The cost volume profit analysis (CVPA) is also known as breakeven analysis.
CVPA determines the breakeven point for different sales volumes and cost structures.
It can be useful for managers for making short-term business decisions.
CVPA makes several assumptions; sales price, fixed cost and variable cost per unit are constant in CVPA.
CVPA also manages contribution margin.
The contribution margin is the difference between total sales and total variable costs.
The main motive of the business is to earn the profits.
For profit, the contribution margin must be exceed to total fixed costs.
The contribution margin may also be calculated per unit.
Under the cost volume profit analysis, we will study the following:
Contribution margin
Profit volume ratio, contribution margin ratio
Determination of selling price, selling price per unit
Profit calculation at different bases, realize profit
Determination of profit from sales volume, budgeted sales volume
Determination of profit on selling price
Determination of profit on cost price
Profit on margin of safety
Cost volume ratio
Under the break-even point analysis, we will study the following:
Break-even analysis under changed situation
Margin of safety
Required sales for desired profit
Cash break-even point
Application of marginal costing
Break-even point analysis is the relationship between cost volume and profits at various levels of activity.
Under this system, variable cost, fixed cost, volume and changing profit are analyzed.
Break-even point analysis is the part of cost volume profit analysis.
It tells us about the level of sales where revenue equal to expenses viz total cost is equal to total sales.
In other words, if there is no profit, no loss that is called break-even point.
It is the important tool for profit planning.
If the production or sales is higher than breakeven point, there is profit.
In the same way, if there is production or sales less than breakeven point, there is loss.
There are three types of breakeven point:
Contribution margin income statement approach
Graphic approach
Formulas approach
Sales or production = Break-even point, No profit no loss
Sales or production > Break-even point, Profit
Sales or production < Break-even point, Loss
Formulas to find out break-even point
Breakeven point (in units) |
= |
Fixed cost ÷ (SPPU – VCPU) |
Or |
= |
Fixed cost ÷ Contribution margin |
|
|
|
Breakeven point (in amount) |
= |
Fixed cost ÷ P/V ratio |
Or |
= |
BEP in units × SPPU |
|
|
|
Break-even point ratio |
= |
Break-even point in amount ÷ Sales in amount |
Break-even point analysis
While calculating BEP, following assumption keep in mind:
All cost can be classified into fixed cost and variable cost viz no place for semi-variable cost
Fixed cost will remain constant (invariable) but variable cost are vary (fluctuate)
Selling price per unit remains constant (invariable).
It is not changed during the period
Production and sales remain unchanged during the period
Changing in opening stock and closing stock are not significant (important)
The major advantages of break-even analysis are as follows:
It measure profit and losses at different levels of production and sales.
It helps to predict the effect of changes in sales prices.
It analyzes the relationship between fixed and variable costs.
It predicts the effect of cost and efficiency changes on profitability.
The major disadvantages of break-even analysis are as follows:
It assumes that sales prices are constant at all levels of output.
It assumes production and sales are the same.
Break even charts may be time consuming to prepare.
It can only apply to a single product or single mix of products.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
Palpali Dhaka (P) Ltd has provided following data for particular product:
VCPU: |
SPPU $300 |
|
Materials |
$100 |
Fixed cost $135,000 |
Labour |
$70 |
Sales units 1,500 Units |
Variable cost |
$30 |
|
Required: (a) P/V Ratio; (b) BEP in amount; (c) BEP in units; (d) BEP ratio
[Answer: (a) 1/3 or 0.333; (b) $405,000; (c) 1,350 units; (d) 90%]
SOLUTION:
Profit volume ratio (P/V Ratio)
= (SPPU – VCPU) ÷ SPPU
= ($300 – $200) ÷ $300
= $100 ÷ $300
= 1/3 or 0.3333
Breakeven point in rupees (BEP)
= Fixed cost ÷ P/V ratio
= $135,000 ÷ 1/3
= $405,000
Breakeven point (in units)
= Fixed cost ÷ (SPPU – VCPU)
= $135,000 ÷ ($300 – S200)
= $135,000 ÷ $100
= 1,350 units
Breakeven point ratio (BEP ratio)
Sales = 1,500 units x $300 = $450,000
Now,
= BEP in amount ÷ Sales in amount
= $405,000 ÷ $450,000
= 0.90 or 90%
The prices of most products are affected according to demand and supply.
