material Local material Labor Variable overheads 1.3 kg at Rs. 750 per kg 0.5 kg at Rs. 150 per kg 2.0 hours at Rs. 300 per hour Rs. 200 per labor hour Selling & administration cost - variable Rs. 359 Other relevant details are as under: Ill. v. Net weight of each unit of finished product will be 1.6 kg. During production, 5% of material input will evaporate. The remaining waste would be disposed off at a rate of Rs. 80 per kg. The cost of existing plant is Rs. 10 million. The rate of depreciation is 10% per annum. Administration and other fixed overheads amount to Rs. 150,000 per month. As a result of the introduction of the new product, these will increase to Rs. 170,000 per month. The management estimates that 20% of the facilities would be used for the new product. The company fixes its sale price at variable cost plus 25%. Applicable tax rate for the company is 35%. Required: Compute the sales quantity and value, required to achieve a targeted increase of Rs. 4.5 million in after tax profit. (10 marks)
  20. A. Solutions: Delta Limited a) Sales Variable Contribution Fixed Cost 600,000+450,000+300,000 (766,000 + 554,000) i) Contribution / unit = 1,650,000 / 150,000 = 11 ii) C/S ratio = 11/20 X 100= 55% iii) Breakeven units = 1,320,000/11 = 120,000 units 1,320,000 / 0.55 = Rs 2,400,000 (120,000 x 20 = 2,400,000) iv) Margin of safety ratio = Budgeted Sales — Breakeven x 100 Budgeted Sales = 150 000 -120 000 x 100 = 20% 150,000 If our budgeted sales reduce by 20% then we will be at breakeven. b) Sales Variable Contribution Fixed Cost Net profit (600,000 + 225,000 + 300,000) (383,000* + 554,000 + 262,500) 3,000,000 1,350,000 1,650,000 (1,320,000) 330,000 3,000,000 (1,125,000) 1,875,000 1,199,500 675,500 *766,000 x 50% = 383,000 i) Breakeven = 1,199,500/12.5* -95,960 units = / 62.5%** = Rs 1,919,200 [95,960 x 201 / 150,000 = 12.5 ; / 20 x 100 = 62.5% ii) Target Profit units = (1,199500 + = 122,360 units [122,360 x 20 = 2,447,200] = = Rs 2,447,200 A.2 Octa Electronics a)i) Breakeven in rupees: = Fixed cost C/S ratio = 6300 000 = 15,750,000 [9,000 / 22,500 x 100 0.4 = 40% of sales If units to be found out then + 4,500 (22,500,000 + 5,000) = 3,500 units (ii) Margin of Safety = 15,750,000) = 6,750,000 or = 5,000 1,500 x 5]
  21. b) i) If variable cost increase by 600/unit, the contribution per unit will reduce from 1800 per unit to 1200/unit a. 1800/unit= + 5,000) b. 1200/unit = + 5,000) - 600 The selling price/unit is 4500 (22,500,000+5,000). Therefore contribution margin ratio is 26.67% CM ratio = x 100] = 26.67% Breakeven units = 6,300,000 + 1,200 = 5,250 units Sales Less: Variable expenses Contribution margin 3,300 / 60 x 100 = 5,500 c) Target contribution = Total Profit + Fixed cost Rupees 3,300 100 60 40 = 3,150,000 + 12,600,000 (6,300,000 x 2) = 15,750,000 Revised Contribution per unit = [4,500- (3,300 x 50%)) = 2,850/unit -15 750 000 = 5,526 units 2,850 AB Emeralds Limited (a) Minimum No. of Units to be Sold at Reduced Price: First Quarter Price 850/unit 580,000 Second Quarter Price 860/unit 540,000 Revised selling price in third quarter 860 Shortfall in profit of second quarter (62,540 Profit for the 1st quarter Target profit for third quarter Add: Fixed Cost Administrative Cost (100% fixed as given) Fixed factory overheads (W-1 ) -15=845 - 59,420) Fixed selling and distribution expenses (W-1) Rs. '000' 3,120 62,540 65,660 23,500 25,500 12,000 61,000
