Illustration # 4

A product has a selling Price of Rs. 50 and a unit variable cost of Rs. 30 Fixed cost for the period is
Rs.100,000.

REQUIRED:

1. What is the break even point for this product in units?

2. What is this point in Rupees of Sales.
3. What Sales Volume in units is needed to earn a target profit of Rs. 50,000
4. What Rupees sales volume is needed to achieve the objective stated above.
5. Management would like to earn a target profit of Rs. 50,000 but also increase the advertising
budget by Rs. 60,000 to stimulate sales.
What Sales volume in units and Rupees in needed to achieve this objective?
6. Suppose that Management expected the advertising campaign to increase profit to Rs. 70,000.
What sales volume would be required to achieve this objective?
7. If the unit selling price is reduced by Rs. 5, what sales volume in units would be needed to
break even.
8. If the unit selling price is reduced by Rs. 5 and variable cost per unit is reduced by Rs. 5, what
impact will this have on the unit break even point.
9. If fixed costs, variable costs, and selling price are each reduce by 20 percent,
what sales volume in units and Rupees will be needed to earn a target profit of Rs. 40,000.

1
 Solution # 4
Sales 50 100%
Variable Cost 30 60%
Contribution 20 40% Fixed cost Rs. 100,000

1) B.E Point in Units = 100,000 = 5,000 units

20

2) B.E. Point in Rupees = 100,000 = Rs. 250,000

4
Or 5,000 Units x Rs. 50/- = Rs.250,000

3) Desired Contribution = 100,000 +50,000 = 150,000

Sales in Units = 150,000/20 = 7,500 Units

4) Sales in Rupees = 7500 x 50 = Rs. 375,000

Or 150,000/0.4 = Rs.375,000
2
 Solution # 4
5) Fixed Cost (100,000 + 60,000) = 160,000
Required Profit 50,000
Desired Contribution 210,000

RS. 10,500
Sale Volume = 210,000/20 =
units

Sales in Rupees = 210,000 = Rs. 525,000

0.4

6) Desired Contribution = 160,000+70,000 = 230,000

Sale Volume = 230,000 = 11,500 units

20

7) Sale (50-5) = 45 100%

Variable Cost 30 66.70%
Contribution 15 33.30%

B.E Point in Units = 100,000 = 6,667 units

15
3
 Solution # 4
Reduction of Rs. 5/- in sale price and Rs. 5/- in variable cost will not charge
8)
contribution per unit; therefore there will be no change in breakeven point.
9) Sales 50- (50 x 20%) = 40
Variable cost 30-(30 x 20%) = 24
Contribution per units = 16

C/S Ratio 40%

Fixed cost 100,000 – (100,000 x 20%) = 80,000

B.E Point in Units = 80,000 = 5000 units

16

Contribution required 80,000 + 40,000 = 120,000

Sales Volume = 120,000 = 7,500 units

16

Sales in Rupees = 120,000 = Rs. 300,000

0.4
4
 Illustration # 5
The chairman of a company faces a difficult board
meeting. During the last quarter the Company
lost Rs. 40,000 and his four other directors are far
from happy.

Each director has a pet proposal which he thinks

could overcome the difficulties. The one thing
which is known with certainty is that the required
profit per quarter is Rs. 80,000.

To assist in his evaluation of the situation, the

chairman asks you, as Management accountant,
to evaluate the proposals.
5
 Illustration # 5
You extract the following data:-

a) Current fixed cost = Rs. 220,000 per quarter.

b) Variable costs per unit are:
Rs. 5 per unit up to 120,000 units.
Rs. 6 per unit in excess of 120,000 units.
c) In the last quarter 90,000 units were sold.

6
 Illustration # 5
The proposals are:

 Director A: Improve packaging at the expense of an extra 50 paisa per unit in

terms of variable cost to increase sales. What is the percentage increase in sales
required?

 Director B: Spend Rs. 20,000 on advertising. What is the percentage increase

in sales required?

 Director C: Drop the selling price by 60 paisa per unit. What is the percentage
increase in sales required?