Economics tells “more supply decrease price and less supply increase price.”
Demand and supply change variable cost, fixed cost and selling price.
According to syllabus, there are three changing:
Change on variable cost
Change on fixed cost
Change on selling price
Under manufacturing expenses, cost of raw materials, labour charge and direct expenses etc are changed.
Under operating expenses, office expenses, administrative expenses etc are changed.
These changes effects different cost.
Change on variable cost
This change effects profit volume ratio and breakeven point.
Revised P/V ratio = 1 – (Revised VC ÷ SP)
Revised BEP = Fixed cost ÷ Revised P/V ratio
Changes on fixed cost
This change effects BEP
= (Fixed cost present + Additional fixed cost) ÷ P/V ratio
= Revised fixed cost ÷ P/V ratio
Changes selling price
This change effects variable cost, BEP, contribution margin, profit and tax.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2B
AM Manufacturing Company has following data:
Variable cost per unit $150
Selling price per unit $250
Fixed cost $500,000
Sales units 1,500 Units
Required: (a) P/V Ratio (old); (b) BEP in rupees and units (old); (c) Revised selling price per unit if it is increased by 10%
(d) Revised P/V ratio; (e) Revised BEP in rupees
[Answer: (a) 40%; (b) $12,50,000 and 5,000 units;
(c) $275; (d) 0.4545; (e) $11,00,110]
SOLUTION:
P/V Ratio
= (SPPU – VCPU) ÷ SPPU
= ($250 – $150) ÷ $250
= $100 ÷ $250
= 0.4 or 40%
Revised breakeven point in amount
= Fixed cost ÷ P/V ratio
= $500,000 ÷ 0.4
= $12,50,000
BEP units old
= Fixed cost ÷ (SPPU – VCPU)
= $500,000 ÷ ($250 – $150)
= $500,000 ÷ $100
= 5,000 units
Revised sales price per unit (if only SPPU increase by 10%)
= $250 + $250@ 10%
= $250 + $25
= $275
Revised Profit volume ratio
= (Revised SPPU – VCPU) ÷ Revised SPPU
= ($275 – $150) ÷ $275
= $125 ÷ $275
= 0.4545 or 45.45%
Revised breakeven point
= Fixed cost ÷ Revised P/V ratio
= $500,000 ÷ 0.4545
= $11,00,110
Sales beyond the breakeven point is called margin of safety.
It is the difference between the budgeted sales and breakeven point sales.
Margin of safety is also known the excess production over the breakeven point output.
Margin of safety gives some profit.
Breakeven point covers only upto fixed cost (viz. cost of materials + variable cost + fixed cost).
Margin of safety (in amount) |
= |
Actual sales – Breakeven point sales |
Or |
= |
Budgeted sales – Breakeven point sales |
Or |
= |
Profit ÷ P/V ratio |
|
|
|
Margin of safety (in units) |
= |
Profit ÷ Contribution per unit |
|
|
|
Margin of safety ratio |
= |
Margin of safety ÷ Actual sales |
Margin of Safety
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
ABC Company has following data:
Fixed assets $90,000
Sales $300,000
Profit $60,000
Required: (a) Variable cost; (b) P/V Ratio; (c) Breakeven point; (d) Margin of safety; (e) Margin of safety ratio
[Answer: (a) $150,000; (b) 50%; (c) $180,000;
(d) $120,000; (e) 40%]
SOLUTION:
Variable cost
Sales |
= Variable cost + Fixed cost + Profit |
300,000 |
= Variable cost + 90,000 + 60,000 |
Variable cost |
= $150,000 |
Profit volume ratio
= (Sales – VC) ÷ Sales
= ($300,000 – $150,000) ÷ $300,000
= $150,000 ÷ $300,000
= 0.5 or 50%
Breakeven point (BEP)
= Fixed cost ÷ P/V ratio
= $90,000 ÷ 0.5
= $180,000
Margin of safety (MOS)
= Actual sales – BEP sales
= $300,000 – $180,000
= $120,000
Margin of safety ratio (MOS ratio)
= Margin of safety ÷ Actual sales
= $120,000 ÷ $300,000
= 0.4 or 40%
Sometimes manufacturing company wants to know the sales to earn desired profit.