  22. 126,000 208 608,942 W-1 Target contribution required Contribution per unit (845 — 637) (w-2) No. of units to be sold Fixed Cost 4 Target Profit Target Volume = Contributi on / Unit 61 .ooo.ooo + 65.660.000 208 608,942 Computation of Fixed Factory Overheads Using High Low Method: W-2 Factory Overheads At 580,000 Volume At 540,000 Volume 80 580 000 Difference 4 080 000 Variable cost/unit 102 Fixed Cost = Total Cost — Variable Cost - (540,000x 102) Or - (580,000x 102) Computation of Variable Cost / Unit: 540,000 Material 197,200,000 580,000 540,000 98,600,000 580,000 Factory Overheads — Variable (W 1) Selling and Distribution Expenses Variable (W 1) Variable cost (650,000 x 637) Fixed cost (61 + Total Cost Profit Total Sales No. of Units to be Sold Per Unit sale price Selling & Distribution 25 500 000 1 000 000 (1 25 - (540,000x25) - (580,000x25) 340 170 102 25 637 650,000 835.70
  23. A.4 Altar Limited reak even sales in quantity for the month of February 2013: nits pr u ess: Defective units [218,750 - 175,000] OR [218,750 x 20%] ood units produced ess: closing inventory umber o units sol ariable Costs: irect material (21 , 750 x x irect labour (218, 750 x 2) ariable overheads (218,750 x 4) ess: Defective units sold (43,750 x 5) otal variable cost of production an e cost per go unit alculation of variable selling expenses per unit [using high-low method]: 42 000 180,000 - 145,000 Fixed costs Fixed overheads (175,000 x 3.5) Selling expenses 295,000 • (145,000 x 1.2) Administration expenses otal fixed costs ontribution margin per unit (26 - 18.75 - 1.2) Break even quantity (834,900 + 6.05) (43,750) (30,000) Rupees 437,500 875,000 (218,750) 3,281 ,250 1.20 612,500 121 ,ooo 101 ,400 834,900 6.05 138,000 ALT ER (not required for additional information) Income Statement (At Breakeven Point) Sales (138,000 x 26) Less: Variable Cost: Variable Cost of Sales: Opening Stock Variable Production Cost (175,000 x 18.75) Closing Stock (175,000 - 138,000 x 18.75) Gross Contribution Variable Selling Expenses (138,000 x 1.2) Net Contribution Fixed Cost Net Profit Rs. 3,281 ,250 (693, 750) 3,588,000 (2,587 ,500) (165,600) 834,900 (834,900)
  24. Income Statement (At Given Level of question) (i.e. 175,000 units produced and 145,000 unit sold) Sales (145,000 x 26) Less: Variable Cost: Variable Cost of Sales: Opening Stock Variable Production Cost (175,000 x 18.75) Closing Stock (30,000 x 18.75) Gross Contribution Variable Selling & Admin (145,000 x 1.2) Net Contribution Fixed Cost Net Profit or [145,000 -138,000] • 6.05 (26-18.75-1.2) Breakeven In Units Fixed cost Contribulion/ Batch (a) Fixed Cost: Production Overheads: Add: Selling & Admin Expenses Total Fixed Cost Weighted Avera e Contribution I Unit: 3,281 ,250 (562,500) Rs. 3,770,000 (2,718,750) 1 ,051250 (174,000) 877250 (834,900) 42,350 133,230,000 w Weight (Sales Mix) Sale Price / Unit 12,800 Variable Cost / Unit Material 4,880 Labour 4,000 Overheads 1,360 (10240) Contribution per Unit 2,560 Contribution/batch (2,560x1) (sales mix means if one unit of w; then 3 of X and 4 of Y) x 3 6,000 1 ,600 2,000 (4,080) 1 ,920 (1 ,920x3) _Z_L2ZQAQQ 4 -8 3,600 1 ,ooo 700 348 (2,048) 1 ,552 (1 ,552x4) 14,528
  25. : 14,528 x 1 14,076 units 14,076 batches X 3 42,229 unit Breakeven Sales w x 14,076 x 12,800 42,229 x 6,000 56,305 x 3,600 OR Calculation of breakeven rupees directly: Fixed Cost Breakeven Sales CS Ratio / Batch Contribution per Batch (as above) 14,528 Revenue per Batch: 12,800 x 1 + 6,000 x 3+3,600 x 4 = 45,200 14528 x 100 -32.14% 45,200 32.14% 12800 45,200 = 180,176,564 Contribution margin / unit Contribution/batch 636,248,491 18,000 45,200 = 253,373,293 - 636,248,491 4.00 (4x4) 16 x 4 56,305 units (Y) 14,400 45200 202,698,634 3.00 (3x3) 9 2.00 (2x7) 14 Rupees 180,1 72,800 253,374,000 -39 / batch Breakeven point 200,000 / 39 - - 5,128 batches
