ASSIGNMENT NO.

4 MANAGERS OF ACCOUNTANTS

TOPIC -Marginal costing, CVP analysis & pricing decisions

SUBMITTED TO
MRS. MANU KALIA GOUSIA AMIN ROLL NO.B54 REG NO. 11006403

SUBMITTED BY

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

a) Find out the P/V ratio, break-even points & margin of safety b) 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 Profit = =150000 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 Sales (10%) Variable cost (50% &5%) Decrease 330000 180000 270000 114000

Fixed cost (10%)

165000

135000

Variable cost dec. by 15000 and inc. in FC 45000 Increase side Variable cost = 165000 Fixed cost = 210000 decrease side 99000 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 Labor Variable overheads 30 10 10

50 Fixed overheads Profit Selling price 25 25 100

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 cookers Where, 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 cookers Where, 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 ratio b) Break-even point for sale c) Profit where sales are Rs 1,00,000 d) Sales required to earn a profit of Rs 20,000 e) Safety margin in period II.

Period

Sales Rs

Profit Rs

I II

120000 140000

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

C) Contribution =sales-variable cost 100-VC=20 V.C. = 80

FIXED COST = 30000 CONTRIBUTION = 20000 LESS FC= -10000 L0SS= Rs 10000 D) Profit to be earned = Rs 20000 Sales = 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 Rs Sales Less: variable cost Fixed cost Net profit 1500000 1200000 150000 150000 Dollar tea Rs 1500000 1000000 350000 150000

You are required to: a) Calculate the break-even point of each company b) 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 = 150000/300000*1500000 =Rs. 750000 DOLLAR TEA =350000/500000*1500000 = Rs. 1050000

b) STERLING TEA Sales 1620000 DOLLAR TEA 1620000 15300001200000 90000420000 157500 (67500)52500 367500

Less variable cost Contribution Less fixed cost Profit

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 Sales ( Rs) Marginal cost: Direct material 10,000 Direct labor Variable overhead 4000 10000 80000

Department B 40000

Department C 60000

5000 5000 5000 10000 25000

10000 10000 20000 20000 66000

Fixed overheads 20000 Total cost 44000

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 Sales Less VC Contribution Less FC 80000 24000 56000 20000

Dept.B 40000 15000 25000 10000

Dept.C 60000 40000 20000 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 doesnt 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 Labor Other variable costs Fixed cost Rs 2.75 each Rs 1.75 each Rs 0.5 each 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 Other VC Total VC =1.75 =.5 =5

Fixed cost =1.25 Total cost =6.25 a) Market price of component = 5.75 Add fixed cost Total cost =1.25 =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 its 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 Total cost =1.25 = 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.