Viz if the manufacturing company earned profit of certain amount, what will be the sales?
There are two types of profit.
Profit before tax and profit after tax.
Sales (in $ before tax) |
= |
(Fixed cost + Desired profit) ÷ P/V ratio |
|
|
|
Sales (in $ after tax) |
= |
Fixed cost + [Desired profit after tax ÷ (1 – tax)] ÷ P/V ratio |
|
|
|
Sales (in $ per units) |
= |
(Fixed cost + Desired profit) ÷ (SPPU – VCPU) |
|
|
|
Required sales for equal profit |
= |
Difference in fixed cost ÷ Difference in P/V ratio |
|
|
|
Required sales [profit % on sales, units] |
= |
Fixed cost ÷ (SPPU – VCPU – Profit per unit) |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
DB Company (P) Ltd has provided these data:
Sales $10,00,000
Variable cost $600,000
Fixed cost $150,000
Required: (1) P/V Ratio; (2) BEP in amount; (3) Sales amount to earn profit $500,000
(4) Sales amount to earn profit $400,000 at 30% tax; (5) If a sale is $20’00,000, find out profit
[Answer: (1) 40%; (2) $375,000; (3) $16,25,000;
(4) $18,03,571; (5) $650,000]
SOLUTION:
Profit volume ratio
= (SPPU – VCPU) ÷ SPPU
= ($10,00,000 – $6,00,000) ÷ $10,00,000
= $4,00,000 ÷ $10,00,000
= 0.4 or 40%
Breakeven point (BEP)
= Fixed cost ÷ P/V ratio
= $150,000 ÷ 0.4
= $375,000
Sales amount to earn profit $500,000
= (Fixed cost + Desired profit) ÷ P/V ratio
= ($150,000 + $500,000) ÷ 0.4
= $650,000 ÷ 0.4
= $16,25,000
Sales to earn $400,000 at 30% tax
= [Fixed cost + {Desired profit after tax ÷ (1 – tax)}] ÷ P/V ratio
= [$150,000 + [$400,000 ÷ (1 – 0.3)] ÷ 0.4
= [$150,000 + $571,429] ÷ 0.4
= $721,429 ÷ 0.4
= $18,03,571
If a sale is $20’00,000, find out profit
20,00,000 |
= ($150,000 + Desired profit) ÷ 0.4 |
20,00,000 x 0.4 |
= 150,000 + Desire profit |
800,000 |
= 150,000 + Desire profit |
Desire profit |
= $650,000 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2E
BM Manufacturing Company has following data:
Selling price per unit (SPPU) $90
Variable cost per unit (VCPU) $50
Fixed cost $300,000
Required: (a) Profit volume ratio; (b) BEP sales units
(c) Determine rupee sales volume required to earn profit of $250,000
(d) Determine the sales volume in units to earn 20% return on sales price per unit
(e) If the company can sell 8,000 units, what will be SPPU to earn $200,000 profit?
[Answer: (a) 44% approx; (b) 7,500 units; (c) $12,50,000;
(d) 13,636 units; (e) SPPU $112.50]
SOLUTION:
Profit volume ratio
= (SPPU – VCPU) ÷ SPPU
= ($90 – $50) ÷ $90
= $40 ÷ 90
= 0.44 or 44%
Determine BEP sales units?
Contribution = SPPU – VCPU = $90 – $50 = $40
= Fixed cost ÷ Contribution
= $300,000 ÷ $40
= 7,500 units
Sales required earning profit $250,000?
= (Fixed cost + Desired profit) ÷ P/V ratio
= ($300,000 + $250,000) ÷ 0.44
= $550,000 ÷ 0.44
= $12,50,000
Sales units to earn 20% profit on sales (20% of SPPU)
Profit per unit = $90 × 20% = $18
= Fixed cost ÷ (SPPU – VCPU – Profit per unit)
= $300,000 ÷ ($90 – $50 – $18)
= $300,000 ÷ $22
= 13,636 units
If the company can sell 8,000 units, what will be SPPU to earn $200,000 profit?
