THE AL-HASHIR Management Accounting [ier Scanned with CamScannerBREAK EVEN ANALYSIS & CONTRIBUTI Breakeven analysis and contribution ; mere Breakeven analysis or cost-volume-profit (CVP) analysis is the study of the interrelationships between costs, volume and profit at various levels of activity. . Cost-volume-profit analysis (CVP) is the study of the effects on future profit of changes in fixed cos, variable cost, sales price, quantity and mix’. Contribution | an Contribution is fundamental to CVP analysis. As you know, contribution per unit is the difference between selling price per unit and variable costs per unit The total contribution from the sales volume for * etiod ‘can be compared with the fixed costs for the period. Any excess of contribution is profit, any ¢ucit of contribution is a loss, Breakeven point The breakeven point occurs when there is neither a profit nor a loss and so fixed costs ‘The breakeven point is the level of activity at which there is neither profit nor loss, ‘The management of an organisation usually wishes to know the profit likely to be made if the aimed-for production and sales for the year are achieved. Management may also be interested to know the activity level at which there is neither profit nor loss. This is known as the breakeven point. ‘The breakeven point (BEP) can be calculated arithmetically. Breakeven point = Number of units of sale required to break even Breakeven point (unit) = eed = Contribution required to breakeven Contribution per unit EXAMPLE-1 Expected sales 10,000 units at Rs. 8 = Rs. 80,000 Variable cost Rs. 5 per unit Fixed costs Rs. 21,000 Required: Compute the breakeven point. SOLUTION: bt Total fixed costs Breakeven point (Units) ‘Contribution per unit Breakeven point (Units) = ae . 7,000 units 7 Breakeven point (Rs.) = 7,000 x Rs. 8 = Rs, 56,000 Sales above Rs. 36,000 will result in profit of Rs. ‘will mean aloss of Rs. 3 per unit foreach unit by will improve or worsen by the amount of contrib 3 per unit of additional sales and sales below Rs. 56,000 ‘hich sales fall short of 7,000 units. In other words, post ution per unit. Scanned with CamScanner—————____ovr ananysis 7,000 units a 7,001 units Revenue re Rs. Less variable costs ae 56,008 Contribution — 35,005 Less fixed costs a 21,003 Profit Le 211000 0 © breakeven) 3 ‘The contribution/sales (C/S) ratio The CS rato (or P/V ratio) isa measure of how much contsbution is earned ffom each Rs rf 1 of sales. CIS ratio = Sale price -varlable cost Sale price CIS ratio and breakeven point Analtemative way of calculating the breakeven point to give an. | . the C/S ratio is as follows. ive an answer in terms of sales revenue and using Breakeven point (Rs.) = — ution required to break even C/Sratio: EXAMPLE-2 The C/S ratio of product W is 20%. IB, the manufacturer of product W, wishes to make a contribution of Rs, 50,000 towards fixed costs, Selling price is Rs. 10 per unit. Required: Calculate breakeven point in Rs. Calculate breakeven point in Units, SOLUTION: Sead Breakeven point (Rs.) =e = Bs. 80,000 20% 5. 250,000 Breakeven point (units) rc . = 25,000 units. cere The margin of safety margin of safety is the difference in units between the budgeted sales volume and the breakeven sales ‘olume, It is sometimes expressed as a percentage of the budgeted sales volume, Margin of — Breakeven Sales (Units) safety (Units) = Budgeted Sales (Units) Asnatively the ecunen safety can be expressed as the difference between the badd sales revenue i ‘en sales revenue, expressed as @ percentage of the; budgeted sales revenue. Margin of safety (Rs) = Budgeted Sales (Rs.) - Breakeven Sales (Rs.) Scanned with CamScanner‘The margin of safety indicates the percentage by which forecast revenue exceeds OF Falls shoq required to break even. _ Budgeted sales — Breakeven polat 199 Margin of safety = = Se EXAMPLE-3 | | | Casio Ltd. makes and sells a product which has a variable cost of Rs. 30 and which sells for Rs. 40, Budgereg fixed costs are Rs. 70,000 and budgeted sales are 8,000 units. : Required: . . . . Calculate the breakeven point and the margin of safety in units and margin of safety rato, SOLUTIO! aleve mix Total fixed costs aaaliaa a ‘ontribution per unit — Bs. 70,000 Margin of safety (Units) = Budgeted Sales (Units) - Breakeven Sales (Units) Margin of safety = 8,000 - 7,000 units 1,000 units ‘ = Budgeted sales ~ Breakeven point Margin of safety = eo x 100 24000 units eeounis x 100 000 units = 12.5% of budget rprgamargin of safety indicates to management that actual sales can fall short of budget by 1,000 units er 12.5% before the breakeven Point is reached and no Profit at all is made, Breakeven arithmetic and profit targets _ Breakeven arithmetic At the breakeven point, there is no profit or loss so Total Costs ixed Costs Sales Revenue Total Contribution TARGET PROFITS: The target profits achieved when sales revenue equals variable costs fore the total contribution required fora target profit = fixed costs + reruit eae eee ad A similar formula may be applied where a company wishes to at él rT achieve this profit, sales must cover all costs and leave the Pu ee Target Profit Volume (Units) = 722! Fixed Cost + Target Profit before tax contribution per unit Target Profit Volume (Rs) = T2tsl Fixed Cost + Target Protte before tax SRR ee Scanned with CamScannerMPLE-S panes \ wakes ‘and sells a single product, for which vari “ iriable costs are as foll pirect materials a - pirect labour é Piable production overhead =__ 6 24 the sales price is Rs. 30 per unit, and fixed costs per Throft of Rs. 16,000 per sn per annum are Rs. 68,000, The company wishes to make m Required: {a)__ Determine the sales units required to achieve this profit. {b) Determine the revenue required to achieve this profit. SOLUTION: (a) Target Profit Volume (Unit) _ Total Fixed Gost + Target Profit before ae contribution per unit 2. 68,000416,000 Fs G02) = 14,000 units (Target Profit Volume (Rs) __ Tota Fixed Gost re Profit before tax _ Bs. 84,000 20% = Rs, 420,000 wl ae price —varlable St x 199 ‘Sale price x10 sok 2 aR B02. 