The Institute of Chartered Accountants of Bangladesh (ICAB)

BUSINESS AND FINANCE

(CA Professional Stage Certificate Level)

Chapter-07
The Business’s Finance Function
(Part-03)

Abdul Hamid, FCA

Email: ahamid1014@gmail.com
Cell: 01755599931
 Management Information
May-June-2019
Question:

2
+

3
 June-2018
Question No. 1

a) King Sport sells cricket products. The APL League Division handles both bats and gloves.
Historically, the firm has averaged three bats sold for each glove sold. Each bat has a Tk. 4
contribution margin and each glove has a Tk.5.contribution margin. The fixed costs of
operating the APL League Division are Tk. 200,000 per year. Each bat sells for Tk.10 on
average and each glove sells for Tk.15 on average. The corporate tax rate for the company is
40 percent.

Required:
(i) How much revenue is needed to break even? How many bats and gloves would this
represent?
(ii) How much revenue is needed to earn a pretax profit of Tk. 90,000?
(iii) How much revenue is needed to earn an after-tax profit of Tk. 90,000?

Answer to the question No. 1(b)

Let, x unit sold of Glove

Then Bat sold 3x units.

Req- (i)
(3x × 10) + (x × 15) = 2,00,000 + (x × 10) + (3x × 6)
 30x + 15x = 2,00,000 + 10x + 18x
 45x-28x = 2,00,000
 17x = 2,00,000
2,00,000
 x = 17
So, x = 11,765

Now, BEP in unit : Glove = 11,765 units & Bat = (11,765 x 3) = 35,295 units
And BEP in sales : Glove = (11,765 x 15)= Tk. 1,76,475 & Bat = (35,295 x 10) = Tk. 3,52,950.

Req- (ii) If pre-tax profit of Tk. 90,000,

(3x × 10) + (x × 15) = 2,00,000 + (x × 10) + (3x × 6) + 90,000
 30x + 15x = 2,00,000 + 10x + 18x + 90,000
 45x-28x = 2,90,000
 17x = 2,90,000
2,90,000
 x = 17
So, x = 17,059

Revenue needed = (17,059 x 15) + (17,059 x 3 x 10) = Tk. 7,67,655.

4
Req- (iii) If after-tax profit of Tk. 90,000,
90000
(3x × 10) + (x × 15) = 2,00,000 + (x × 10) + (3x × 6) + 1−0.40
 30x + 15x = 2,00,000 + 10x + 18x + 1,50,000
 45x-28x = 3,50,000
 17x = 3,50,000
3,50,000
 x = 17
So, x = 20,588
Revenue needed = (20,588 x 15) + (20,588 x 3 x 10) = Tk. 9,26,460.

Question No. 6

b) Information concerning ABC Limited's single product is as follows.

Tk. per unit

Selling price 6.00
Variable production cost 1.20
Variable selling cost 0.40
Fixed production cost 4.00
Fixed selling cost 0.80

Budgeted production and sales for the year are 10,000 units.

Required:
(i) What is the company's breakeven point, to the nearest whole unit?
(ii) How many units must be sold if ABC Limited wants to achieve a profit of Tk. 11,000
for the year?
(iii) It is now expected that the variable production cost per unit and the selling price per
unit will each increase by 10%, and fixed production costs will rise by 25%. Other costs
are expected to remain the same. What will be the new breakeven point, to the nearest
whole unit?

5
Answer to the question No. 6(b)

Q. 6(b) Solution:
Working –(a) Per Unit Contribution

Selling price 6.00

Less: Variable cost:
V. production cost 1.20
V. selling cost 0.40 1.60
4.40

Working –(b) Fixed Cost:

Production cost (10,000 x 4) = 40,000

Selling cost (10,000 x 0.80)= 8,000
48,000

Req-i
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 48,000
BEP = 𝐶.𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = = 10,909 units
4.40

In Tk. (10,909 x 6) = Tk. 65454.

Req-ii
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡+𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑃𝑟𝑜𝑓𝑖𝑡 48,000+11,000
= = 13,409 units
𝐶.𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 4.40

Req-iii

Working –(a) Per Unit Contribution, if 10% increased

Selling price 6.60

Less: Variable cost:
V. production cost 1.32
V. selling cost 0.40 1.72
4.88

Working –(b) Fixed Cost, if 25% increased :

Production cost = 50,000

Selling cost = 8,000
58,000

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 58,000

BEP = 𝐶.𝑀 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = = 11,885 units
4.88

In Tk. (11,885 x 6.60) = Tk. 78,441.