Sales units |
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU) |
8,000 units |
= ($300,000 + $200,000) ÷ (SPPU – $50) |
8,000 units |
= $500,000 ÷ (SPPU – $50) |
8,000 (SPPU – $50) |
= $500,000 |
8,000 SPPU – $400,000 |
= $500,000 |
8,000 SPPU |
= $500,000 + $400,000 |
8,000 SPPU |
= $900,000 |
SPPU |
= $900,000 ÷ 8,000 units |
|
= $112.50 |
Cash Break-Even Point
Breakeven point tells about volume of sales to cover all the operating expenses.
Sales more than BEP are the profit.
Sales less than BEP are loss.
Sales equal to BEP means no profit no loss.
If manufacturing company is suffering from losses, company cannot pay operating expenses.
Sometimes fixed cost includes non-cash expenses like depreciation and amortization etc.
They should be deducted from fixed cost.
= Fixed cost in unit ÷ SPPU – VCPU
= Fixed cost ÷ P/V ratio
Non-operating income |
Non cash/operating expenses and losses |
Interest on investment or deposit |
Interest on debenture or loan |
Dividend from shares |
Legal fee for issuing for shares and debenture |
Rent received from sub-letting |
All provisions and reserve |
Gain on sales of fixed assets or investment |
Donations, charity and presents |
|
Loss on sales of fixed assets or investment |
|
All written off on patents, preliminary expenses etc |
|
Depreciation, amortization |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2F
The extracted data are taken from BK Garment (P) Ltd 31st December:
Fixed cost $600,000
Rent and taxes $200,000
Salary and wages $300,000
Depreciation on equipment $600,000
Selling price per unit $400 and variable cost per unit $300
Required: (1) P/V Ratio; (2) BEP in units; (3) Cash fixed cost; (4) Cash BEP in units
[Answer: (1) 0.25; (2) 6,000 units; (3) $500,000; (4) $20,00,000]
SOLUTION:
Profit volume ratio
= (SPPU – VCPU) ÷ SPPU
= ($400 – $300) ÷ $400
= $100 ÷ $400
= 0.25 or 25%
BEP sales units
= Fixed cost ÷ (SPPU – VCPU)
= $600,000 ÷ ($400 – $300)
= $600,000 ÷ $100
= 6,000 units
Cash fixed cost
= Fixed cost – Depreciation
= 600,000 – 100,000
= $500,000
Cash breakeven point in units
= Cash fixed cost ÷ P/V ratio
= $500,000 ÷ 0.25
= $20,00,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2G
Khurja Ceramic (P) Ltd manufactures different kind of cups, plates and mugs. Generally it is sold as 6 pieces a set. Following data are related to specific coffee mug set:
Selling price per set $200
Variable cost per set $150
Fixed cost $100,000
Sales set 5,000
Required: net profit or loss by changing only required data:
(a) Selling price increase by 10%; (b) Variable cost decrease by 10%; (c) Fixed cost increase by $50,000;
(d) Decrease 10% in SPPU and increase VCPU 10%; (e) Increase 5% in SPPU but decrease 10% in sales units;
(f) Fixed cost decrease by $25,000 but increase 10% in sales units
Particulars |
Base |
a |
b |
c |
d |
e |
f |
Sales (units x SPPU) |
10,00,000 |
11,00,000 |
10,00,000 |
10,00,000 |
9,00,000 |
9,45,000 |
11,00,000 |
Less: Variable cost |
7,50,000 |
7,50,000 |
6,75,000 |
7,50,000 |
8,25,000 |
7,50,000 |
7,50,000 |
Contribution |
2,50,000 |
3,50,000 |
3,25,000 |
2,50,000 |
75,000 |
1,95,000 |
3,50,000 |
Less: Fixed cost |
1,00,000 |
1,00,000 |
1,00,000 |
1,50,000 |
1,00,000 |
1,00,000 |
1,00,000 |
Net profit (loss) |
1,50,000 |
2,50,000 |
2,25,000 |
1,00,000 |
(25,000) |
95,000 |
2,50,000 |
Given and working note:
(a) New SPPU |
= 200@110% |
= 220 |
(b) New VCPU |
= 150@90% |
= 135 |
(c) New fixed cost |
= 100,000 + 50,000 |
= 150,000 |
(d) New SPPU |
= 200@90% |
= 180; |
VCPU |
= 150@110% |
= 165 |
(e) New SPPU |
= 200@105% |
= 210; |
Sales units |
= 5,000@90% |
= 4,500 |
(f) New fixed cost |
= 100,000 – 25,000 |
= 75,000; |
Sales units |
= 5,000@110% |
= 5,500 |
Marginal costing is a very useful tool for management.