  26. A 5128 x 4 B 5128 x 3 C 5128 x Total Sales Variable costs: Breakeven point for each product c- Units 20512 15,384 35 896 Sales Price 10 8 Break-even Sales 4 x 10-40 3 x8 7 x 11=77 A — 24 B-3x5-15 c-7x9-ß3 11 24 141 102 Contribution margin 200,000 (39 / 141) x100 = 723,077 Contribution margin Contribution/batch = 200,000 / 43 - - 4,651 batches Breakeven point for each product 205 120 123,072 394 856 723 066 4.00 (4x6) 24 3.00 (3x3) 9 2.00 (2x5) 10 -43 / batch A 4651 x6 B 4651 x 3 c 4651 x5 Total Or Sales: Units 27,900 13,950 23,250 Sales Price 10 8 11 Break-even Sales 279,000 111,600 255,750 646 350 A-6x10=60 B-3x8=24 c-5x11 -55 139
  27. Variable costs: A — x 6 36 B-3x5=15 c-5x9=ß3 Contribution Margin (43 / 139) x100 646,512 Plus = 28,765 x 5 = 143,825 Packets 95 43 A batch can be a packet of units, a box of packets or a cartoon of boxes. In the given question, a box contains 5 : 3 : 2 packets (sales mix should be on the basis of number of units sold) Breakeven in Packets Fixed Cost + Contribution per batch (A) + 956 (B) 28,765 batches In 28,765 batches ; packets should be as follows: c v Plus 28,765 x 3 Plus = 28,765 x 2 = 86,295 Packets 57,530 Packets 143,825 x 263.16 86,295 x 243.11 57,530 x 236.84 (A) Breakeven Sale Rupees will be: C Plus I Plus V Plus Fixed Cost: Production Fixed Overheads: 25 x 540,000 22 x 275,000 20 x 185,000 Selling & Distribution Fixed Overheads: 5 x 425,000 5 255,000 5 170,000 Total Fixed Cost 37 20,979, 177 13 625 405 72453.569 Rupees 3.700.000 Rupees 2,125,000 850.000 23,250,000 +
  28. (B) Contribution per Batch: C Plus Sale price / per packet 263.16 Variable Cost per Packet Direct Material 100 Direct Labour 15 Variable Production Overhead 23 Variable Selling Overheads 12 "Commission to distributors 13.16 (163.16) Contribution per packet 100 Sale Price: (40% CS Ratio of net sales) — 138 150 I Plus 242.11 98 13 19 8 12.11 (150.11) 92 130 135 V Plus 236.84 97 12 16 10 11.84 (146.84) 90 125 135 c v c v - v.c 60 +40= 100 Plus 150/60 x 100 250 /95 100 -263.16 x = 13.16" Plus 138/60 x 100 230/95 x 100 -242.11 x 50/0 = 12.11 Plus 135/60 x 100 225 / 95 x 100 -236.84 x = 1 1.84 Commission: Plus 263.16 - 250 13.16 Plus 242.84 - 230 12.11 Plus 236.84-225 11 84 Weighted contribution per batch: 100 x 5+ 92 x 3+ 90 x 2 = 956 Breakeven Sales Rupees (Directly): Fixed Cost * CS Ratio / Batch sale Price / Batch (263.16 x 5 + 242.11 x 3 + 236.84 2) Variable Cost / Batch (163.16 x 5+ 150.11 x 3+ 146.84 x 2) Contribution / Batch CS Ratio / Batch 955.97/2,515.78 x 100 37.99% or 38% 27500.000 72,368,421 38% 2,515.78 (1 ,559.81) 955.97
  29. Income Statement (not required just for additional information) (on the basis of planned level of production) Sales Variable COS: Opening Stock + Variable COGM — Closing Stock Gross Contribution Variable Selling Exp. Net contribution Fixed Cost: Production Selling Net profit Cross check Contributions: At Breakeven Level: 143,825 x 100 86,295 x 92 57,530 x 90 Equal to total fixed cost 111 (425,000x236.16) 74,520,000 53,1 93,000 (10,693,000) (425,000x25.16) 61,738,050 35,750,000 (275,000x 130) (20,000x 130) (33,150,000) (5, 128,050) (255,00020.11) (170,000x236.84) 23,125,000 (185,000x125) (1 125) (21 (170,000x21.84) 14,382,500 7,939,140 5, 177,700 27,499,340 28, 117,500 10,122,300 53,760,660 Total 213,843,850 133,395,000 100,793,850 (19,533,850) 81 (23,250,000) Extra profit at Budgeted Level: 425,000 - 143,825 x 100 255,000 - 86,295 x 92 170,000 - 57,530 x 90