6
 Management Information
May - June 2017
Question No. 2 (b)

Q.No.2 (b) Solution:

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
Breakeven Point = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
𝑇𝑘.80,000
= 𝑇𝑘 (50−40) = 8,000 Unit

Margin of Safety = (10,000−8,000) Units

= 2,000 Units

2000 𝑈𝑛𝑖𝑡𝑠
Which may be expressed as × 100
10,000

=20%

Management Information
Nov-December-2017

7
Q, No.5 (b) Solution:

After increasing materials & labor cost, then variable cost will be
=Direct Materials+Direct Labor+Variable Overhead+Shipping & handling Cost
=( Tk 40 x 1.1) +(𝑇𝑘 30 × 1.15) + 𝑇𝑘 24 + 𝑇𝑘 6
= Tk. 44 +34.50 + 34 + 6

Tk. 108.50 Per Unit

So, Contribution Margin for next year

= Sales – 𝑉𝐶 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
= Tk 320−108.50 = 𝑇𝑘. 211.50 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡

and Contribution Margin in Tk

= Selling Units × 𝐶𝑀 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
= 10,000 × 211.50
=Tk 24,15,000

Business & Finance

Nov-Dec. 2017

8
Q. 2 Solution

Req. (i)

(1) Capital re-intensive

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
Breakeven Point =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡

𝑇𝑘 ( 24,40,000 +5,00,000
=
( 𝑇𝑘 30−14−2)
= 2, 10,000 Units
(2) Labor-Intensive
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
Breakeven Point =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑀𝑎𝑟𝑔𝑖𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡

𝑇𝑘 ( 13,20,000+5,00,000)
=
𝑇𝑘 ( 30−17.60−2 )
= 1, 75,000 Units.

Req. (ii)
Let x is the number of unit sold at which net operating income is the same for capital intensive
method and labor intensive method.
Tk. 14x−29,40,000 = 𝑇𝑘 10.40𝑥 − 18,20,000
=Tk.14x−10.40𝑥 = 𝑇𝑘 29,40,000 − 18,20,000
=Tk 3.60x = Tk 11,20,000
=x = 11,20,000
3.60
∴ 𝑥 = 3,11,111 𝑈𝑛𝑖𝑡𝑠.

9
 Business & Finance
May-June 2017

Q.4 (b) Solution

𝑹𝒆𝒒(𝒊)

Contribution Margin = (3 × (Tk 5 × 40%)) + (4 × (𝑇𝑘 2.50 × 30%))

= (3 × Tk 2)+(4 × 𝑇𝑘 0.75) = 𝑇𝑘 9

Selling Price= (3× 𝑇𝑘. 5 ) + (4 × 𝑇𝑘 2.50 ) = 𝑇𝑘 25

𝐹𝐶 𝑇𝑘 72,000
∴ 𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑃𝑜𝑖𝑛𝑡 = 𝐶𝑀 = 𝑇𝑘 9
𝑆𝑎𝑙𝑒𝑠 𝑇𝑘.25

= Tk 4,00,000

𝑹𝒆𝒒.(𝒊𝒊) If fixed costs is Tk 36,000 then,

𝐹𝐶
BEP Sales Value = 𝐶𝑀 𝑅𝑎𝑡𝑖𝑜

𝑇𝑘 36,000
Product A = =Tk 90,000
40%

𝑇𝑘 36,000
Product B = 30%
= Tk. 1,20,000

10
𝑹𝒆𝒒(𝒊𝒊𝒊)

If additional fixed cost spending Tk. 9,700 then

CM= (5× 𝑇𝑘 2) + (4 × 𝑇𝑘 0.75 ) = 𝑇𝑘 13
SP= (5× 𝑇𝑘 5) + (4 × 𝑇𝑘 2.50 ) = 𝑇𝑘 35

𝑇𝑘 72,000+𝑇𝑘 9,700
So, REP Sales Volume = 𝑇𝑘 13
𝑇𝑘 35

= Tk 2,19,962

Operating Profit under:

Old Product Mix

CM A= 30,000 × 𝑇𝑘 2 = 𝑇𝑘 60,000
B= 40,000 × 𝑇𝑘 0.75 = 𝑇𝑘 30,000
Tk 90,000
Less Fixed Cost 72,000
Operating Tk 18,000

New Product mix

CM A = 40,000× TK 2 = Tk 80,000
B= 32,000× Tk 0.75 = Tk 24,000
Tk. 1,04,000
Less: Fixed Cost = Tk. 81,700
Operating Income Tk. 22,300

Yes, the proposal to spend the additional Tk.9,700 a month should be accepted.