24 x 100 CIS ratio EXAMPLE-6 make & SLB Co wishes to sell 14,000 units of its product, which has a variable cost of Rs. 15 {© Fixed costs are RS. 47,000 and the required profit is Rs. 23,000. Required: i Caleulate sale price per unit __ Total Fixed Gost + Target Prof before tax it target profit Volume (Unit) “contribution per unit ae __ 47,900 + 23,000 x “ala ptce= 4 Brice~15 Sale Price =n : 14,000 #15 sale Price = Rs. 20/unit Scanned with CamScannerGa Cee A budgeted breakeven sales revenue of Rs. 600,000 and fixed costs of Rs. 210,000 for the ‘month of September. red: is é Cains ts la erate nid w atone profit of Rs. 75,250 in September. SOLUTION: = Fixed costs Breakeven point (Rs.) “Cs ratio Rs. 600,000 CIS ratio To il Fixed Cost + Target Profit before tax ‘Target Profit Volume (Rs) = TO Cost Rares Prot before nee Rs. 210,000+ 75,460 ~Rs.035 =Rs. 815,000 EXAMPLE-8 in ‘A company manufactures and sells a single product that has the following cost and selling price structure: Rs. /anit Selling price 120 Direct material (22) Direct labour G6) Variable overhead (14) Fixed overhead a2) Profit per unit 36 The fixed overhead absorption rate is based on the normal capacity of 2,000 units per month, Assume that the same amount is spent each month on fixed overheads, Budgeted sales for next month are 2,200 units. Required: (@® —_Breakeven point, in sales units per month Gi) Margin of safety for next month (tii) Sales required to achieve a profit of Rs. 96,000 in a month, SOLUTION: @ Break even point = = —Total fixed costs 2 (anit) Contribution per unit. = R812 x 2,000 units = nts Rs.48 = 500 units (i) Marginal of Safety Margin of safety (Units) = Budgeted Sales Uni nits) — Breakeven Sales (Unit : =2,200 500 = Margin of safety =1,700 uni 384 = Scanned with CamScanner‘Target profit TN ce anata + Profit Volume (Unit) e = Total ice costs target Prom ber P Contribution per unit et 10+RS.96,000 : Gi) et r Contribution per unit =120-22-36-14 =Rs. 48 EXAMP! ‘A company manufactures and sells a single product which has the following cost and sell selling price structure. Selling price Rs. /unit Rs. unit Direct material uaa Direct labour 2 Variable overhead i Fixed overhead n 84 Profit per unit 6 ‘The fixed overhead absorption rate is based on the normal capacity of 2,000 units per month Assume that the same amount is spent each month on fixed overheads. Required: Calculate () The breakeven point, in sales units per month (i) The margin of safety (unit) for next month (ii) ‘The sales required to achieve a profit of Rs. 96,000 in a month (iv) The contribution to sales ratio wv) The breakeven revenue that must be generated in order to break even. SOLUTION: @ Breakeven point (unit) = eee _fena000 a = 500 Units a it Margin of safety (Units) = Budgeted Sales (Units) - Breskeven Sales uss) = 2,200 - 500 = 1,700 units Scanned with CamScannerSHALY Gy, SS ae = (uni Tota ined ost Target Prof befor tx fit Volume (Unit) contribution per ui aun (Rs.12 x2,000)+ Rs.96,000 Rea = 2,500 units ” : ale ps x 100 CIS ratio Sale price = Bato s. 129 = 40% co) Total Fixed costs Breakeven point (Rs.) a a = R12 2,000 units “ 40% = Rs, 60,000 W-L Contribution point =Rs. 120~ (Rs, 22 + Rs. 36 + Rs, 14) =Rs. 48 EXAMPLE-10 A break down of KP's profit in the last accounting period showed the following: Rs. 000 Sales 450 Variable costs (220) Fixed costs 60) Profit — Due to a downturn in market conditions the company is worried ‘would like to know the change in sales th: that P at would make this happen,» "** Y°" may result in losses and Required: ‘The percentage fll in sales that would be necessary before the to two decimal places) Company Would begin to incur losses (work SOLUTIO! : = Stle price ~ variable cose CIS ratio Ff ‘Sale price x 100 = (450.000-22b 00) 450,000 x 100 =51.1% Breakeven point (Rs.) = Reel ators Rs 160000 OsIT = Rs. 313,111 Scanned with CamScanner= Bude ster ~Bresevensae 9p fet Budgeted sal % of fel) = #5no00— 18 450,000 mer00 0.4% «at forthe company to fal nto a loss making psi ris ls 4 from their current position, over 2° pREAK-EVEN CHART BY satis a chart or graph showing, for all volumes of output and sales: even en os analyzed between variable costs and fixed costs total costs, n its sales next year would have to fall a \d total costs) ‘ = nce between total sales an _ ‘ mie et (where total costs = total sales revenue, and profit = 0) « The ent Sales s Fixed! ible costs Second break-even chart: Fixed costs on top of varia $ ui Scanned with CamScannerProfivolume chart (P/V chart) native toa break-even char for resenting CVP internat, art (or PIV chart) is an alter ; A profi ome roto fossa al levels of output and sales ‘An example is shown below. Profit Break-even point LO3: MULTI-PRODUCT CVP ANALYSIS In multiproduct CVP analysis we will assume that product will be sold in shape of a batch and the ratio of product in a batch will not be changed what so ever no. of batches are sold. In multi-product CVP, following are the formulas Weighted average C/S Ratio tea Breakeven Revenue (Units) ee Breakeven Revenue (Rs.) - Tae ‘Target Profit Volume (Units) Ce Target Profit Volume Rs.) oie EXAMPLE-13 ‘Murray Ltd produces and sells two types of sports equipment items for children, Bat and Racquets. ‘A Bat sells for Rs. 8 and has a variable cost of Rs. 5 Racquets sell for Rs. 4 per unit and have a unit variable cost of Rs. 2.60. For every 2 Bats sold, one Racquet is sold. Murray budgeted fixed costs are Rs. 407,000 per period. Budgeted sales revenue for next period is Rs. 1,250,000 in the standard mix. Required: a) Calculate Breakeven point in units of each product. b) _ Calculate Breakeven point in Rs. . of each product and in total. Scanned with CamScannerchars ee aie eee soLuT!o. preakeven Revenue (Batches) pL _Totaraed cont Contributton/Batcn Rs. 4 = 55,000 Batches Bat 55,000 Batches x 2 = 110,000 Bats Racquets 55,000 Batches x 1 = 55,000 Racquets Bats (Rs. 8x 110,000 Bats) Rs. 880,000 Racquets (Rs. 4.x 55,000 Racquets) Rs.__ 220,000 Total Breakeven Revenue Rs. 1,100,000 Scanned with CamScanneror QuESTIONA3 A sompany manufactures and markets records: ; “MEle Produet, The followin Sales ~ units (per monthy Poets availabe from the Selling price 4.000 units a Direct Material RS. 50 per unit Direct Labor Rs.20 per unit Overheads RS.5 per unit Production related oe Other Fixed * $0,000 per month Required: * 36,000 per month a, Number of units required to be Sold to achieve the b, Level of sales required to Benerate 20% Profit on sales, © Extra units which should be sota to obtain th n by 20%, the present profit if iti ititis proposed to reduce the selling price 4. Selling price to be fixed to bring down its break-even point to S00 units UE: A B Ratio 20: 4 Sale Price 50 20 Variable Cost 30 10 Contribution Margin 20 10 Total Fixed Cost Rs. 30,000 Required: & Calculate break b. Calculate break & Iftarget profit is Rs. 10,000, target of A and B. 4. {ibudgeted sales (batches) is 750, then calculate Margin of safety in batches and Rupees and also Margin of safety of A and B. QUESTION.15 se 5 . = Catling intends to sell two products; " Selling prices and variable costs of the products are follows: i Toduct a x Rs. Rs. Selling price 0 3 Material 10 f Labour 5 si Variable overhead 3 Scanned with CamScanner~ Fixed costs ofthe business are estimated to be Rs. 15,000 per annum, Carling can enter ints ago with just one of three potential customers. ; tra (1) HLtd has an interest in purchasing up to Rs. 2,500 units of D. (2) Wplcare only interested in T. (3) R.