  30. A.8 T.F.C Contribution Batch Variable Cost Sale Price 187.5 x 100 = x 100=2038 92 x 100 = 187.5 150 203.8 (193.3) 37.5 138 138 80 135 80 x 100 = 172.5 92 168.75 92 x 100 183.42 Sale price per unit Variable cost per unit Contribution / packet 187.5 (153) 34.5 Contribution / batch - [2 x 37.5+2 x 34.5 + 1 x 33.75] = 177.75 177.75 347,679 Packets •workings: Total Fixed Production Cost Total Fixed Selling Cost Total fixed cost 173,840 batches 347,679 Packets [400,000 x 25 + 475,000 x 22 + 285,000 x 20] [380,000 x 5 + 380,000 x 5 + 190,000 x 5] 4, 750,000 135 183.42 (149.67) 33.75 173,840 Packets
  31. (b) Income Statement (At Planned Level) Sales Variable Cost: Variable cost of sales Opening Stock Variable Cost of goods manufactured Closing Stock Gross Contribution Variable expenses Selling 77,444 55,200 (2,760) (20,000x 138) (52,440) 25,004 (10,754) [(380,000x (12+16.3)] 14,250 71 ,250 (380,000x 187.5) 61,750 (12,350) (95,000x 130) (49,400) 21 ,850 (8,740) [(380,000x (8+1 5)] Net Contribution Fixed cost Production Selling Net Profit Proof of Profit (by units sold above break even): 13,110 1 ,212 1,115 545.4 2,872 32,321 x 37.5 32,321 x 34.5 16,160 x 33.75 A.9 Sales — Rupees Price / Units Sales — Units Sales Mix Variable Costs: Material Direct Labour Solvent Limited Mixed Breakeven Product A 20 34,850 35,625 (285, ooox 125) (11,875) (95,000x125) (23, 750) 11,100 (4,687) [(190,000x (10+14.67)] 6,413 Product B 25 [6] 37.50/0 Rs. 000 Total 183,544 152,575 (26,985) (125,590) 57,954 (24,181) 33,773 (26,150) (4,750) 2,873 Total [16]
  32. Variable OH (W-1) Per Unit Variable Cost Contribution per Unit Contribution per batch (having 16 units in total) [8.94 x 10+ 11.61 = 159.06/ batch Fixed Cost (W -1) Breakeven batches = Contributi on / batch x 10 2,455,677 units x 20 OR Breakeven directly: 85,948,699 45.45% Sale Price / Batch: 20 x 10 +25 x 6 -350 159.06 x 100 45.45% 350 Total Overheads Variable OH: Rent based on space (120,000 x 12) Indirect Labour: Electricity & Fuel: x 80%) / x x 80%) / x Variable overheads Fixed overheads (balance) 11.06 8.94 13.39 11.61 159.06 245,568 batches. 1 units x 25 36,835,157 Rs. Rs. Total = 85,948,699 Rs.
  33. A.ll ABC Limited rojected contribution margin(CM) for 2014 rojected CM on sales for 2014 (after dvertising) Rs. in mill M on normal sales growth rate of 5% Rs. in milli dditional CM due to advertising dvertising cost et increase in profit due to advertising Rs. in milli orking: ale price per unit Rs. M per unit Rs. ariable cost per unit Rs. evised sales price with 14% increase Rs. Revised variable cost with 8% increase Rs. rojected CM per unit for 2014 Rs. ales quantities for 2013 and 2014: ales volume ratio ales ratio otal sales Rs. in million Ota' sales quantities for 2013 Units in milli les quantities for 2014 at estimated normal rowth of 5% Units in million ales volume increase % for 2014 with dvertising ale quantities for 2014 having advertising ffect Units in million CxK CxH A (Axl.14) (8x1.08) c D E (AxD) F(EA69x 15.6) G (FAA) H (Gx1.05) 3,120 2,850 270 10,000 5,000 5,000 11,400 (5,400) 6,000 2 20,000 4,522 0.452 0.475 15% 0.520 2,827 2,649 178.56 8,000 3,000 5,000 9,120 (5,400) 3,720 3 24,000 5,426 0.678 0.712 12% 0.760 c 3,058 2,920 137.76 5,000 2,000 3,000 5,700 (3,240) 2,460 5 25,000 5,652 1.130 1.187 10% 1.243 Total 9,005 8,419 586 (250) 336 10 69,000 15,600