The merit of marginal costing are as following:
(1) Cost control
(2) Profit planning
(3) Evaluation of performance
(4) Decision making:
(a) Fixation of selling piece
(b) Make or buy decision
(c) Selection of a suitable product mix
(d) Effect of change in price
(e) Maintaining a desired level of profit
(f) Alternative methods of production viz produced by hand or machine.
(g) Diversification (wide range) of products
(h) Closing down or suspending activities etc
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2H
The annual fixed cost of ABC Company is $2,40,000. The sales of the first year is $9,00,000 and the second year is $12,00,000 and profit for second year was $1,00,000 higher than first year.
Required: (a) P/V Ratio; (b) If sales is $18,00,000 what will be profit for 3rd year?
(c) At what rupees volume does company break-even?
[Answer: (a) P/V Ratio = 1/3; (b) Profit = 3,60,000; (c) BEP $= 7,20,000 ]
Solution:
Given and working note:
|
Year 1 |
Year 2 |
Fixed cost |
= $240,000 |
$240,000 |
Sales |
= $900,000 |
$12,00,000 |
Profit |
= ? |
(? + 100,000) |
Different in profit = (? + 1,00,000) – ? = 1,00,000
Different in sales = 12,00,000 – 9,00,000 = 3,00,000
Profit volume ratio
= Difference in profit ÷ Difference in sales
= $100,000 ÷ $300,000
= 1/3 or 0.333
Find out profit if sales are $18,00,000
Sales |
= (Fixed cost + Desired profit) ÷ P/V ratio |
$18,00,000 |
= ($2,40,000 + Desired profit) ÷ 1/3 |
$18,00,000 x 1/3 |
= ($2,40,000 + Desired profit) |
$6,00,000 |
= $2,40,000 + Desired profit |
Desired profit |
= $600,000 – $240,000 |
|
= $360,000 |
BEP in amount
= Fixed cost ÷ P/V ratio
= $240,000 ÷ 1/3
= $720,000
Mixed Problems and Solutions
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2I
XYZ Company has just been incorporated and plans to produce a product that will sell for $10 per unit. Preliminary market surveys show that demand will be around 10,000 units per year.
The company has the choice of buying one of the two machines, each of which has a capacity of 10,000 units per year. Machine ‘A’ would have fixed costs of $30,000 per year and would yield a profit of $30,000 per year on the sale of 10,000 units. Machine ‘B’ would have fixed cost of $18,000 per year and would yield a profit of $22,000 per year on the sale of 10,000 units. Variable costs behave linearly for both machines.
Required: (a) P/V Ratio; (b) Break- even sale for each machine; (c) Sales level where both machines are equally profitable;
(d) Range of sales where one machine is more profitable than other.