11
 Business & Finance
Nov-Dec-2016

Q.3 (b) Solution

Req (i)

Working Fixed Costs=

Factory O/H Tk. 30,000
Selling & Others O/H Tk. 42,000
Tk. 72,000
Variable Cost Per Unit
Direct materials Tk. 48,000
Direct Labor Tk. 60,000
Variable Factory O/H Tk. 12,000
Variable Selling & other O/H Tk. 24,000
Tk 1,44,000÷ 6,000 𝑈𝑛𝑖𝑡𝑠 = 𝑇𝑘. 24 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
𝐹𝐶
So, BEP in units = 𝑇𝑘 ( 𝑆𝑎𝑙𝑒𝑠−𝑉𝑐)𝑃𝑒𝑟 𝑢𝑛𝑖𝑡

𝑇𝑘 72,000
=𝑇𝑘 (40−24)

= 4,500 Units

12
Req (ii)

If Sales increased by 25% , sales volume will be 6,000× 125% = 7,500 𝑈𝑛𝑖𝑡𝑠
Not operating income with increased sales volume is as follows:

Sales ( 7,500 × 40) Tk 3,00,000

Less: Variable Expenses ( 7,500 × 24) Tk. 1,80,000
Tk. 1,20,000
Less: Fixed expenses Tk. 72,000
Net Operating income Tk. 48,000

Req(iii)
(𝑇𝑘 60,000)
Direct labor cost per unit before automation is 6,000 𝑈𝑛𝑖𝑡
= Tk.10
After 40% reduction, direct labor cost will be = Tk.10−(10 × 40%)
= Tk.6

Therefore, the new cost structure will be,

Selling Price = Tk.40
Variable Exp = Tk.24−𝑇𝑘 4 = 𝑇𝑘. 20
𝐹𝐶
∴ BEP in Units =(𝑆𝑎𝑙𝑒𝑠−𝑉𝐶)𝑃𝑒𝑟 𝑢𝑛𝑖𝑡

𝑇𝑘 (30,000 × 2) + 42,000)
=
𝑇𝑘(40 − 20)
=5,100 Units

13
 Business & Finance
November-December 2014
Question No. 5

(a) What is margin of safety?

(b) W. Limited sell one product for which data is given below:

Selling price per unit Tk.10

Variable Cost per unit Tk.06
Fixed Cost per unit Tk.02

The fixed cost are based on a budgeted level of activity of 5000 Units for the period.

Requirement:

(i) How many units must be sold if W Limited wishes to earn a profit of Tk.6000 for one
period ?
(ii) What is W.Limited margin of safety for the budgeted period if fixed lost prove to be
20% higher than budget.
(iii) If the selling price and variable cost increase by 20% and 12% respectively by how
much must sales volume change compared with the original budgeted level in order
to achieve the original budget profit for the period?

Answer to the question No. 5(b)

Working (a) contribution Margin per Unit

Selling price per unit Tk.10

Less Variable cost per unit Tk.06
Contribution per Unit Tk.04

Working (b) Total fixed cost = Budgeted

Units X Fixed cost per unit
= 5000X2 =Tk.10,000

Requirement (i) = Required sales in unit

= Fixed cost + desired profit
Contribution per unit
= Tk.10,000+Tk.6000
Tk.4
= 4000 Units

14
Requirement (ii) Revised Fixed Cost = Tk.10,000 +(Tk.10,000X20%
= Tk.12000
We know Margin of Safety = Total Sale/Budgeted sale- Break even sale

BEP in Units = Fixed Cost_____ = Tk.12000

Contribution per unit(W-a) Tk. 4
= 3000 Units

Margin of safety =5000 Units -3000 Units

= 2,000 Units
Margin of Safety ratio =(2000 X 100) = 40%
5000

Working ( c ) Revised contribution per unit W-(a)

Revised selling price Tk.10+(Tk.10X20%) =Tk. 12.00

Revised variable cost Tk.06+(Tk.6X12%) = Tk. 6.72
Revised Contribution per unit Tk. 5.28

Working(d) Required Profit

Original /Budgeted profit:

