ASSIGNMENT NO. 4

MANAGERS OF ACCOUNTANTS

TOPIC -Marginal costing, CVP analysis & pricing decisions

SUBMITTED TO

MRS. MANU KALIA SUBMITTED BY

GOUSIA AMIN

ROLL NO.B54

REG NO. 11006403

1.A manufacturing Company’s director budgeted the following data for the coming year:Sales (1, 00,000 units) --3, 00, 00Variable costs ----1, 20,000Fixed costs ---- 1, 50,000

a) Find out the P/V ratio, break-even points & margin of safetyb) Evaluate the effect of: i) 10% increase in physical sales volume. ii) 10% decrease in physical sales volume.iii) 50% increase in variable costs.iv) 5% decrease in variable costs.v) 10% increase in fixed costs.vi) 10% decrease in fixed costs.vii) Rs 15,000 variable cost decrease accompanied by Rs 45,000 fixed cost increase.

Solution 1.

Sales = 300000

Less variable cost =120000

Contribution=180000

Less fixed cost =150000

Profit = 30000

a)

PV Ratio =contribution/sales *100

=180000/300000*100

=60%

Breakeven point (for sales) = Total fixed cost/contribution*sales

=150000/180000*300000

=Rs. 249999

Or

Breakeven sales = total fixed cost/ PV Ratio

=150000/60%

=Rs. 250000

Margin of safety = actual sales – break even sales

=300000 – 250000

= Rs. 50000

b)

Increase Decrease

Sales (10%) 330000 270000

Variable cost (50% &5%) 180000 114000

Fixed cost (10%) 165000 135000

Variable cost dec. by 15000 and inc. in FC 45000

Increase side decrease side

Variable cost = 165000 99000

Fixed cost = 210000 180000

QUESTION 2.A single product company sells its products at Rs 60 per unit. In 1996, the company operated at a margin of safety of 40%. The fixed costs amounted to Rs. 3, 60,000 & the variable cost ratio to sales was 80%.

In 1997, it is estimated that the variable costs will go up by 10% & the fixed costs will increase by 5%.

Find the selling price required to be fixed in 1997 to earn. The same P/V/ ratio as in 1996. Assuming the same selling price of Rs 60 per unit in 1997, find the number of units required to produced & sold to earn the same profit as in 1996.

ANS:-

Calculate p/v ratio in 1996

p/v ratio =selling price –variable cost *100

selling price

=60-48/100

=12/60 *100

=20%

Calculate of units sold in (1996 )

B.E.P =FIXED COST /CONTRIBUTION PER COST

=360,000/12

=30,000 UNITS

Margin of safty 40 % there for B.E.P Is 60 % of unit sold = B.E.P /60%

=30,000 unit /60%

=50,000

Cal the profit earn in 1996

Profit =total contribution –fixed cost

=50,000unit *RS 12 PER UNIT -360,000

=240,000

SELLING PRICE TO BE FIXED IN 1997

Variable cost per unit in 1987 = RS 52.86 ( 48 +4.80 )

Fixed cost in 1997

=378000(360000+18000)

p/v ratio in 1996 =20%

since p/v ratio is 20% variable cost is 80 %

hence the required sp = 52.86 /80% *100

= 66 ANS

Q4. This price structure of a gas cooker made by super frame company Ltd is as follows:

Per gas cooker

Materials 30

Labor 10

Variable overheads 10

50

Fixed overheads 25

Profit 25

Selling price 100

This is based on the manufacture of one lakh gas cookers per annum. The company expects that due to competition they will have to reduce

selling price, but they want to help the total profits intact. What level of production will have to be reached that is , how many gas cookers will have to be made to get the same amount of profits, if :A) The selling price is reduced by 10 %?B) The selling price is reduced by 20%?

Solution-

Breakeven point = fixed cost/ selling price (-) variable

Maintaining profit= fixed costs+ profit/ selling price (-) variable

1. 25, 00,000+25, 00,000 / 90 (-) 50= 50, 00,000/40=1, 25,000 gas cookersWhere,

10% reduction in selling price= 100*90/100

= Rs 90

2. 25, 00,000 + 25, 00,000 / 80 (-) 50=50, 00,000/30= 1, 66,667 gas cookersWhere, 20% reduction in selling price= 100*80/100= Rs 80

QUESTION5.Assuming that the cost structure and selling price remains the same in the period I & II as given in the preceding question, find out:

a) P/V ratiob) Break-even point for salec) Profit where sales are Rs 1,00,000d) Sales required to earn a profit of Rs 20,000e) Safety margin in period II.