[Answer: (a) P/V Ratio 0.60 and 0.4;
(b) $50,000; $45,000 (c) $60,000]
SOLUTION:
Given and working note:
Machine A |
Machine B |
||
SPPU |
= $10 |
SPPU |
= $10 |
Sales units |
= 10,000 units |
Sales units |
= 10,000 units |
Sales |
= $100,000 |
Sales |
= $100,000 |
Fixed cost |
= $30,000 |
Fixed cost |
= $18,000 |
Profit |
= $30,000 |
Profit |
= $22,000 |
|
|
|
|
Sales |
= Fixed cost + Variable cost + Profit |
Sales |
= Fixed cost + Variable cost + Profit |
100,000 |
= 30,000 + Variable cost + 30,000 |
100,000 |
= 18,000 + Variable cost + 22,000 |
VC |
= 40,000 |
VC |
= 60,000 |
|
|
|
|
VCPU |
= $40,000 ÷ 10,000 units |
VCPU |
= $60,000 ÷ 10,000 units |
|
= $4 |
|
= $6 |
Profit volume ratio
Machine A |
Machine B |
= (Fixed cost + Profit) ÷ Sales |
= (Fixed cost + Profit) ÷ Sales |
= ($30,000 + $30,000) ÷ $100,000 |
= ($18,000 + $22,000) ÷ $100,000 |
= $60,000 ÷ $100,000 |
= $40,000 ÷ $100,000 |
= 0.60 or 60% |
= 0.40 or 40% |
Breakeven point in rupees (BEP)
Machine A |
Machine B |
= Fixed cost ÷ P/V ratio |
= Fixed cost ÷ P/V ratio |
= $30,000 ÷ 0.6 |
= $40,000 ÷ 0.4 |
= $50,000 |
= $45,000 |
Required sales for equal profit
= Difference in fixed cost ÷ Difference in P/V ratio
= ($36,000 – $18,000) ÷ (0.6 – 0.4)
= $12,000 ÷ 0.2
= $60,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2J
The installed capacity of ABC Company is 2,00,000 units per year and the normal capacity is 1,50,000 units per year. Standard variable manufacturing costs are $10 per unit and fixed factory overhead cost is $3,00,000 per year. Variable selling and distribution expenses are $2 per unit and fixed selling and distribution expenses are $1,56,000 per year. The unit selling price is $20.
The operating result for the last year is as follows:
Sales 1,20,000 units
Production 1,30,000 units
Beginning inventory 10,000 units
Required: (a) P/V Ratio; (b) Break- even sales volume in amount; (c) Sales volume in units to earn a profit of $40,000;
(d) Sales volume in units required to earn a net income of 10% on sales.
[Answer: (a) 40%; (b) $11,40,000; (c) 57,000 units; (d) 76,000 units]
SOLUTION:
Given and working note:
VCPU: Manufacturing + S&D = $10 + $2 = $12
Fixed cost: Factory + S&D = $300,000 + $156,000 = $456,000
SPPU = $20
Sales units = 120,000 units
Profit volume ratio
= (S – V) ÷ S
= (20 – 12) ÷ 20
= 0.4 or 40%
Breakeven point in rupees (BEP)
= Fixed cost ÷ P/V ratio
= $456,000 ÷ 0.4
= $11,40,000
Sales units to earn $40,000 profit
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU)
= ($456,000 + $40,000) ÷ (S20 – S12)
= $456,000 ÷ $8
= 57,000 units
Sales units to earn 10% profit on sales unit
Profit = 10% on sales units = $20 @ 10% = $2
= Fixed cost ÷ (SPPU – VCPU – Profit per unit)
= $456,000 ÷ ($20 – $12 – $2)
= $456,000 ÷ $6
= 76,000 units
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2K
The price structure of Magic Polymer Ltd is given related to footwear:
Particulars |
Per pair |
Fixed overheads per unit |
$50 |
Materials |
$60 |
Profit |
$50 |
Labors |
$20 |
Selling price per pair |
$200 |
Variable overheads |
$20 |
|
|
|
$100 |
|
|
This is based on the manufacture of 100,000 pairs per annum.
The company expects that due to competition they will have to reduce selling prices, but they want to keep the total profits intact. How many cycles 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%?