& Co wish to purchase both D and T in the proportion one D to every five T, Required: Calculate the volume of sales to H Ltd required @ @ To break even i) To generate a profit of Rs. 29,000 per annum, 6 (©) Calculate the sales revenue required from W ple @ To break even @ (i) To generate a profit of Rs. 45,000, Calculate based on R & Co's specified mix, the break - even sales revenue and volume, © Z ple operates asingle outlet selling direct tothe public. Profit statements for August and September 2014 aeas follows August — September Rs. Rs. Comotaaes 0) she fe (50,000) (55,000) Goat 30,000 35,000 a - Annan dso dean Neti 15,000) (15,000) 7,000 11,000 Required: (@) _Usethe high low method to identify the behaviour ofthe following: @ — Costofsales Gi) Selling and distribution costs Gi) Administration costs (©) __Drawa contribution breakeven chart and identify the monthly breakeven sales value, and area of contribution. QUESTION-1 The following details relate to a shop, which currently sells 25,000 pairs of shoes annually Selling price per pair of shoes Rs. 40 Purchase cost per pair of shoes Rs. 25 Total annual fixed costs Rs. Salaries 100,000 Advertising 40,000 Other fixed expenses 100,000 Scanned with CamScanner© eat part independently of d i — och ly of data contained in other arate the breakeven point and marg Parts or the statement, ) sime that 20,000 pairs of sh in of safety in number pars of en f thoes were sald 2 shoes sold is a / - Estimate the shop's net income (er seling commission of Rs2 per par of shes . sol i (© iges would need to be sold ina year inorder to ciao oe ye - cg) Assume that for next year an additional advertising campaign of Rs. 20, Olen fhe same time selling prices are to be increased by 12%, ———E What would be the break-even point in numberof pairs of shoes? (@ Show, ona break-even chart, the effect of the advertising campaign in (4) on the original profit of. 110) Ger Robust Engineering Plc produces an electric multi-purpose tool, wich sells at Rs. a riny cl , . 10, Sal mounting to Rs. 4 million represent 80% capacity ofthe factory and this is regarded as the normal evel of activity with costs as follows: Rs. Prime cost per unit 4 Factory indirect costs 200,000 (including variable cost Rs. 40,000) Selling costs 170,000 (including variable cost Rs. 80,000) 100,000 (including variable cost Rs. 60,000) Distribution costs Administration costs Local promotional commission pay’ 720,000 able averages 5% of sales value. Required: (@) Calculate the break-even activity level . (b) Prepare statements showing sales income costs and profit: (i) Atthe normal level of activity. : (ii) Hf unit selling price is reduced by 5% thereby increasing activity level. Gii) If unit selling price CaN on marina aS ota en Oy ake (@ Calculate the quantity to be sold, under the Price arrangem sales volume by 12.5% of the normal thereby increasing sales volume by 25% of the normal thatthe profit be the same as in (©) C- estone put of its production toa single customer, °F P ; Pensen esa ig Po entire i sels the produet under their Ov label namely 4 {Pearson is not incurring marketing, Stores” who runs a chain of super markets in : stomer i tha "TT brands”, One of the advantage ingle jut price consequently, the margin 5 of selling 10.25! rod to reduce ‘the pr . i coats betta rs poarnagus pressure Stores a result, Pearson Lid considering selling its considered thin. and It will improve the ‘margin but there will, would be de vat consi lecreased which is ae coring “Pearson ayaa directly in the mar! ‘The oe deat sia .4 from the cost accounting records fn TT Bra meee aided tee ok ot eeaeeel quater 2015 oF s Tenpany based on sale to “TT Brand” is given - below: Scanned with CamScanner24 queens First quarter of 2015 Second Quarte, _% sale to TT B, ms Projecteyy Sales eal 5,000,000 Sante ection costs pe one ‘Administration costs (all fixed) onan 1,000,000 Profit before taxation . 760,000 Turation @34% 136,000 258.400 Profit after tax 264,000 501,600 it contributi in on “ Art” brand sales is e: For second quarter of 2015 the unit contribution margin on “Pearson ; pected tp 125% pester than contribution margin on “TT Brand” sales. Pearson Ltd. Will also bear a ah marketing cost of Rs. 8 per unit and fixed marketing cost of Rs. 300,000 in second quarter. Required: (@ Calculate the following for second quarter: @ Present variable manufacturing cost per unit for “TT brand” and total fixed manufacturing cost. (04) Gi) Per unit selling price for “TT brand”. mn ii) Per unit selling price for “Pearson art” brand if decided to sell directly. (05 (©) Calculate the following for second quarter assuming that 100% sales are related to the “Pearson Art” brand: ( _Breakeven point in terms of units and sales value. @ (ii) Margin of safety in terms of units and sales value, © like hand bags and jewelries. Eid celebrations and Christmas are peak seasons in which demand for the company’s products increases. Maanjees engages independent sales agents to market company’s products in advance to meet the peak seasons as well as regular demand. Currently, Maanjees pays commission of 25% of sales to these independent agents, but they are demanding an increase in commission to 30% of sales made during the year ended June 30, 2015, ‘The Assistant Finance Manager prepared the budget for 2015, but this budget does not include the agents" demand for an increase in commissions. Assume that all cost of goods sold is 100% variable. Following budgeted income statement for 2015 is provide by the Assistant Finance Manager: Rs.1000" Sales 153 Cost of goods sold $420 Gross margin 710 Selling and administrative expenses: Commissions @ 25% of sales 3,888 Other fixed expenses _180 408 Income before taxes 3,082 Income tax (33%) io Net income 203 Scanned with CamScannerz peje’ Mating, Monogr is evaluating the independent sales agents demand and suggested that ‘and total volume in units of Y is $2,098,400 + $80 = 26,230 and (y daily volume is 26,230 + 305 €86. Therefore, $6 dinners and 2, 1 numb F 01bne x 86172 lunchés were served on an‘average day. This is 1 We gy 2 runt F (Lp He velum } hen 2 numb f dire — dinner and 2 lunches above thé break-even volume. + bx se vAge - Pryed sort 2 ‘ay B feel vest wee 9 preciarragee 2 =2rir 7 Scanned with CamScannerdimmed 305A GS = 7Lerby dinners selling 4 1Cx C/m Per 