Selling price 5000X10 = Tk. 50,000

Less: Variable Cost 5000 X 6 = Tk. 30,000
Revised Contribution = Tk. 20,000
Less – Fixed cost = Tk. 10,000
Required profit = Tk.10,000

Requirement (iii)  Required sales in Units = Fixed cost + Desired Profit__

Revised contribution per unit

= Tk.10,000 +Tk.10,000 =3788 Units

5.28

15
 May-June 2013
Question No. 06

X Company produce and sales a single product for which variable cost are as follows:
Materials cost Tk.10
Labour cost Tk. 8
Production overhead Tk. 6
= 24

Sales price is Tk.30 per unit and fixed cost per annum is Tk.68,000. The company wishes to
make a profit of Tk.16000 per annum. Determine the sales required to achieve the targeted profit.

Answer to the question No.06.

Working (a) Contribution per Unit:

Sales price per unit Tk.30

Less: Variable cost per unit :

Materials Tk.10
Labour Tk. 8
Production over head Tk. 6
Tk.24
Contribution per unit Tk.06

Required sales in Units = Fixed Cost + Desired Profit

Contribution per Unit

= Tk.68000 + Tk.16000
Tk.6

= 14000 Units

Required sales in Taka = 14,000 unit X Selling price per unit

=14,000XTk.30
= Tk.4, 20,000

16
 November-December 2012
Question No. 03

(a) Write limiting factors of Breakeven analysis

(b) The present cost of a product is as follows:

Variable cost per unit Tk.450

Fixed cost per unit Tk.100
Total cost per unit Tk.550

The overhead charges were established taking normal operational of 2,0,000 Units of production
and sales during the year. The products is sold at Tk.1000 per unit less 5% commission to the
dealers.

You are required to:

(i) Calculate the break even sales in units.
(ii) Calculate the additional sales in units required to maintain the current profit level if
the selling price is reduce by 10%

Answer to the question No. 03

(a) Limiting factors of Breakeven Analysis:

(i) Costs can be bifurcated into variable and fixed

(ii) Fixed cost will remain constant during the relevant volume.
(iii) variable cost per unit will remain constant
(iv) Selling price per unit will remain constant
(v) In case of multi product sales mix will remain constant
(vi) Production and sales volume are equal.

Requirement (b)

Working ( i) Contribution per unit:

Selling price per unit Tk.1000

Less- Variable Cost per unit

Dealers Commission
(1000 X 5%) Tk. 50
Other variable cost Tk.450 Tk 500
Contribution per unit Tk.500

17
Working (2) Total fixed Cost = 20,000 Units
XTk.100 per unit
=20,00,000

Requirement (i) BEP in unit = Fixed cost__

Unit Contribution
= 20,00,000
Tk.500
= 4,000 Units

Working (3) Present profit level:

Total contribution (20,000 X Tk.500) = Tk.1,00,00,000
Less: Total Fixed Cost = Tk. 20,00,000
Present Profit Tk. 80,00,000

New selling price = 1000 – (1000X10%)

= Tk.900

Net selling price 900-(900X 5%) = 855

New contribution New net selling price per unit
- variable cost per unit
=855-450=Tk.405

 Requirement (ii) Required sales

in unit = Fixed Cost + Desired Profit
Contribution per unit

= 20,00,000 + 80,00,000
405

= 24,691 Unit

Required sales in Units = 24,691

Less: Present sales in Units = 20,000
Additional unit required to
maintain current profit 4691

18
Problem # 01:

X Company has decided to introduce a new product. The new product can be manufactured by
either a capital intensive method or a labour intensive method. The manufacturing method will
not affect the quality of the product. The estimated manufacturing cost under the two methods
are as follow:

Capital intensive Labour

intensive
Raw materials per unit Tk.5.00 Tk.5.60
Direct Labour per Unit
(.5DLHX12) Tk.6.00 (.8DLHX9)Tk.7.20
Variable overhead per Unit
(.5DLHX6) Tk.3.00 (.8DLHX6)Tk.4.80
Directly traceable additional
Annual fixed manufacturing Unit Tk.24,24,000 Tk.13,20,000

X Company’s market research department has recommended an introductory unit sale price of
Tk.30.00. The additional annual marketing expenses are estimated to be Tk.5,00,000.00 plus
Tk.2 for each unit sold regardless of manufacturing method.