 Director D: Buy a more efficient machine which will cut variable costs by Rs.
1.50 per unit at all levels of production. Sales are to remain at present levels. What
is the maximum increase in fixed machine costs per quarter to justify the
proposal?

REQUIRED:
• Evaluate the above proposals of the Directors.

7
 Solution#5)
Last Quarter – Income Statement:

%
Sales (90,000 x 7/-) (W-1) 630,000 100
Cost of Sales:
Variable (90,000 x 5/-) 450,000 71.42
Contribution 2/- 180,000 28.58

Fixed Cost 220,000

Loss 40,000

Contribution per
(W-1)
Unit Rs.2
Loss -40,000 Variable Cost Rs.5
Fixed Cost 220,000 Sales Price Rs.7
Contribution 180,000
Units Sold 90,000
8
Director A

Up to 120,000 units Above 120,000 units Total

Sales Price Rs. 7.00 7
Variable Cost 5.5 6.5
Contribution Margin 1.5 0.508
Units 120,000 240,000 360,000
Contribution Margin 180,000 (Balance)120,000 300,000 (W-2)

% increase in sale required (360,000 – 90,000) = 270,000/90,000

300.00%

Contribution
W-2 Required
Profit 80,000
Fixed Cost 220,000
300,000
9
Director B:

Up to 120,000 units Above 120,000 units Total

Sales Price Rs. 7.00 7
Variable Cost 5 6
Contribution Margin 2 1
Units 120,000 80,000 200,000
Contribution Margin 240,000 (Balance)80,000 320,000 (W-3)

% increase in sale required (220,000 – 90,000) 110,000/90,000

122.22%

Contribution
W-3 Required
Profit 80,000
Fixed Cost 240,000
320,000
10
Director C:

Up to 120,000 units
Above 120,000 units Total
Sales Price
Rs. 6.40 6.4
Variable Cost
5 6
Contribution Margin
1.4 0.4
Units
120,000 330,000 450,000
Contribution Margin
168,000 (Balance)132,000 300,000

% increase in sale required (450,000 – 90,000) 360,000/90000 400.00%

11
Director D:

Sales Price 7
Variable cost 3.5
Contribution Margin 3.5
Units 90,000
Contribution Margin 315,000
Less: Required Contribution
Fixed Cost 220,000
Required Profit 80,000 300,000
Maximum increase in Machine
Cost
15,000
12
 Illustration # 6
Precision Engineering Co. Ltd., and original equipment
manufacturer (OEM) manufactures three
components using same machine for each.
The budget for the next year calls for the production
and assembly of 4,000 of each component.
The variable production cost per unit of cassette player,
the final product is:
Component Part No. Machine Time Variable Cost
Rs.
(1) Spurr Gear G-40 3-minutes 20
(2) Pully Gear p-51 2-minutes 36
(3) Cam Gear C-75 4-minutes 24
Assembly 20
100 13
 Illustration # 6
• Only 400 Hours of machine time will be available
during the year, and sub-contractor has quoted the
following unit prices for supplying components:
• Spurr gear Rs. 29; Pully gear Rs. 40; Cam gear Rs. 34.
• Required:
Advise Precision Engineering Co Ltd. About in-house
production or sub-contracting of gears whichever will
be the cheapest production policy.

14
 Solution # 6

Total time
Hours
Required:
Spurr Gear 4,000 x 3/60 200

Pully Gear 4,000 x 2/60 133

Cam Gear 4,000 x 4/60 267

600 Hours
Limit 400 Hours
15
 Solution # 6

The answer with limiting factor is as

under
Spurr(Rs.) Pully(Rs.) Cam(Rs.)
Buying price 29 40 34
V.Cost 20 36 24
Excess of Buy Out price 9 4 10
Machine Time 3 min 2 min 4 min
Excess cost per minute 3 2 2.5
Ranking to buy 3 1 2

16
 Solution # 6
Produce
4,000 x 3/60
Spurr
=200hrs
3,000 = 12,000/4 = 200 hrs (The remaining 200 hrs i.e.
Cam
12,000 minutes will be allocated to Cam)
Buy Cam =1,000
Buy Pully = 4,000

Optimal Plan:

Cost to Total Cost to

Cost to Buy
Produce Produce & Buy

Spurr 4,000 x 20 80,000

Pully 4,000 x 40 160,000
3,000 x 24 1,000 x 34 106,000
72,000 34,000 346,000

17
 Solution # 6
Those Products earning highest rates of
contribution (Excess Buying cost over variable
producing cost) per unit of limiting factor
should be retained
OR Lower excess cost per unit of limiting
factor should be bought out.