4 : : Fine P23 fx Aad) vedume 3 Pr puey 5 G lunch ord Y eAY Volume = we Copy Bese = 13 30% Ym pes PAP 2. ‘The extra annual contribution margin from the 3 dinners and 2:63 ¢ 6 lunches is: oe 3x$40x.30x 305 = $10,980 rE +x $20 x 30x 305 = _10.980 “ e Total 321.960 ‘The added contribution margin is greater than the $15,000 advertising expenditure. Therefore, the advertising 2 ¢ expenditure would be warranted. It would increase operating ~ [ed __ineome bi $21,960 -$15,000=S6960 c .., 3 Let Yagain bea combination of I dinner and 2 lunches, ¢ LJ pric priced at $80. Variable costs are .70 x $80 = $56, of which $56 N x .25 = $14 is food cost. Cutting food costs by 20% reduces _ 7 variable costs by .20 x $14 = $2.80, making the variable cost of as 9%" ¥ $56 - $2.80 = $53.20 and the contribution margin $80 - . Sellir ge $53.20 = $26.80. (This could also be determined by adding the peste ev $2.80 saving in food cost directly to the old contribution age) (AHF margin of $24) The required annual volume in ¥ needed tg ¥ keep operating income at $7,080 is: 7 v Wo ht bite 440 = $7,080 - 307 |e E 5 , s cb th, sD = efore, daily volume = 23,490 +305 = If volume drop: inners and 172 - oF a 154 = 18 lunches, using the less costly food is more profitable, 5% a al However, there are many subjective factors to be considered. I Volume may not fall in the short run, but the decline in quality may eventually affect repeat business and cause a und cost iy Iong-run decline. Much may depend on the skill of the chef. ’ If the quality difference is not readily noticeable, so that cut Qo ] volume falls less than, say, 10%, saving money on the purchases of food er | i a my 29 £23) 0 eceah Hd foto wd oo ik i ESS sole ge osh lays GR 7 — TRUMat The company has a Q. 1 Glow Company is @ pioneer in innovative lighting solution in Pakistan. 3 has Slate-oftho-aft manufacturing facilly in Karachi in which all variants and designs of lighting ae produced. The company offers distinct products which are distributed all over Pakistan, ‘which include Tube Lights, Energy Savers, Halogen Lamps, Solar Bulbs and LED Lights, Following budgeted statement of profit or loss for the year 2015 based on absorption costing was prepared by the controller of accounts, of the company: ' Tes revenue Cost of goods sold: a cf : G8 ae eax mi ing and administrative expense a Net income, lar Mr. Maqsood has recently taken charge as president of Glow Company. While going through the above itnet at tte iss he etd his danToenon Aesortng fo Ren hae not reflect product-wise performance and profitability that might help in making strategic business decisions. You have lately joined Glow Company as Management Accountant and heading the cost department of the company. President called a management meeting of all Operating managers including Marketing, Production, Procurement, Human Resource, Finance and Cost departments to discuss different oplioris available to the company that are to be considered for preparation of budget for the year 2015. Manager marketing was interested in knowing the amount of sale he can make of each of the praducts and the order Of sale preference to maximize contribution as percentage of sales. President asked you 10 Provide figure of product-wise breakeven sale as well as producl-wise contribution margin falio to manager marketing.You pointed out that this exercise will require a product-wise Sales mix ratio from marketing department and breakup of mixed costs into fixed and variable costs, Pr nt asked markeling manager to provide a product sales mix ratio and you asked) | your Assistant Cost Accountant for a bi eakup of all costs into variable and fixed elements by applying statistical techniques. Assistant Cost Accountant calculated the percent tages of variable elements in the total mixed costs shown inthe above stalement of profit or loss: —— ee % Materials “O04 = AHO Labour 80 - - won Manufacturing expenses. 60 Selling and adr istrative expenses _70 a Scanned with CamScannerPresident : is interested to know the re. 5 fara: ing Glow Company's labour force and here is. a chance ¥ 2015, Manager an fee besipe might loose 10% of its labour force in the budget 2218 Mange att pant tes as ee ee he gl er “Product? a IX Energy savers “ 15” . 0 Halogen lamps / 7 ¥ . Solar bulbs 7 28 a LEDIights ~ 20 Total 700" Presi Eisai oti You {0 calevlate an appropriate product saled Trix lo mazimize contibution, raring cee tl onsiraint. to assist manager marketing Yo formulale-@ proper Tragtating strategy. Manager marketing informed that there is an enquiry from an overseas fyatomer for an order of Rs.1.5 milion for each of Tube Lighls, Halogen Lamps, and LED that the’ oor ne if & eating fora commission that is yet fo be worked out. President decided {hat the company should earn 20% contibution on this order. He asked you to calculate ‘commission payable to the agent asa percentage of sale. = Cost department also prepared the following statement showing apportionment of vatiable costs elements in tem 9) variable Go: e ost terms of percentage of the total sts for the five products to be manufactured: Costs Percentages (%) Tube Energy Halogen Solar LED, ights Savers Lamps Bulbs Lights Tt! Materials 40 20 10 20 10 1400 Labour 15 26 10 25 25 100 Manufacturing expenses 30 10 10 30 «20100 Selling and administrative expenses __10 30 20 3010 ‘100 Required: Provide following information to assist management to make strategic business decisions in the year 2015 (a) Prepare budgeted statement of profil or loss based on direct costing. 05 (6) Calculate product-vise contribution margin ratio and explain the factors to be catered for the products having a zero or negative contribution. " (c) Calculate product-wise breakeven sales evel or {@) Determine the order of sale preferences to maximize contribution as = percentage of sales. ° i mnifion to maximize contribution, assuming that re a revised sales mix of Rs.60 (2) Pract wise budgeted sols may vary by 10% (up o dow). 06 the above products as customers buy Jow Company cannot drop any of s as ¢ €f) Assume Ina maximum conirbution Glow Company can ereve ilabour fore in mix. reduces by 10% and product mi may Vary by upto 20% = ane rage of commission tral canbe ofered 10 the ero exp cde of jale percentage Of ore ts, Halogen lamps and LED lights 2° Po Pp Calcul: (9) 5.4.5 milion manager marketing. ft ond. earn "20% contribution on total sales value. Scanned with CamScanner@.1 (a) Budgeted statement of profit or loss based on direct costing: gi Sales hE geey 25 = Olas TO COUR Variable cost of goods sold: a Materials Labour ‘2.000 % Manufacturing expenses 4,500 a Selling and administrative exponsos 3,500 42,500 ‘4 Contbution margin F500. % Fixed costs (W-1) 10,000, __Netincome 7.500. % Wet: Fi ‘osts: Rs. ‘000° Material — 2,500 ’ Labour 3,000 % Manufacturing expenses ___~ 3,000 % Selling and administrative expenses 1,500 % ‘ 10,000 (b) Product wise contribution margin ratios:_ 7 boar J h Rs. ‘000° Tube / Energy Halogen Solar LED Light’ Saver Lamps Bulbs Light "Ol! Sales. 