Practical Problems Q. Rajkumar Ltd. provides you the following information: (June 03) Sales (Rs.)
Profit (Rs.)
Period 1
10,000
2,000
Period 2
15,000
4,000
You are required to calculate:
P/V ratio Fixed cost Break-even sales volume Sales to earn a profit of Rs. 3,000 and Profit when sales are Rs. 8,000
i)
Change in profit P/V ratio =
x 100 Change in rate 2000
=
x 100
=
40%
=
2000
5000 ii)
Fixed Cost = Contribution - Profit 10000 =
x 40 - 2000 100
iii)
Fixed Cost Break-even sales volume = P/V ratio 2000
=
X 100 40
= 5000 iv)
Fixed cost + Profit Sales = P/V ratio 2000 + 3000 Sales = 40% = 12500 v)
Profit = Sales - Variable cost - Fixed cost Variable cost = 8000 x (60/100) = 4800 Profit = 8000 - 4800 - 2000 = 1200
Q. From the following information relating to Smith sons, calculate the breakeven point and the turnover required to earn a profit of Rs. 3,00,000 (Dec. 02) Fixed Overhead = 2,10,000 (total) Variable Cost = 20 per unit Selling price = 50 per unit If the company is earning a profit of Rs. 3,00,000, what is the margin of safety available to it? Also state the significance of this margin.
Selling price Less variable cost Contribution
= 50 = 20 = 30 Fixed cost
BEP in units = Contribution per unit 2,10,000 =
=
7,000 units
30 2,10,000 BEP in amount =
=
3,50,000
60% Calculation of turnover to earn a profit of Rs. 3,00,000
Fixed cost + Desired Profit Sales = Contribution per unit 21,000 + 3,00,000 = 30 = 17000 units Fixed cost + Desired Profit Sales (amount) = P/V ratio 21,000 + 3,00,000 = 60% = 8,50,000 Margin of Safety
Margin of safety = Total sales - sales at BEP MOS (Amount) = 850000 - 350000 = 500000 MOS (Units) = 17000 - 7000 = 10000 units > For theory part please refer to chapter 9.
Q. Premier Ltd. produces a standard article. The results of the last four quarters of the year 2000 are as follows: (Dec. 01) Quarters I II III IV
Output (unit) 1,000 1,500 2,000 3,000
The cost of direct material is Rs. 30 and direct labour is Rs. 20 per unit. Variable expenses are
Rs 10 per unit. Fixed expenses are Rs 6,000 per annum. (i) Find out full cost percent for each quarter. (ii) Find out BEP (Break Even Point) in units for each quarter if selling price is Rs 100 per unit and the entire output is sold.
I 1000 30000 20000 10000 1500
Output Direct material Rs. 30 Direct Labour Rs. 20 Variable Expenses Rs. 10 Fixed Expenses
II 1500 45000 30000 15000 1500
III 2000 60000 40000 20000 1500
IV 3000 90000 60000 30000 1500
Annual expenses = 6000 Quaterly expense = 6000/4 = 1500 i) Full cost percent for each quarter
Total Percentage
61500 13.5
91500 20
121500 26.7
181500 39.80
ii) BEP in units
BEP = Fixed cost/ contribution per unit Contribution = Sales - Variable cost = 100 - (30 + 20 + 10) = 40 BEP = 6000/40 = 150 units
Q. From the following data : (June 01) Selling Price = Rs. 40 per unit Variable manufacturing cost = Rs. 20 per unit Variable selling cost = Rs. 10 per unit Fixed factory overheads = 10,00,000 per year Fixed selling costs 4,00,000 per year Calculate : i) Break-even point expressed in rupee sales. ii) Number of units that must be sold to earn a profit of Rs. 2,00,000 per year.
i)
Contribution = Sales - variable cost = 40 - (20 + 10) = 10 Total fixed cost = Fixed factory overheads + Fixed selling cost = 10,00,000 + 4,00,000 = 14,00,000 Fixed cost BEP in units = Contribution per unit 14,00,000 = 10 = 1,40,000 units BEP (Value) = Fixed cost/(P/V ratio) Contribution P/V ratio =
x
100
Sales = 10/40 X 100 = 25% BEP (value) = (14,00,000/25) X 100 = 56,00,000 ii) Number of units must be sold to earn a profit of Rs. 2,00,000 per year
Fixed cost + Desired Profit Sales = P/V ratio = (14,00,000 + 2,00,000) / 25% = 64,00,000
Q. A medical advisory service offers to its subscribers complete information on doctors, paramedicals, health insurance, super speciality hospitals and general health awareness. It now plans to computerise these sevices and has a choice of two systems on which to offer these services. Under option A, a computer system would be leased for Rs. 50 lakhs per year and the subscriber requests would be processed with avariable cost of Rs. 20 per request. Under plan B, a computer system would be leased for Rs. 10 lakhs per year and the subscriber requests would be processed with a variable cost of Rs. 120 per request. Under either option, the subscriber can
and is happy to pay Rs 220 per request that is processed. On the basis of this data (i) Which option is more risky? (ii) Draw break even charts for both options. (iii) At what volume of business would the operating profit under either option be the same? (iv) Which plan has a higher degree of operating leverage? (Jan. 01)
(i) PLAN A BEP (units) = Fixed costs/contribution per unit = 50,00,000/(220 - 20) = 25,000 requests PLAN B BEP (units) = Fixed costs/contribution per unit = 10,00,000/(220 - 120) = 10,000 requests
Plan is more risky because initial fixed cost is very high. If sales fall below 25,000 requests, losses will be incurred. (ii) Break even chart
iii) Profit under plan A = (Price - Varaible cost) X Units - FC = (220 - 20) X (x) - 50,00,000
Profit under plan B = (220 - 120) X (x) - 10,00,000 Equating both the equations we get
(220 - 20) X (x) - 50,00,000 = (220 - 120) X (x) - 10,00,000 100x = 40,00,000 x = 40,000 requests iv) Operating Leverage
Degree of operating leverage = %change in net operating income / % change in units sold or sales = Contribution/EBIT Where EBIT is Earning before interest & tax In both the plans the contribution is calculated taking hypothetical data of 50,000 requests because the question does not provide any information. PLAN A
50000 X (Rs. 220 - Rs. 20) = 50000 X (220 - 20) - Rs. 50,00,000 =2 PLAN B
50000 X (Rs. 220 - Rs. 120) = 50000 X (220 - 120) - Rs. 10,00,000 = 1.25 Plan A has greater operating leverage owing to higher fixed costs.
