A Company manufactures a single product with a capacity of 1,50,000 units per annum.

The summarized profitability statement for the year is as under:

Rs. Rs.
Sales: 1,00,000 units @ RS.15 per unit 15,00,000
Less : Cost of Sales :
Direct Materials 3,00,000
Direct Labour 2,00,000
Production overhead :
Variable 60,000
Fixed 300000
Administration Overhead (Fixed) 150000
Selling and Distribution Overheads:
Variable 90,000
Fixed 150000 12,50,000
Profit 2,50,000
You are required to evaluate the following options:

(I) What will be the amount of sales required to earn a target profit of 25% on sales, if the packing is improved at a cost of Re.1

(2) If an expenditure of Rs. 3,00,000 is made on advertising the sales would increase from
the present level of 100000 units to 1,20,000 units at a price of Rs. 18 per unit, will that
expenditure be justified?

(3) If the selling price is reduced by Rs. 2 per unit, there will be 100% capacity utilization.
Will the reduction
in selling price be justified?
 mc 400000

target prof 375000

1% increas 100000
new sales 475000

Fixed cost+Desired Profit/PV Ratio

mproved at a cost of Re.1 per unit?

1

3
Fill in the blanks for each of the following independent situation :
I II III IV
Selling Price per unit 5 50 20 16.667
Variable Cost as % of Selling Price 60 60 75 75
No. of units sold 10000 4000 30000 6000
Marginal contribution 20000 80000 150000 25000
Fixed costs 12000 60000 120000 10000
Profit/Loss 8000 20000 30000 15000

fc 1.2 Marginal c 80000

let selling price be 100 Profit/Loss 20000
marginal contri 40% sales 200000
p/v ratio 40 vc % 60
sales 50000 vc 120000
profit=contri-sales 8000
 V
30
66.66667
5000 revenue 100000 revenue 150000
50000 profit 15000 mc % 33.33333
35000 selling per 16.66667
15000

MC 150000
revenue 600000
no of units 30000
MNP Ltd. produces a chocolate almond bar. Each bar sells for Rs. 20. The variable cost for each bar
(sugar, chocolate, almonds, wrapper, labour) total Rs. 12.50. The total fixed cost are Rs. 30,00,000.
During the year, 10,00,000 bars were sold. The CEO of MNP Ltd. not fully satisfied with the profit
performance of chocolate bar, was considering the following options to increase the profitability :
(I) Increase advertising
(II) Improve the quality of ingredients and, simultaneously, increase the selling price
(III) Increase the selling price
(IV) Combination of three.

Required
(I) The sales manager is confident that an advertising campaign could double sales volume. If the company
CEO's goal is to increase this year's profits by 50% over last year's, what is the maximum amount that
can be spent on advertising.

(2) Assume that the company improves the quality of its ingredients, thus increasing variable cost to Rs.15.
Answer the following questions:
(a) How much the selling price be increased to maintain the same break-even point?
(b) What will be the new price, if the company wants to increase the old contribution margin ratio by
50%?

(3) The company has decided to increase its selling price to Rs. 25. The sales volume drops from 10,00,000 to
8,00,000 bars. Was the decision to increase the price a good one? Compute the sales volume that would be
needed at the new price for the company to earn the same profit at last year.
the company

cost to Rs.15.

om 10,00,000 to
that would be