18,000 9,900 4,200 16,800 12,000 60,000 1 Materials —— 9,000 4,500 2,250 4,500 2,250 22,500 1 Labour 4,800 3,000 1,200 3,000 3,000 12,000 1 Manufacturing expenses 1,350 450 450.-«1,960 900 4,500 1 Selling and administrative expenses-—_350 _ 1,050 __700 _1,050 __350 _3,500 1 Total variable cost _ 42,500 _9,000 __4,600 _ 9,900 _ 6,500 42,500 1 Contribution margin. 5,500 0 (400) 6,900 5,500 17,500 1 Contribution margin ratios (%) 30.56 0-952 41.07 45.83 29.17 1 Three of the products (Tube Lights, Solar Bulbs and LED Light) make a contribution towards fixed cost and profit, but product Halogen Lamp has negative contribution and product Energy Saver has zero contribution. In making decisions about the future of the various products, at least three factors would have to be considered. 4. The stage in the product life. It is possible for example, Energy savers, and Solar bulbs are relatively new products which have not yet achieved full profitability, or that they reaching the end of their lives, with demand falling. 1 2, An interrelationship between the products. It is possible thal sale of more profitable products can be made only when a full range (including Energy saver and Halogen lamp) is offered. 3, Whether there are any significant limiting factors on the production or sales that can be achieved. If so the amount of contribution per unit of the limiting factor becomes important. Scanned with CamScanner¢ j i rks (©) Product-wise breakeven sales level: Rs. ‘000' ‘Assuming a constant mix of sales, average Contribution margin ratios: Rs.17,500 + 60,000 = ye ‘ ‘The break-even sales level is therefore: Y Res.10,000 + 29.17% = Rs.34,261.60'7 cia rr TK Total Sale %Sale B/E Sale Margin Tube Lights 19,000 30—«*10,285*" 3,144 1 Energy Saver 9,000 15 5,142 0 4 Halogen Lamps 4,200 7 2,400 (228) 4 Solar Bulbs 16,800 28 «9.599 3,942 1 LED Lights 42,000 __ 20. 6856 _3.142 1 90,000 100 34,282 10,000 (a) Order of sale preference: ty The order of preference, based on contbuion margin ratios: (LED Light ¥ (i) Solar Bulb % (i) Tube Light (iv) Energy Saver (v) Halogen Lamps | 2 (0) Revised mix of Rs. 60 milion sales to maximize contribution: The mix of sales to maximize contribution, assuming variations from present level of £10% is: 0 “Product Sales Contribution LED Ligt ; (12,000 + 10%) 13,200, 6,050 1 Solar Bulbs || (16,800 + 10%) 18,480 7,590 1 Halogen Lamp. (4,200 - 10%) 3,780 (360) 1 Energy Saver (9,000 - 10%) 8,100 0 1 Tube Light (Balance 18,000- 8.67%) 16,440 __5,024 _ Hl Total 60,000 18,304 (f) Preliminary calculation ~ Contribution per Rupee labour cost (physical manpower not given): Rank Tube Light (6,500 + 1,800) 306% = 1 Energy Saver (0+ 3,000) Oe 4 Halogen Lamp (400 + 1,200) 33.3% = 8 Solar Bulbs (6,900 + 3,000) 230% 2 LED Light (5,500 + 3,000) 183% 3 2 aap or a aaa SES RTS STE ETRE ey TER i es TO Ta a pe Seen tases MNT Scanned with CamScannerRs. "000" Labour Sales Contribution Tube Light (18,000 + 20%) 2,160 21,600 6.601 1 Halogen Lamp 960 3,360 (820) 1 Energy Saver 2400 7,200 1 LED Light (12,000 - 20%) 2400 9,600 1 Solar Bulbs (Balancing 16,800-4%) 2,880 _ 16,128 1 eats 10,800__ 67,688, (9) Percentage of commission: Rs. "000" Tube Light Halogen Lamp LED Light Total Sales 1,500 1,500 1 Contribution margin ratio. 30.56% (9.52)% 45.83% Contribution margin 458.4 (142.8), 687.45 1,003 1 Minimum desired contribution (4,500 x 20%) _ 900, % Available commission ; 103, % Scanned with CamScanner~ v= sreniran ueeision making, 5 Maanjees is a wholesaler of formal stitched dresses and other accessories ike hand bags and produces EM celebrations and Christmas are sont eo oo in which demand for the company's Products. increases. Maanjees engages independent sales agents to market the company's products Came nce to meet the peak seasons as wel as renusroeroen SuITENtly, Maarizes pays commission of 25% of alee to mas independent agents, but they are demanding an increase in commission to 30% of sane none during the year ended June 30, 2616, Ahe Assistant Finance Manager prepared the budget for 2015, bos ine budget does not include the agents’ demand for an increase in commissions Assume that ai cost of goods sold is 100% variable cost Following budgeted income statement for 2015 is provided by the Assistant Finance Manager: Rs. ‘000° Sales 45,5507 Cost of goods sold 8.420 Gross margin > Selling and administrative expenses Commissions @ 25% of sales 3,888 Other fixed expenses, 180 _ 4,068 Income before taxes 3,062 Income tax (33%) 4,010 Net income» 2,052 Maanjee's Marketing Manager is evaluating the independent sales agents It is estimated that all other fixed costs, as well as the Same as estimated in 2015 budgeted income statement Required: Compute the following: (a) the estimated break-even point in rupees for the year ended June 30, 2015, based on the budgeted income statement prepared by the Assistant Finance Manager. (b) the estimated break-even point in rupees for the year ended June 30, 2016, if the company employs its own full time sales personnel (C) the estimated sales volume in rupees that would be required for the year ended June 30, 2015, to yield the same net income as projected in the budgeted income statement, if management continues to use the independent sales agents and agrees to thelr demand for & 30% cows commission variable cost percentages would remain the THE END ‘SMa-Spring 2015 40f4 Scanned with CamScanneras (a) Break-even point for 2015, based on current budget 15,550,000 -6,420,000-3,888,000_ 15,550,000 = 20.85% or 21% gp Contribution-margin ratio Break-even point = {b) Break-even point full time employment of sales personne: New fixed expenses: Previous fixed expenses Sales personnel salaries (40,000 x 3) Sales manager's salary Total fixed expenses New contribution margin ratio: Sales Cost of goods sold Gross margin Commissions (at 5%) 05 Rs.857,143 0.5 180 05 120 0s 254 05 554 15,550 05 8420 | os 7,130 as 778 os. 0s Contribution margin : ar on 63,52,000. _ 75,550,000 : Fixedexpenses Estimated break-even point = Sputionmarginrallo i _ 554,000 ~ “04t Contribution-margin ratio = 40.85% oF 41% Rs-1,351,220. 