FAISAL MUMTAZ

FA08-EPE-038
ENGINEERING ECONOMICS

[September 26,2011]

Q.1) What is the significance of tangency between an Equal Product Curve and Iso-Cost Line in a firms optimization problem? Ans: The point at which the iso-cost line tangent to equal product curve tells the minimum cost at which maximum output can be obtained. Q.2) Krishna Company Ltd has the following details: Fixed cost=Rs. 4,000,000 Variable cost per unit = Rs. 300 Selling price per unit = Rs. 500 Find a. The break even sales quantity b. The break even sales c. If the actual production quantity is 1, 20,000 find the following i. Contribution ii. Margin of safety by all methods Sol: a. break even sales quantity: Break even quantity = fixed cost / (unit selling price unit variable cost) = FC / (s v) = 4000000/(500-300) = 20,000 units b. break even sales: break even sales = [FC / (s v)]*s = [4000000/(500-300)]*500 = Rs. 10,000,000 c. i. Contribution: Contribution = sales variable cost = s*Q v*Q = 500*120,000 300*120,000 = Rs. 24,000,000 ii. Margin of safety (M.S.): Method I: M.S. = sales break even sales = s*Q v*Q = 500*120,000 10,000,000 = Rs. 50,000,000 Method II: M.S. = (profit/contribution)*sales Profit = sales (fixed cost + variable cost) = 500*120,000 (40,00,000 + 300*120,000) = Rs. 20,000,000 So M.S. = (20,000,000/24,000,000)*60,000,000 = Rs. 50,000,000 M.S. as a percent of sales = (M.S./sales)*100 = (50000000/60000000)*100 = 83.33% Q.3) Consider the following data of a company for the year 1998 Sales =Rs. 240,000

Fixed cost = Rs. 50,000 Variable cost = Rs. 75,000 Find the following a. Contribution. b. Profit c. BEF d. Margin of safety Sol: a. Contribution: Contribution = sales variable cost = 240000 75000 = Rs. 165000 b. Profit: Profit = sales (fixed cost + variable cost) = 240000 (50000 + 75000) = Rs. 115000 c. BEP: P/V ratio = contribution/sales = 165000/240000 = 0.6875 or 68.75 % Now BEP = FC/PV ratio = 50000/0.6875 = Rs. 72727.273 d. M.S. = profit/PV ratio = 115000/0.6875 = Rs. 167272.23