MANAGEMENT

ACCOUNTING TERM PAPER

ANKIT SINGH CHAUHAN

2019SMF6504
ENTRYNO.-55
8146128893
ankit.singhchauhan@dmsiitd.org
 MANAGEMENT ACCOUNTING TERM PAPER

Introduction:-
Willie Wonka owns a chocolate factory named Twix Choco Limited and
produces different types of chocolate . He has a exclusive store in the town
where he sells all his chocolates . The price of different type of chocolate is
similar with uniform manufacturing cost and selling price. Mr Wonka is
thinking to open a another store in the nearby town and this new store would
have the following expense and revenue relationship :
Variable Data: Per chocolate(Rs)
Selling price 50
Cost of chocolate 25
Salesman’s commission 5
Annual fixed costs:
Rent 1,50,000
Depreciation 90,000
Salaries 4,00,000
Advertising and distribution 1,50,000
Other fixed expenses 50,000
8,40,000

Statement of Problem:
To check for whether at what point will the new store start to generate profit
we do the Break – even analysis and cash break-even to measure the viability
of the new store and contribution the that store in the log term.
A) To calculate annual break-even point in units and in value.

B) Calculate the cash break -even point in units and value.

C) The sales commission is to be discontinued, and instead a fixed amount

of 70,000 is to be increased on the salary head. A reduction in selling
price of 10 percent is also proposed. What will be the BEP in units?
A)
Selling price per chocolate Rs50
Less variable costs
Cost of chocolate 25
Sales’ man commission 5
Contribution margin per unit 20
Contribution to Volume 40%
ratio(Rs20/50)
Break- even point(in 42,000
units)=8,40,000/20
Break even Sales 21,00,000
revenue=8,40,000/0.40

B)
Cash break-even( in units)= Total cash fixed costs/ Contribution margin per
unit(CMPU)
Total cash fixed costs= TFC - Depreciation
8,40,000-90,000 = Rs 7,50,000
CBEP in units = 7,50,000/20= 37,500( Units)
Cash break- even point =Total cash fixed costs/ (C/V ratio)
7,50,000/0.40= Rs 18,75,000

C)
Determination of CMPU(revised):
Selling price per chocolate(Rs 50-10% of 50 i.e., Rs 5) Rs 45
Less cost of chocolate Rs 25
Contribution margin per unit(revised) Rs20
BEP, in units(Revised)=( 8,40,000+70,000)/20= 70,020 units

New Proposal (Make or Buy decision):

Twix Choco limited has been procuring cocoa mixture for their chocolates from
Mars Cocoa Limited at price of Rs 50 per kg and the annual requirement of
cocoa mixture is 5000 kg. The cost of producing the cocoa mixture by Twix
Choco Limited per kg is estimated to be:

Direct Material Rs 20
Direct Labour 7
Variable Manufacturing overheads 5
Fixed Costs(apportioned) 8
Rs40

Incremental Analysis:
Particulars Amount(Rs)
Increase in revenue/ Cost 2,50,000
savings(5000 kg* Rs 50)
Less incremental cost of making
Cocoa mixture:
Direct material(5000kg*Rs20) 1,00,000
Direct Labour (5000kg*Rs 7) 35,000
Variable Manufacturing 25,000
Overheads(5000Kg*Rs5)
Net cost savings/ Net increase( 90,000
before taxes) in profits(5000kg*Rs18)

After the incremental Analysis we can conclude that Willie Wonka should start
manufacturing his own cocoa mixture instead of procuring it as it will be
profitable by Rs 90,000.

Note:- This paper is allowed to be used by Prof P.K. Jain