01 Scanned with CamScanneree (c) Estimated sales volume: New contribution margin ratio: Sales Cost of goods sold Gross margin Commissions (30% of sales) Contribution margin : 24,65,000 Contribution-margin ratio = een 15.85% OR 16% ontribution-margin ratio 75,560,000 OR 16% Sales volume in rupees ie Fixed expenses + targeted after tax income/t-t required to earn = after tax net income Contribution margin ratio 180,000 +20,52,000/1-.33 0.16 = 3,242,686 + 0.16 = — 20,266,791 Scanned with CamScannerat “m “The market share of air fiter is stable for to change the been increasin SU Bey 2014 High Tech is a renowned group of companies across automobile spare paris group member, manufactur and t¢ ‘Air filer and i fi customers, The Quite pleased wit 70.0 Her, produce company is run by the true prof ionals Per Unit (Rs.) 450 90 60 40 oo * "220 aictilters and 140, 00 rs will be sold. The Spears below, Shows" that High Teetoees High Tech Automobil Projected Operating Statement for the year 2 sor noyaar ended December i, 2014. ane QilFiter : otal Total Benue Pee acid (Rs. 000") 7 (Rs. 000") 24.900" 300 - 63,000 Prod clion costs: Materials 5,600 80. 42.600 Direci iabour 2,800 40 8,400 Variable overhead 2,800 4a. ss G09 “xed overhead £1800 20 4209 Total 42.600 "480 30.400 Gross Profit i 8.400 120 32,200 Fixed selling and administrative costs. Netineame before taxes Income tax S (35%) Net income Though, the company is is very popular among the consumers but to reduce the prie managing director competitors. 5 the last few years, and the air filler price. However, the compet tien 19 Superior quali the director mark OF its oil fillers Irom Rs. 450 to Is. 400 pi greed to the proposal considering th 10f6 230 Mai lomobiles, a country. High Tech Aul 5 ia a is products 10 wholesales ¢ company are popular products among ve rosea ite Soopers mmanagemen! i 1s Performance for the curient year. Projected sales for 2014, indieale et Projected operating statement, whict “Tomiobiles will eam aller tax profit around 15%,of Total (Rs. 000") 84,000 E> a 18,200 42,870 Company does no! intend among manutactufers of ail fiter hos y oil filers andi this brand ting has strongly recommended er nil from January 1, 2015, The 4 '¢ price reductions expected trom M PTO Scanned with CamScannerg5f7 eS ~ ha COMpany is fully aware of the impact of agwertisement on its salt Planned to spend an additional Rs.1.140,4Qu on adyesluaing during th consequence of these actions, managementestimates that 60%, of its tolaLcouenue yj Gerived from oil fillessasal pared will 75% in 2044, A prior years, the sales migg assumed to be the same at all volume levels. The total fixed overhead costs will remain the same in 2015. The variable overhead rag, (applied on direct labour hour base) will also not change. However, the cost of raw materia, components will be cheaper in 2015 and it is estimated that material cost will decrease ty 10% for the air filter and 20% for the oil filler in 2015. Direct labour cost for both products wy increase by 10% in the coming year. Scanned with CamScannery Al ' (ay Vow many at ters and oi titers wil High Tech Automobiles have to sellin 2014 i te company neither earn any profit nor incur loss? (b}How many air filters and oil filters will High Tech Automobile: 2 breakeven? iles have to sell in 2015 to (c)How much total sales revenue is required if High Tech Aut 3 profitin 2016 equal to 15% on sales? -~ jeobe 1810, eam afer tax a (Which product do you recommend High Tech Electronics to promote in the adveriisin, campaign? aistio (e) Would you recommend High Tech Electronics to change supplier and if so, which product would you recommend? Support your answer with calculations? ‘ Marks 08 05 02 Scanned with CamScanner14) Break-even points in 2014 Heres RRMTPOPMTETSTS liters = oilfiters = 70,000: 140.000 = 4:2 1 Total fixed costs: Rs, "000 Manufacturing overhead 5,600 Selling and administrative 2000 Total 26,400 a = 7 Gale) TE i Contribution margins: Rs. Unit Air Fillers Ol Fillers, Selling price 300 450 Variable costs 160 190 Contribution margin 140 260 nye 4 =i? 2 ‘Weighted average contribution margin (Rs. 000) {1/3 (140) + 2/3 (260) 220 ~ Break-even in total units (26,400,000 220) 1200001 Break-even in air filters (120,000 x13) 40,0001 Break-even in cil fiters ‘ (120,000x2) 90.0001 (b) 2015 fixed cost = 26,400,000 + 1,149,000 = Rs.27,640,000 1 Contribution margins: ; RJ Unit Air Filters OlFilters Selling price 300 400 Variable costs ae Material ~ = 2 Direct labour ae se Overhead a0 bd Total 186 178 Contribution margin 144 222 2Contiputon Ne eR Workings: ue “ / ? (a) Material - ir filter (80x09) = (0) Material - oil fiter> (20x08) 7 jbour — air filter (40 x 1.1) lhe | (60x 1.1) 66 1 (a)_Labour — ol iter qoown xivorr Woo 260 avg Ym = Aloooe Z CO vo PH und - Bs . ; i Yeek even coke =e ahh c Cpa, ei SD SSRI ay 2 ee eae SRT ao a de Bere enc wr cancecy te ematon Os e SS rate PE eran Weer Sareea Break eon air Filte c {000d Sonia (toa prea evar oth filty> oN g as Scanned with CamScannera — SEMESTER-6. Ff. in 2018 because of the Rs.400 a1 80% of sales wall be from them The Sales mix will be the same for all volume levels. To find the sales mix in units for 8ch product, we can use the sales mix in Rupees o For example, if the new sales Rupee percentages had prevailed in 2014, the sales mix ratio in units would have been 1:3, computed a5—— ~~ Oi titers (84,000 x0.80) 37,200» 400 A (titers (e000 0.20) 16,800 300-56 =| wv) rod % of oil filters - 000 Toa [Deven otariers ___—_s.000/224000 28% ' pve ae ae) g| A Wasted average cotuion marin 0.25 (14a) +075 (222) 202.5 Ao Sa yeg Scan nis 2150007025380 eat? Break-even in air filters 136,000 x 0.25 34,000 + . h ee) sa0s revenue needed in 2015 to earn a profit of 15% on sales after taxes: of ost Rupees 4 a 0 nyyoriveshiod average sles (0001028) 400 (078) 375 of QO fo, PM rota sates revenue 375 where's the total uns sold : ni Profit goal (375 x 0.15Y/0.65 86.54 vi, Profitgeal __75x0.15Y0.85 86.54 ~ Total sales in units: EE 202.5(S) = 27,840,000 + 86.54S "(202.50 is the weighted average contribution margin) 115.96(S)) = 27,540,000 = § = 237,496 units 1 Sale of air filters (units) (237,496 x0.25) 59,374 1 Sale of oil fiters (units) (237,496 x0.75) 178,122 Sia Rupees Oil filters: (69,374 x 300) 17,812,200 Air filters (178,122 x 400) 71,248,800 Total 89,061,000 1 Thus the company needs sales revenue of Rs.89,061,000 to achieve its profit goal of 15% on sales after taxes (a) Contribution margin rate: Product-A (300,000 = 1,200,000) 25% “Product-B (108,000 +720,000) 15% Product-C (24,000 + 480,000) 5% Product-A should be promoted because of ils highest contribution margin rate (25%). 