  34. A.12 Orient Stores Limited (OSL) Rs in 000 Sales-Retail price printed (1,500 x x 0.8) Sales-Retail price not printed (1,500 x 60% x 0.8 x 1.1) Total Sales A Variable cost— Retail price printed (1,500 x 40% x 85%) b) I would recommend option I as under option l, profit on expected sales is much higher and the Variable cost— Retail price not printed (1500 x x 0.8 x 75%) 55 commission to outlet owner (1,272 x 5%) Contribution Margin B Fixed Cost (150 + 75) C Profit Contribution Margin Ration D = (B + A) x 100 Breakeven sales C+ D breakeven sales is also lower than option ll. A.13 Incrementa I Fixed Cost + Targeted Increased Incrementa I Contributi on per Unit 540,cm + 6,923,077 Units 600.025 12,437 x 3,000.25 Incremental Fixed Cost Option I 480 792 1,272 (408) (540) 324 (225) 99 25.47% 883.39 pr oft Depreciation on cost of additional Capacity x 10%) Incremental admin & other fixed overheads (1 70,000 — 150,000) x 12 Targeted Profit: Profit after tax Profit before tax (4,500,000 . 65%) Contribution per Unit: Variable Cost per Unit Imported RM Local Material Sale of wastage (1.8 x 1.6) Cost of material / unit Labour (2 x 300) Overheads (2 x 200) Selling & Admin Cost (given) 1.3 025 0.11 Rate 750 150 80 Option Il 480 792 1,272 (408) (540) (63.6) 260.4 (200) 60.4 20.47% 977.04 12,437 37,314,108 300,000 6,923,077 Cost per Unit 975 75 104.120 600 400 359 2 400.20
  35. 2,400.3 Sale Price / Unit x 125 100 Contribution / IJnit Income Statement (not required for additional information) Sales (12,437 x 3,000.25) Variable cost (12,437 x 2,400.2) Contribution Fixed Cost Profit before tax Tax @ 35% Profit after tax 3,000.25 600.05 Rs. 37,314,109 (29.851.287) 7.462.822 (540,000) 6 922 822 (2,422,988) _4499ß34
  36. Extra practice questions: Question 1 Himalayan Rivers (HR) is planning to install a new plant. Planned production from the plant for the next year is 150,000 units. Cost of production is estimated as under: Direct material Direct labour Production overheads Production overheads include the following: Rs. In million 6.00 5.00 10.29 (i ii) (iv) (v) Factory premises would be acquired on rent at a cost of Rs. 1.8 million per annum. Indirect labour has been budgeted at 30% of direct labour cost, 50% of which would be fixed. Depreciation of the plant would be Rs. 0.5 million. Total power and fuel cost has been budgeted at Rs. 3 million. 80% of power and fuel cost would vary in accordance with the production. All remaining production overheads are variable. The sales and marketing budget includes the following: (i) Employment of two sales representatives at a monthly salary of Rs. 25,000 each and a sales commission of 2% on sales achieved. (ii) Hiring of a delivery van at Rs. 70,000 per month. (iii) Launching an advertisement campaign at a cost of Rs. 1.5 million. Required: Calculate the breakeven sales revenue and quantity for the next year if HR expects to earn a contribution margin of 40% on sales, net of 2% sales commission. (10) Q. 2 Auto Industries Limited (AIL) manufactures auto spare parts. Currently, it is operating at 70% capacity. At this level, the following information is available: reak-even sales Mar in of safet s. 125 million s. 25 million ontribution mar in to sales AIL is planning to increase capacity utilization through the following measures: Selling price would be reduced by 5% which is expected to increase sales volume by 30%. Increase in sales would require additional investment of Rs. 40 million in distribution vehicles and working capital. The additional funds would be arranged through a long-term loan at a cost of 15% per annum. Depreciation on distribution vehicles would be Rs. 5 million. As a result of increased production, economies of scale would reduce variable cost per unit by 10%. Required: • Prepare profit statements under current and proposed scenarios. • Compute break-even sales and margin of safety after taking the above measures. Note: if nothing is mentioned then depreciation is always a fixed cost. Interest on loan is also a fixed cost which neither varies with production nor sales.