Required:

01. Calculate the estimated break even point in annual unit sale of the new product if X company
uses a capital intensive manufacturing method or (b) the labour intensive manufacturing
method.

02. Determine the annual unit sale volume at which X company would be in different between
the two manufacturing methods. Explain the circumstances under which X company should
employ each of the two manufacturing methods.

Answer:

Requirement(i)BEP in Units= Total fixed cost

Unit Contribution Margin
W-I Calculation of Unit contribution:

Labour
Capital Intensive Intensive
Selling price per unit Tk.30.00 Tk.30.00
Less: Variable cost per unit :-
Raw material Tk. 5.00 Tk. 5.60
Direct Labour Tk. 6.00 Tk. 7.20
Variable overhead Tk. 3.00 Tk. 4.80
Variable Selling Tk. 2.00 Tk.16.00 Tk 2.00 Tk.19.60
Contribution Margin per unit Tk.14.00 Tk.10.40
19
(a) BEP in Unit =Tk.24,40,000+Tk.5,00,000
Tk.14

=Tk.29,40,000
Tk.14

= 2,10,000 Unit

(b) BEP in Units= Tk.13,20,000+Tk.5,00,000

Tk.10.40

=Tk.18,20,000
Tk.10.40

= 1,75,000 Units

Req. (2) Let X Company would be in different between the two manufacturing methods at the
volume of K units where total cost of both method are equal.

Tk.16K + Tk.29,40,000=19.60K+18,20,000

16K-19.60K=18,20,000-29,40,000

3.60K=11,20,000

K=11,20,000
3.60
K=3,11,111 Units

X company employ the capital intensive manufacturing method if annual sales are expected to
exceed 3,11,111 units because variable cost per unit under capital intensive method is lower than
that of labor intensive method.

X company employ the labor intensive manufacturing method if annual sales are not expected to
exceed 3,11,111 Units since total fixed cost is less under labor intensive method than that of
capital intensive method.

20
November-December 2015

Knowledge level

Question # 09.(a) What important information is conveyed by the margin of safety calculation in
CVP analysis ?

(b) Zoran Corporation manufactures and sells a single product; cordless telephones. Zoran is
considering upgrading its current manufacturing facilities with more modern equipment.
Relevant cost data under the current facility and the upgraded facility is provided below:

Current Upgraded
Manufacturing Cost:
Direct Materials Cost per unit Tk.20.00 Tk.20.00
Direct Labor Cost per unit Tk.18.00 Tk.10.00
Variable Overhead Cost per unit Tk.34.00 Tk.24.00`
Fixed Overhead Cost in total Tk.43,000 Tk.1,60,000
Selling and Administrative Expenses:
Variable Expenses per unit Tk.5.00 Tk.5.00
Fixed Expenses in total Tk.12,000 Tk.12,000

Under either system, Zoran will sell the cordless phones for Tk.125 per phone.

Required:

i. What is the break-even point (in number of phones) of each option ?

ii. At what level of sales (in number of phoes) will it start being more profitable for Zoran to
have the upgraded facilities?

21
Answer Q No.9.
Nov.Dece.2015
Knowledge level.

(a)Sales beyond the Break even sale is called the margin of safety. In other words, the excess of
total sales over Brak-even sales is called margin of safety. A high margin of safety is a strong
profitable position whereas a small margin of safety is a difficult profitable position.
(b)
BEP in Number of phone = Total fixed cost
Contribution per unit
W-1 Contribution per Unit:
Current Upgraded

Selling price Tk.125.00 Tk.125.00

Less: Variable cost per unit:
Direct Material Tk. 20.00 Tk.20.00
Direct Labor Tk. 18.00 Tk.10.00
Variable overhead Tk. 34.00 Tk.24.00
Selling and Admin overhead Tk. 5.00 Tk. 5.00 Tk.59.00
Tk.77.00 Tk.66.00
Contribution per Unit Tk.48.00

Current Upgraded

BEP in Number of Phones= 43,000+12,000 1,60,000+12,000

48 66
= 1146 2606
Phones Phones
(ii) Let X is the (in difference) number of phones where total cost of current facility equal to total
cost of upgraded facility.
 77 x + 55,000 = 59 x + 1,72,000

77 x – 59 x = 1,72,000-55,000

18 x = 1,17,000

x = 6,500 Phones

Since variable cost per unit is lower of upgraded facility than that of current facility therefore if
annual sales are expected to exceed 6500 number of phones, upgraded facility will be more
profitable.

22