2 Scanned with CamScannerIncome Taxes on Hotels. E ‘Study Appendix 2B. The Four Four Wit | in downtown Phoenix has annual fixed costs applicable to rooms of $9.2 million for its 600: tel, average daily room rates of $105, and average variable costs of $25 for each room rented. It operates 365.days per year. The hotel is Subject to an income tax rate of 40%. { v ¥ 1. How many rooms must thé hotel rent to earn a net income after taxes of $720,000? Of $360,000 2. Compute the break-even point in number of rooms rented. What pescentage ceeupancy forthe ar is needed to break even? mig 3, “Assume that the volsime level of roomy ‘The manager is wondering how much esa Could be generated by adding sales of 15,000 rooms. Compute the addtional netincome after taxes. ——_ Scanned with CamScannerSato puce [es aunt = Jor - Variabhe eg s Bey -a¢r lm fer unit Baw iG —= Total crtyibution 10 400,900 : = dixed Cust G2 00 acu pr tid beter Tax 1400, 060 t00/ - Tax @ hos (%3cc) fo Profit after qax ___72Q0d0 ba waking Jredit heteye TH 2 profil afte Tar Jon . be i ie Precen } prdd hedave Tar > roves ] ( a Scanned with CamScannerQuestion No. 5 Proposed Time: 25 Min. | Total Marks : 14 Healthy Foods (Pvt) Limited is engaged in the manufacturing of fast-moving consumer goods (FMCG), The company is reviewing iis portfolo of products and has provded the Tolling information in relation to the budgeted sales for the product ‘Almond Oil = er. Sales units (Bottles) 120,000 Selling price per unit 2,250 Variable cost per unit 1,650 Net profit/ (loss) 25,200,000 Required: In order to assist the Sales Manager for further analysis, you, being a Cost Accountant, have been asked to work out the following (a) Calculate total fixed cost attributable to Almond Oil (b) Calculate contribution margin ratio of Almond Oil () (i) Explain the term ‘break-even’. ii) Calculate the break-even point for Almond Oil in sales units and sales tumover. (4) (i) Explain the term ‘margin of safety’. (ii) Calculate the margin of safety percentage for Almond Ci. (e) Healthy Foods (Pvt) Limited is considering a policy of achieving a target profit of Rs. 82.2 million on all business lines. Calculate the activity required by the product (Almond Oil) in order to generate this target profit. Scanned with CamScanner 02 o2 02 01 02[Question No. 5 (@) Calculation of Total Fixed Cost: Rupees ‘Sales (120,000 * 2,250) ‘270,000,000 Variable costs (120,000 * 1,650) (198,000,000) Contribution 72,000,000 Net profit (25,200,000) Fixed costs 46,800,000) (b) Contribution margin ratio = Rs.72,000,000/ Rs.270,000,000 = 26.666667% or 26.7% (c) (I) The break-even point is the number of sales units (or revenue) at which a product does not ‘make a profit or a loss. It can be found by dividing fixed costs by contribution per unit. (ll) Break-even point = Rs.46,800,000/Rs.600 = 78,000 units. Break-even tumover = 78,000 units x Rs.2,250 = Rs.175,500,000 (2) (The margin of satety is the difference between the breakeven sales and the actual sales as a percentage of actual sales. {(U) Margin of safety = 120,000 units - 78,000 units = 42,000 units = 42,000 / 120,000 = 35% (©) Activity required = Rs.82,200,000 + Rs.46,800,000 = Rs. 129,000,000 / Rs.600 = 215,000 units 0s 0s 0.25 os 0.25 o1 o1 Scanned with CamScannerQuestion No. 6 Proposed Time : 26 Min. | Total Marks : 14 Papersack Limited, a public limited company, produces and sells finest quality hard paper bags for flour industry. A new product of paper bag has been introduced into the market by one of its competitors that the company is anxious to produce and sell. The company has sufficient capacity Of producing 100,000 bags per month. The new product of paper bag will incur a variable manufacturing and selling cost of Rs. 25 per bag and a total fixed cost of Rs. 1,250,000 per month. The Marketing Department forecasts that demand for the product will exceed from company's maximum capacity of producing 100,000 bags per month. Additional manufacturing space can be rented from another company at a fixed cost of Rs. 75,000 per month. Variable cost for rented facility would cost Rs. 28 per bag because of the less efficient operations that of the main plant. The bag would be sold for Rs. 36 per bag Required: {a) Calculate the monthly break-even point for the new product of paper bag and the number of bags required to achieve a target profit of Rs. 250,000. (b) If the Marketing Manager receives a bonus of Rs. 2 for each bag sold in excess of break-even point, how many units must be sold each month to eam a retum of 20% on the monthly investment in fixed cost? Scanned with CamScannerQuestion No. 6 (@) The contribution margin per bag of first 100,000 bags: Rs. per ba Sales price 36 05 Less: Variable cost 25 05 Contribution margin i 05 Total contribution margin = 100,000 bags x Rs.11 per bag = R: os ‘The contribution margin per bag over 100,000 bags: Rs. per bag Sales price 36 05 Less: Variable cost 28 05 Lontribution margin 8 oS Rupees Fixed cost for first 100,000 bags 4,250,000 0s ‘Less: Contribution margin of first 100,000 bags 4,100,000 05 Uncovered fixed cost 150,000 05 ‘Add: Monthly rental cost of additional space needed to produce more than 100,000 bags 75,000 05 Total fixed cost to be covered by remaining sales 225,000 05 Additional units = Total remaining fixed cost + Unit contribution margin over 100,000 bags = Rs.225,000 + Rs.8 per bag = 28,125 bags 10 Total units must be sold for break-even point = 100,000 + 28,125 = 128,125 bags 0s Total sales = 128,125 bags x Rs.36 per bag = Rs.4,612,500 0s Break-even to achieve target profit = Target profit + Unit contribution margin = Rs.250,000 + Rs.8 per bag = 31,250 bags 10 The company must sell 31,250 bags above break-even to achieve a profit of Rs.250,000 er month, Total bags must be sold = 100,000 + 31,250 = 131,250 bags 10 {b) If bonus paid to the Marketing Manager above break-even point then the revised contribution margin would be: Rs. perbag Existing contribution 8 05 Less: Bonus 2 05 Revised contribution 6 0s ‘The desired monthly profit would be Rs.265,000 [20% x (Rs. 1,250,000 + Rs.75,000)}- 10 Break-even to achieve target profit = Target profit + Unit contribution margin = _Rs.265,000 + Rs.6 per bag = 44,167 bags os The company must sel 44,167 bags above break-even to 68m a pratt of R8.286.000 per ‘month. ‘These bags added to 128,125 bags required to break-even, would equal to the total sales of 172, 292 bags (128,125 + 44,167) each month. os Scanned with CamScannerye iyere vest nnaiyare ees NSE cen ene oes appointed a management SS reat Tee Is to analyse company’s cost-volume: shi ompany's summarized income statement for the last year ia ae a Rupees otal Revenue 2,000 Trips 15,000,000 aio ee oom Less: Variable cost 9,000,000 4,500 60 Contribution margin T6.000,000"" 3,000 a Less: Fixed cost , 420 Net operating income ‘ 20 According to the~agreement with tocal government at least one trip a day is mandatory, tore year = 360 days) Se Required: Oo Calculate: yr \s (a) Existing break-even in trips and amount 07 (b) Number of trips needs to be completed to achieve a profit target of Rs. 5,000,000. 