  37. Question 3 [CVP & Joint By Product] Ideal Chemicals (IC) blends and markets various cleaning chemicals. Presently, IC's plant is working at 70% capacity. To utilize its idle capacity. IC is planning to acquire rights to produce and market a new brand of chemical namely Z-13 on payment of fee of Rs. 160,000 per month. In this respect the relevant information is summarized as under: Z-13 would be produced using the existing plant whose cost is Rs. 81 million. Processing would be carried out in batches of 2,000 litres of raw materials. Production costs per batch are estimated as under: Raw material: Imported Local Direct labour Variable production overheads 1 ,200 litres @ Rs. 1,5()() per litre 800 litres @ Rs. 900 per litre 4,000 hours @ Rs. 165 per hour @ Rs. 120 per direct labour hour (ii) (iii) (iv) (v) (vi) (vii) (viii) 1 , 700 litres of Z-13 is produced from each batch. 100 litres are lost by way of evaporation whereas 200 litres of input is converted into solid waste. The approximate weight of the solid waste is 225 kg per batch. Net volume of each bottle of Z-13 would be 1.25 litres. The solid waste would be refined to produce a by-product, polishing wax. Refining would cause an estimated loss of 2% of by-product output. Cost of refining and sales price of wax would be Rs. 250 and Rs. 400 per kg respectively. Net sales revenue (sales less refining cost) from sale of wax is to be deducted from the cost of the main product. Variable selling overheads are estimated at Rs. 175 per unit. The plant is depreciated at 10% per annum. It is estimated that production of Z-13 would utilise 20% capacity of the plant. To introduce Z-13, IC plans to launch a sales campaign at an estimated cost of Rs. 3.5 million. IC wishes to sell Z-13 at a contribution margin of 40% on sales. Required: Determine Z-13's sale price per unit and annual units to be sold, if IC intends to earn an incremental profit before tax of Rs. 10 million from its sale. (11)
  38. Q. 4 Americano Limited (AL) is engaged in the assembling and marketing of three products, Alpha, Beta and Gamma. AL is in the process of preparation of product-wise projected statement of contribution margin for the next financial year commencing from 1 January 2020. Following information in this regard is available: Total sales of AL for the year ending 31 December 2019 are estimated to be Rs. 28 million. The current sales price and ratio of sales for each of three products are given below: Sale price per unit (Rs.) Ratio of quantities sold Alpha 8,000 4 Beta Gamma 12,000 1 10,000 2 With effect from 1 January 2020, AL is intending to increase the selling prices by 10%. The demand would decline by 2% due to increase in sale prices. The details of components that are used in each product are as follows: Components Description Alpha Beta Gamma Purchase price per component 4 5 4 45 units 4 60 5 6 4 30 The suppliers have informed AL that prices of components would increase by 15% with effect from 1 April 2020. All products pass through assembling and finishing departments. Details of labour costs at each department are as follows: (iii) Required: Assembling Finishing Description Alpha Beta Gamma Rate per hour Direct labour (Hours) 10 12 10 50 15 20 18 40 Factory overheads are estimated at 60% of direct labour cost. 40% of factory overheads are fixed. Prepare a product-wise statement showing projected contribution margin for the year ending 31 December 2020. (16)
  39. Macchiato (Private) Limited (MPL) is planning to launch a new business of manufacturing carpets and rugs. The extracts from the projected statement of profit or loss of the new business are given below: Sales Cost of goods sold Gross profit Operating expenses Profit before taxation Taxation @ 35% Profit after taxation Rs. in '000 500,000 (360,000) 140,000 (90,000) 50,000 (17,500) 32,500 Selling prices of carpets and rugs would be Rs. 24,000 and Rs. 4,000 per unit with contribution margin of 25% and 20% respectively. Carpets and rugs would be sold in the ratio of 114. Required: (a) Compute the sales revenue at break-even and the margin of safety in units. (b) Determine the number of carpets and rugs that must be sold if MPL wishes to maintain profit after taxation equivalent to 10% of budgeted sales. Basketball (Private) Limited (BPL) is in the process of planning for the next year. BPL is currently operating at 70% of the production capacity. The management wants to achieve an increase of Rs. 36 million in profit after tax of the latest year. The summarized statement of profit or loss for the latest year is as follows: (07) (05) Sales Cost of sales (60% variable) Gross profit Operating expenses (40% variable) Profit before tax Tax (25%) Profit after tax Rs. in million 567 (400) 167 (47) 120 (30) 90 Following are the major assumptions/projections for the next year's budget: (iii) Selling price of all products would be increased by 8%. However, to avoid any adverse impact of price increase, 10% discount would be offered to the large customers who purchase about 30% of the total sales. Additionally, distributor commission would be increased from 2% to 3% of selling price. Average variable costs other than distributor commission are projected to increase by 4% while fixed costs other than depreciation are projected to increase by 5%. Depreciation for the latest year was Rs. 90 million and would remain constant.