[Answer: (a) 1,25,000 pairs; (b) 1,66,667 pairs]
SOLUTION:
Given and working note:
Total VCPU = $100
Fixed cost = 100,000 units @ $ 50 = $50,00,000
Desire profit = 100,000 units @ $ 50 = $50,00,000
SPPU = $200
If selling price reduces by 10%, find out sales units at same desire profit of $ 50,00,000
New SPPU = $200 @ 90% = $180
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU)
= ($50,00,000 + $50,00,000) ÷ ($180 – $100)
= $1,00,00,000 ÷ $80
= 125,000 pairs
If selling price reduces by 20%, find out sales units at same desire profit of $50,00,000
New SPPU = $200 @ 80% = $ 160
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU)
= ($50,00,000 + $50,00,000) ÷ ($160 – $100)
= $1,00,00,000 ÷ $60
= 166,667 pairs
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2L
Bajaj Home Appliances has following data:
Sales of last year were $20,00,000 and its net profit 10% of sales.
As a result of the increase in appliance sales through departmental stores and mail-order business establishment, the company is considering elimination of wholesalers and selling directly to retailers.
It is estimated that this would result in a 40% drop in sales but net profit would be $1,80,000 due to the elimination of middlemen. Fixed expenses would increase from $2,00,000 to $3,00,000 owing to additional warehouses and distribution facilities.
You are required to find out:
(a) P/V ratio for last year and current year
(b) Whether the proposed will change BEP in rupees? By how much?
(c) What would be the sale volume in rupees to obtain as much as profit of last year?
[Answer: (i) 20% and 40%; (ii) Rs.10,00,000 and Rs.7,50,000;
Reduced by $2,50,000; (iii) Rs.12,50,000]
SOLUTION:
Given and working note:
Sales |
= $20,00,000 |
Sales 20,00,000 @ 60% |
= $12,00,000 |
Net profit |
= 20,00,000 @ 10% = $200,000 |
Net profit given |
= $180,000 |
Fixed cost |
= $200,000 |
Fixed cost given |
= $300,000 |
Profit volume ratio
P/V ratio |
= (Fixed cost + Profit) ÷ Sales |
|
Year 1 |
= ($200,000 + $200,000) ÷ $20,00,000 |
= 0.2 |
Year 2 |
= ($300,000 + $180,000) ÷ $20,00,000 |
= 0.4 |
Breakeven point in units and rupees (BEP)
BEP in units |
= Fixed cost ÷ P/V ratio |
|
Year 1 |
= $200,000 ÷ 0.2 |
= $10,00,000 |
Year 2 |
= $300,000 ÷ 0.4 |
= $750,000 |
Here,
New proposal reduces BEP in rupees by 10,00,000 – 750,000 = 250,000
Sales in rupees if profit $200,000
= (Fixed cost + Desired profit) ÷ P/V ratio
= ($300,000 + $200,000) ÷ 0.4
= $500,000 ÷ 0.4
= $12,50,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2M
ABC Company (P) Ltd produces a single product. Its fixed cost has been budgeted for annual range of operation of 30,000 units to 40,000 units. Net income at these two different points of operation has been presented below:
Units sold |
30,000 units |
40,000 units |
Sales revenue |
$3,00,000 |
$4,00,000 |
Cost of goods sold and other expenses |
$3,00,000 |
$3,70,000 |
Profit before tax |
Nil |
$30,000 |
Required: (a) P/V ratio; (b) Fixed cost for the year; (c) Which sales volume in units will bring the company a profit of $18,000?
(d) If a reduction of 25% in the original sales [as required in [c] is made. By how much the selling price should be increased to put the company in breakeven level?
[Answer: (a) 30%; (b) $90,000; (c) 36,000 units; (d) $10,333]
SOLUTION:
Profit volume ratio
= Difference in profit ÷ Difference in sales
= ($30,000 – Nil) ÷ ($400,000 – $300,000)
= $30,000 ÷ $100,000
= 0.3 or 30%
Fixed cost
P/V ratio |
= |
(Fixed cost + Profit) ÷ Sales |
0.3 |
= |
(Fixed cost + Nil) ÷ $300,000 |
0.3 x $300,000 |
= |
Fixed cost |
Fixed cost |
= |
$90,000 |
Sales in rupees if profit $18,000
= (Fixed cost + Desired profit) ÷ P/V ratio
= ($90,000 + $18,000) ÷ 0.3
= $108,000 ÷ 0.3
= $360,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2N
The Kantipur Club is making plans for dinner-dance. Each ticket will admit one couple to the dance and each partner to enjoy a buffet supper. The following information is providing:
Rent of hall $10,000
Fee to be paid to musical group $5,000
Ticket printing charge $1,000
Advertisement $3,500
Newsletter sending to club-members $500
Party favors per couple $100
Buffet dinner per person $250 or per couple $ 500
Required:
(a) Calculate the number of tickets to be sold to break-even on the dance, if the price set is $650 per ticket.