Period Sales Profit

Rs Rs

I 120000 9000

II 140000 13000

Solution5

A) P.V. Ratio=change in profits/change in sales*100=4000/20000*100=20%

B) Contribution for the first half = 1200000*20%= 24000Profit = 9000Fixed cost= 15000For the second halfContribution =140000*20%=28000Profit=13000Fixed cost= 15000Total fixed cost=Rs 30000Breakeven point= fixed cost/P.V. Ratio =30000/20%=Rs 150000

C) Contribution =sales-variable cost100-VC=20V.C. = 80

FIXED COST = 30000CONTRIBUTION = 20000LESS FC= -10000L0SS= Rs 10000

D) Profit to be earned = Rs 20000Sales = FC+PROFIT/CONTRIBUTION=30000+20000/20%=250000

E) MARGIN OF SAFETY FOR PERIOD II= Profit/ PV Ratio=13000/20%=Rs 65000

QUESTION6.Sterling Tea Ltd & dollar Tea Ltd, sell their entire product in tea in the same market at a uniform price of Rs 10 per kg. Their budget for the year ended 31st December 2007 was as follows:

Sterling tea Dollar tea

Rs Rs

Sales 1500000 1500000

Less: variable cost 1200000 1000000

Fixed cost 150000 350000

Net profit 150000 150000

You are required to:

a) Calculate the break-even point of each companyb) State the impact on each company when the year ended with

production exceeding the budget by 20% and had to be sold at a price 10% lower than budgeted. The variable & fixed cost increased by 5% over budget.

Solution.

a)Breakeven point =Total fixed cost/contribution*100

STERLING TEA DOLLAR TEA

= 150000/300000*1500000 =350000/500000*1500000

=Rs. 750000 = Rs. 1050000

b)

STERLING TEA DOLLAR TEA

Sales 1620000 1620000

Less variable cost 15300001200000

Contribution 90000420000

Less fixed cost 157500 367500

Profit (67500)52500

The company is in the stage of profit in the only dollar case. And in sterling tea the company is in loss.

QUESTION7. A Ltd company has three departments. The following data relates to the period ending 31st December 2006.

Department A Department B Department C

Sales ( Rs) 80000 40000 60000

Marginal cost:

Direct material 10,000 5000 10000

Direct labor 4000 5000 10000

Variable overhead

10000 5000 20000

Fixed overheads 20000 10000 20000

Total cost 44000 25000 66000

The manager in charge of department is disappointed with the result of higher marginal cost & there is no hope of being reduced further. You are required to present the information in the most suitable manner indicating whether or not department C should be close down.

Solution.

Dept. A Dept.B Dept.C

Sales 80000 40000 60000

Less VC 24000 15000 40000

Contribution 56000 25000 20000

Less FC 20000 10000 20000

Profit 36000 15000 nil

PV RATIO = Contribution/ sales*100

Dept A =56000/80000*100

=70%

Dept B = 25000/40000*100

=62.5%

Dept C = 20000/60000*100

=33.33%

The manager is right at his place that he is disappointed with the result of higher marginal cost & there is no hope of being reduced further.Information is required to be presented in the most suitable manner indicating that department C should be close down. I suggest that A limited company should have to close the department C as it doesn’t provide any profits to the company and even it takes more total cost i.e. Rs 66000 more than the other departments moreover PV Ratio is also the lowest which is an important tool to measure the profitability of each product.

QUESTION8.A radio manufacturing finds that while it costs Rs 6.75 each to make a component of 376 R , that same is available in the market at Rs 5.75 each with the assurance of continued supply.

The breakdown of costs is as follows:

Materials Rs 2.75 each

Labor Rs 1.75 each

Other variable costs Rs 0.5 each

Fixed cost Rs 1.25 each

Rs 6.25

a) Should you make or buy?b) What should be your decision if the supplier offered the component

at Rs 4.55?

Solution.

Variable cost =2.75

Labor cost =1.75

Other VC =.5

Total VC =5

Fixed cost =1.25

Total cost =6.25

a)

Market price of component = 5.75

Add fixed cost =1.25

Total cost =7

If the same is available in the market at Rs 5.75 each with the assurance of continued supply .Company should not accept the offer as the component costs more than it’s manufactured in the company because the fixed cost remains the same. The company should produce the component itself.

b)

Market price of component = 4.55

Add fixed cost =1.25

Total cost = 5.80

If the supplier offered the component at Rs 4.55, the fixed remains the same i.e. 1.25 so the total cost is 5.80. The company should accept the offer to buy the component at price 4.55 because the component manufactured cost in company is more than the market price and it might lead the company to earn more profits.