  40. Required: (a) Compute the amount of sales required to achieve the target profit. (b) Determine the production capacity that would be utilized to achieve the sales as computed in (a) above. Answer 1 Breakeven Revenue & Quantity: Total Fixed Cost / CS Ratio Breakeven units 16,811 ,224/200 OR 84,056 x 200 Workings: (W-1) Total Fixed Cost: Production Fixed Cost: Rent — factory premises Indirect labour (5 x 30% x 50%) Depreciation Power & Fuel (3 x 20%) Sales and marketing Expenses: Employees Salary (25,000 x 2 x 12) Delivery van (70,000 x 12) Advertisement Campaign Total Fixed Cost (W-2) Variable Cost: (Excluding Commission) (09) (02) Direct Material Direct Labour V-OH (10.29 - 3.65) Per Unit Variable Cost (17.64 M v.C+C=s 60 +40 100 117.6 x 100 196 60 + 150,000) Rs. In Millions 16,811,224 84,056 Units 84,056 Units 16,811,224 1.8 0.75 0.5 0.6 3.65 0.60 0.84 1.50 6.59 6.00 5.00 6.64 17.64 117.6/ unit
  41. Gross Sales — Commission = Net Sales 2 100 196 98 — x 100 200 (Selling Price) 98 Per Unit Contribution: Sale price/unit = V.C / unit Commission / unit (200 x 2%) c,'S Ratio 78.4/200 x 100 39.2% to fixed cost; so 125 x 20% = 25 200 (117.6) 78.4 Current 150 (120) 30 should be Proposed 185.25 (140.4) 44.85 (36.00) (b) Profit Statement Sales (125 + 25) Variable cost of sales (15() x 80%) Contribution 'Fixed cost Net Profit •At breakeven point, contribution is equal contribution as well as fixed cost. Profit Statement Sales (150 x 1.3 x 0.95) Variable cost of sales (12() x 1.3 x 0.9) Contribution Fixed cost (25 + 5+40 x 15%) Net Profit Breakeven Sales: Fixed cost * CS Ratio 36 + 24.21% 148.70 CS Ratio: (44.85 + 185.25) x 100-24.21% Margin of safety 185.25 - 148.7 36.55
  42. Answer 3 (a) (b) Selling Price per Unit: v.C+c=s 60 +40 100 2841.80 (W -1) x 100 = 4,736.34 per unit 60 Number of units to be sold to earn an incremental profit before tax of 10 millions: Incrementa I Total Fixed Cost + Incrementa I Pr oft Before Tax Incrementa I Contributi on / Unit 5420000 (W -2) + 8,139 units 1894.54 (W -3) Workings: (W-1) Per batch [of 2,000 x litres] Imported 1,200 L Material: Imported [1200 x 15001 = Local [800 x 900] = Labour: [4,000 x 165] = Variable Overheads: [4,000 x 120] = Total variable Production Cost 1700 L 100 L 200 L Loss (Normal) Waste Rs. '000' 1,800 720 660 480 3,660 (33.15) 3626.85 : 1,360) Sold Waste [225 kg] 221 x 400 = 221 x 250 = 2% Less: net revenue from the by-product Net variable production cost (of 1700 litres) No. of bottles to be produced from 1700 litres [1 ,700 + 1.25) 1,360 units (bottles) Variable Production Cost per Unit = (3,626,850 Variable Selling Cost per Unit [given in point (v)] Total Variable Cost per Unit Polishing Vax 100% 88,400 55,250 33,150 2,666.8 175 2,841.80
  43. (W-2) Incremental total Fixed Cost Manufacturing rights [160,000 x 12] Fixed Selling Cost (W-3) Contribution per Unit: Sale price per unit = Variable cost per unit Contribution per unit Not required for extra information: If working in litres rather than bottles: Net variable production cost (of 1 , 700 litres) Variable production cost per litre = 3,626,850/1 , 700 Variable selling cost per litre [175 + 1.25) Total variable cost per litre Contribution per Litre: 2,273.44 x 40 1,515.63/1itre 60 No. of litres to be sold to earn an incremental profit before of 10 million: 4 10000000 10,174 litres 1,515.63 10,174 8, 139 bottles. 1.25 Ans. 4 Sales (w-1) American Limited Product-wise Statement of Contribution Margin For the year ended 31-12-2020 Variable Cost of Sales: Opening Stock *Variable Cost of Goods Manufactured Direct Material (w-2) Direct Labor (w-3) Variable Overheads (w-4) Closing Stock Alpha 15,092 858.5715 1,886.5 679.14 3,424.21 5,659.5 307.654 606.25 216.09 1,123.994 4,736.34 (2,841.80) 1 ,894.54 3,626,850 2,133.44 140.0 2,273.44 Gamma 9,432.5 457.905 1,046.15 376.614 1,880.669