04 (c) For next year, the company is planning to purchase @ computerized booking system having cost of Rs: 1,000,000. Company will save 3% of variable cost ayes. 400,000 of fixed cost after instalation of new system. Calculate break éven in percentage and amount after installing the new system. 04 Solution: (a) Existing break-even in trips and amount: Fixed cost Rupees, Fixed cost 3,000,000 Mandatory trips (360 X40).— 4,620,000. ~ Total Fixed Cost $520,000 _ Fixed cost__ _ _4,620,000_ = Ro77,550,000 Breakeven Rs. Se en F ; Fixed cost, 4,620,000 = “4,540 Trips = —Fixedcost_ _ 40° = — i Breakeven(Trips) aarti 3,000 (b) Trips Need to be Completed to achieve profit target: |_ te Profit CM per init X Nos. of trips - fixed cost OR 5,000,000 3,000 X Nos. of trips - 4,620,000 * ~+uu OR — 5,000,000 4,620,000 = 3,000X Nos. of tips 9,620,000 3,000 = Nos. of trips ‘ Nos. of trips = 3,207 Scanned with CamScannernent Ri Revenue 24,050,000 Less: Variable Cost 414,430,000 Contribution Margin {9,620,000 Less: Fixed Cost 4,620,000 Net operating Income. 5,000,000 (c)Breakeven in Percentage and Amount After New System: Rupees, Variable cost per trip ee Les: 3% saving ——_ z Variable cost per trip / ee 4365 Fixed cost 4,620,000 | Less: Savings 400,000" 4,220,000 — CM per trip» = 7,500 - 4,365 ’ 3,135 Breakeveii% = = 741.80%%__ 4,220,000 _ Breakeven Rs. = — fied cost — = 4220000 = 10,095,694 / > 4,220,000 ~/_Bréakevei(Trips) = CesT = ARNO = 1,346 Trips a2 /¢/ a ROSSA IGER AD ane Ah P-F LOW {al Only variable costs can be differential costs. Do you agree? Explain. 02 ~(b) Mdst recent income statement of a small manufacturing company is shown below: Total Per Unit L (Rs. 000’) (Rs.) . Sales (3,000 units) 7,500 S00 err ® Less: Variable expenses. 900 300 Contribution margin ~~ 600 200 Less: Fixed expenses 500 a Net operating income +~ 100 S a LL a ae Required: Prepare a new income statement under each of the following conditions (consider each case independently): (i) The sales volume increases by 15%.. 1 (ii) The selling price decreases by Rs. 50 per ynit, and the sales volume increases by 20%. « ae 02 y ee Scanned with CamScannereeeeeeeSss—“‘(]RNNNNN’N. TS (itl) The selling price increases by Rs. 50 per unit, fixed expenses increase by Rs. 100,000, and the sales volume decreases by 5%. 03 the selling price increases by (iv) Variable expenses increase by Rs. 20 per unit 12%, and the sale volume decreases by 10%. (c) What is meant by term sales mix? What assumption is usually made concenhoiG sales mix in CPV analysis? Solution: (a) i No, differential costs can be either variable or fixed. For example, the altemaivet might consist of purchasing one machine rather than another to make @ frOnke The difference in the fixed costs of purchasing the two machines wou! differential cost ») Fue # 2 [ooyo? Total Per Unit ___(Rs.) (i) Sales volume increases by 15% Sales (3,000 units x 1.15 = 3,450 units) 500 Less: Variable expenses - i 30 Contribution margin Less: Fixed expenses Net operating income 4s (ii) Selling price decreases by Rs. 50 per unit and the sales volume increases by 20% — x ‘Sales (3,000 units x 1.20 = 3,600 units) 450 Less: Variable expenses 300 Contribution margin 150 Less: Fixed expenses Net operating income (ill) Selling price increases by Rs. 50 per unit, fixed expenses Increase by Rs. 100,000, and the sales volume decreases by 5%: Sales (3,000 units x 0.95 = 2,850 units) 1,567.5 550 Less: Variable expenses 855.0 _____300_ Contribution margin 712.5 250 Less: Fixed expenses (rs 500 000+Rs 100,000) 600.0 Net operating income 412.5 Rs. 20 per unit, the selling pi (iv) Variable expenses increase by ume decréases by 10%: increases by 12%, and the sale vol ¥, Y Sales (3,000 units x 0.90 = 2,700 units) 1,513~ £9) t Less: Variable expenses. ie ——_3 Contribution margin ~ oe oS Less: Fixed expenses — —— 2 Net operating income Scanned with CamScannerQ.6. Rehman Limited (RL) manufactures a single product namely Beta. Following information pertains to product Beta for recent year ended 30" June 2018: Sales Revenue Rs. 300 milion Contribution margin 20% ‘Annwal fixed factory overheads cost Rs. 20 milion ‘Annual Administration cost Rs. 25 milion Tax rate 25% During the next year, which will end on 30" June 2019, the company has projected the following changes: * Sale price will increase by 10% but sales volume will decrease by 5% * Variable cost per unit will increase by 4% duc to inflation + Annual fixed factory overheads cost will increase by 10% due to inflation Required: (a) Define Margin of Safety. (b) Calculate Net Profit before ‘Tax for the year ended 30" June, 2018. (©) Calculate Net Profit before ‘Tax for the year ended 30" June, 2019. (@) Calculate Contribution Margin Ratio for the year ended 30" June, 2019. (c) Calculate Breakeven Sales Revenue for the year ended 30 June, 2019. (Calculate Margin of Safety Ratio (%4) for both years? (g) Calculate Sales Revenue to achieve after tax profit of Rs. 60 million Scanned with CamScanner—2-#6 Rehman tid _p SSUMZ:- Sake units 501,000 uncte _ —B sate price Inwease © of a UNS, = Sense 12 300 miblicn!2 2 49 100 a Soke 34305 330 miklion— SoH,c00 aS 2 ASQ00 units : Seo, aSce units = — GEDA Sale Vere - “Sale Yavenue = 30 midtion Contribution margin = 2a 2 a = 3 mittion _ - less vane = ry — Gin 3H il Scanned with CamScannerSSeS Se vale ntl 1 units Sosx 4 2 24 ia test Soee So. [Sarl 7 in l — E $a ie i t. t - 330, oct oe 7 WC se 4 9 G0 unch hi Fixed Foot cast Inscye © Te fas Sea 26 millionx (I- ye Paar teal Fall cost « Boy, June PIF Scanned with CamScanner192 Margin fely - Difference. bedudéen ____— Budseled! le and Rreakeven sale nel Profil before jax Sehiune 22/8 ees £3 I Gate Revinue= 300 milf lent Vavlabke fo = Qua mide Cc [m 30 @ Wl = bd miktion — less fixeol asf — fixed Fat cep= 20 Mile fixed Admin whe AC Mb/s wel prafed befuac Tox 1s Millian pena 1 ne Def. befote Tox _ 30th Fune_2# J4_ _ SOR Reyenux= 330 Mikien less vay@hle cSt = AS) mpeya ee a — mika. a) Cin yatio CYs yatie) 32h Tune 20/g See A te arate ii Gate rice Perunth — Variobhe cH Paani xep sole Pleo Pex unit = 6965 6a 645 ©) Byeakeven sade inks ath Tyne #/F SS X/w Toil Fixecl CoSt iz aS iblin 2 fm yato QYY. |2q mites] = ® js vatio = Sudseded sch - Sfeakevon sade, f duller Sale ES = 330- 219 Scanned with CamScanner