18
 Illustration # 7
Optimal Ltd. Manufactures three products whose
standard costs are as shown below:-
Product A Product B Product C
Rs. Rs. Rs.
Raw Materials 30 20 10
Variable Overheads 15 5 10
Fixed Overheads 8 12 4
53 37 24

Fixed overheads are allocated on basis of variable overhead

for each of the products. The current price of the three
products are:
Product A Product B Product C
Rs.60 Rs.41 Rs.30
19
 Illustration # 7
All three products pass through machines for cording,
spinning and weaving. The hours Required by each product on
each machine is as shown below:
Cording Machine Spinning Machine Weaving Machine
(Hours) (Hours) (Hours)
Product A 3 6 4
Product B 2 4 8
Product C 4 3 4
The Total machine hours available are as follows:

Machine Hours Available

Cording 26,000
Spinning 27,500
Weaving 24,000
The maximum potential sales for each of the products is as follows:-
Product A 1,000 units

Product B 2,000 units

Product C 3,000 units

20
The Total fixed overheads are Rs. 40,000 per month.
 Illustration # 7
• Required:
Production mix that maximizes profits and
calculations of those profits.

21
 Solution # 7
A B C
Units 1,000 2,000 3,000
SP/Unit (Rs.) 60 41 30
Sales (Rs.) 60,000 82,000 90,000

TIME REQUIRED FOR MAXIMUM POTENTIAL SALES

Available
Hours Hours Hours TOTAL HOURS
Cording 3,000 4,000 12,000 19,000 26,000
Spinning 6,000 8,000 9,000 23,000 27,500
Weaving 4,000 16,000 12,000 32,000 24,000

Since the usage of weaving machine time (for production to met maximum sales)
is less than available machine time, therefore limiting factor is weaving machine time.
22
 Solution # 7
Rs. Rs. Rs.
Sales Price 60 41 30
Less: Variable Cost 45 25 20
Contribution per unit 15 16 10
Weaving machine time
4 8 4
(hrs)
Rs. Rs. Rs.
Contribution per hour 3.75 2 2.5
Ranking 1 3 2 23
 Solution # 7
OPTIMUM PRODUCTION PLAN
(Allocation of weaving time) HOURS
A 1,000 units @ time 4 4,000

C 3,000 units @ time 4 12,000

B 1,000 units @ time 8 8,000

24,000

CONTRIBUTION Rs.
A 1,000 x 15 =15,000
B 1,000 x 16 =16,000
C 3,000 x 10 =30,000
61,000
Less Fixed Cost 40,000
Profit 21,000
24
 Accountants Vs. Economists Break
Even graphs

Total revenue

Breakeven point
Cost Breakeven Cost
Breakeven point No. 2
Price Price
point No. 1
Total Cost

loss Total revenue

Max. Profit

Volume Volume

Economist’s breakeven chart Accountant’s breakeven chart

25
 Economist’s Vs. Accountant’s Break
Even Graphs
Economist’s Break Even Chart
1. Total revenue is curvilinear
because to increase the number
of units sold price has to be
reduced.
2. Total cost line shows economy of
scale at first (unit cost decreases
as output increases), but then
return upward as diminishing
return set in.
3. The shape of total costs and
total revenue lines means that
there are two breakeven points.
At the second, decreasing total
revenue equals increasing total
costs.
Accountant’s Break Even Chart
1. It is assumed that sale prices will
be constant at all level of
activity.
2. It is assumed that fixed costs are
the same in total and variable
costs are the same per unit at all
levels of output.
3. It provides information within
relevant range (usually the levels
at which the firm has had
experience of operating in the
past.
26