  44. Contribution Margin (W-1) Sold Units of Alpha. Beta and Gamma in 2019 11,667.79 4,535.506 7,551.831 Sale price per Batch: 28,000,000/64,000 = 1,750 units Sale in 2020 8000 x 4 + 12,000 x 1 + 10,000 x 2 - 64,000 437.5 batches 437.5 units 875 units Alpha Beta Gamma 1,750 x 98% = 1,715 x 8,000 x 1.1 437.5 x 98% = 428.75 x 12,000 x 1.1 875 x 98% = 857.5 x 10,000 x 1.1 3,001.25 "000" = 15,092 = 5,659.5 = 9,432.5 W-2) Direct Material cost Alpha: A 1,715 x 4- c 1,715x5 - 6,860/12 x 3 x 45 = 77.175 B 1,715 x 2 = 3,430/12x3x60- = 8,575/12 x3x 30- 6,860/12 x 9 x 45 x 1.15 - 3,430/12 x 9 x 60 x 1.15 = 177.502 8,575/12 x 9 x 30 x 1.15 - Total = 192.9375 + 665.634 = 858.5715 - 51.45 - 64.3125 192.9375 - 266.254 - 221.878 665.634 Beta: A 428.75 x 5 2,143.75/12 x3x45 B 428.75 x4=1715/12x 3x60 C 428.75 x 6 = 2572.5/12 x3x30 = 24.117 = 25.725 = 19.294 69.136 2,143.75/12 x 9 x 45 x 1.15 = 83.204 1,715/12 x 9 x 60 x 1.15 = 88.751 2,572.5/12 x 9 x 30 x 1.15 = 66.563 238.518 Total (69.136 +238.518) = 307.654
  45. Gamma: = 38.587 B 857.5 2572.5/12x3x60 = 38.587 c 857.5x4= 3430/12 x3x 30 = 25.725 102.899 3430/12x9x45x1.15 -133.127 2572.5/12x9x60x1.15 -133.127 3430/12x9x30x1.15 -88.751 355.006 Total (102.899 +355.006) = 457.905 (W-3) Direct Labour: Alpha: 1715x10x50+1715x15x40 = 1,886.5 Beta: 428.75x12x50+428.75x20x40 = 600.25 Gamma: 857.5x10x50+857.5x18x40 = 1046.15 (W-4) Variable Overhead: Alpha: = 679.14 Beta: = 216.09 Gamma: -376.614 Q.5 (a) Breakeven in Rupees = Total fixed cost Contribution/batch (w—g) 9.200 (w—4) = 7,065 batches Carpets: 7,065 units x24,ooo 282,600,000 Workings: W-1 Budgeted Units: sale price per batch = 40,000 / batch Rugs: 28,620 units 4,000 500.000.000 40,000 12,500 batches
  46. Carpets: 12,500 units W-2: Contribution per batch Selling price/unit Variable Cost/unit (75%) Contribution/unit (25%) Fixed Cost: Total Cost 360,000,000 + = 450,000,000 Carpets 24,000 (18,000) 6,000 Rugs 50,000 (28,260) 21,740 Rugs: 50,000 units Rugs 4,000 (3,200) (80%) (20%) 800 Variable Cost 385,000,000 Fixed Cost W-4 Contribution per batch: 6,000x1 + 800x4 = 9,200/batch Margin of Safety in units: Budgeted units Breakeven units Margin of safety units Carpets 12,500 (7,065) 5,435
  47. Total Fixed Cost+Prortt before Tax Contribution/ batch 9.200 -15,426 batches Carpets: 15,426 units Answer: 6 a) x4 Rugs: 61,704 units Rs. in million — Amount of sales to achieve the target profit = Total fixed cost + Target profit before tax W-1 Total fixed cost: cost of sales (400 x 40%) Operating expenses (47 x 60%) Existing total fixed cost Less: Depreciation Other fixes cost x 1.05 + Depreciation (Constant) Revised total fixed cost W-2 Target profit before tax Target profit after tax (90 + 36) Target profit before tax (126/75 x 100) Contribution sales ratio (Because information of units is not available) = 193.11 (W-1) + 168 (W-2) 53.67 (W-3) = 672.83 160 28.2 188.2 (90) 98.2 103.11 90 193.11 126 168
  48. W-3 Contribution sales ratio Sales (W-3.1) Total variable cost (W-3.2) Contribution 318.82/594 x 100 = 53.67% of sales W-3.1 sales 567 x 1.08 612.36 x 30% x 612.36 x 70% Total sales W-3.2 Variable cost Variable cost of sales (400 x 60%) Variable operating expenses (47 x 40%) Existing total variable cost Less: Existing commission (567 x 2%) Other variable cost x 1.04 Add: Revised commission (594*3%) Revised total variable cost b) Total capacity available: 810 is at latest year's price, Therefore convert it Into next year's price 567/70*100 874.8 x 30% x 874.8 x 70% Capacity utilization = 810 810 x 1.08 236.2 612.36 672.83/848.56 x 100 594 (275.18) 318.82 612.36 165 429 594 240 18.8 258.8 (11.34) 247.46 257.36 17.82 275.18 874.8 848.56 79.25%

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