(b) What price per ticket must be charged in order to break-even if expected number of tickets to be sold is 500 tickets?
[Answer: (a) 400 tickets; (b) $640]
SOLUTION:
Given and working note:
Fixed cost: |
|
Variable cost: |
|
Rent of hall |
10,000 |
Buffet dinner $250 x 2 |
500 |
Fee to musician |
5,000 |
Party favor |
100 |
Ticket printing |
1,000 |
Total |
+ $600 |
Advertisement |
3,500 |
SPPU (per ticket) |
$650 |
Newsletters |
+ 500 |
|
|
Total |
$20,000 |
|
|
If SPPU is $650 find out BEP units
= Fixed cost ÷ (SPPU – VCPU)
= $20,000 ÷ ($650 – $600)
= $20,000 ÷ $150
= 400 units (ticket)
If BEP units are 500 tickets find out SPPU (Let be SPPU = ?)
BEP sales units |
= |
Fixed cost ÷ (SPPU – VCPU) |
500 |
= |
$20,000 ÷ (? – $600) |
500 (? – $600) |
= |
$20,000 |
500? – $300,000) |
= |
$20,000 |
500? |
= |
$20,000 + $300,000 |
500? |
= |
$320,000 |
? |
= |
$320,000 ÷ 500 |
|
= |
$640 |
Therefore, SPPU (?) = $640
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2O
The extracted data are given below related to cheese balls by Marigold Snacks (P) Ltd. The second column can be ignored since it is only one of the projections of an assistant accountant: But it may be useful to you:
Particulars |
Actual data |
Future estimation |
|
First week of June, 2021 |
Second week of June, 2021 |
Sales in units |
10,000 |
20,000 |
Profit (loss) in amount |
(10,000) |
10,000 |
Fixed cost in amount |
30,000 |
30,000 |
Variable cost per unit in amount |
8 |
8 |
One the basis of first column, determine:
(a) What increase sales volume is required to cover an extra attractive packaging cost of $0.50 per unit to increase the sales at the existing selling price to yield zero profit?
(b) What increased sales volume is required at present fixed cost of $5,000 for that period while yielding a profit of $5,000.
(c) What increased sales volume is required to reach a profit of $4,000 while reducing selling price by 3%.
[Answer: (a) 20,000 units, $2,00,000; (b) 20,000 units, $2,00,000;
(c) 20,000 units, $1,94,000]
SOLUTION:
Given and working note:
Sales units |
= 10,000 units |
FCPU |
= $30,000 ÷ 10,000 units |
= $3 |
Profit (loss) |
= (10,000) |
Loss per unit |
= $10,000 ÷ 10,000 units |
= $1 |
Fixed cost |
= $30,000 |
SPPU |
= FCPU + VCPU – Loss |
= 3 + 8 – 1 = $10 |
VCPU |
= 8 |
|
|
|
If variable cost increases by $0.50 per unit, find out BEP sales units and BEP in amount
New VCPU = 8 + 0.50 = $8.50
BEP in units |
BEP in amount |
= Fixed cost ÷ (SPPU – VCPU) |
= BEP in units x SPPU |
= $30,000 ÷ ($10 – $8.5) |
= 20,000 x $10 |
= $30,000 ÷ $1.5 |
= $200,000 |
= 20,000 units |
|
If fixed cost increase by $5,000 and desire profit is $5,000; find out BEP sales units and BEP in amount
New fixed cost = 30,000 + 5,000 = 35,000
BEP in units |
BEP in amount |
= (New fixed cost + Desired profit) ÷ (SPPU – VCPU) |
= BEP in units x SPPU |
= ($35,000 + $5,000) ÷ ($10 – $8) |
= 20,000 x $10 |
= $40,000 ÷ $2 |
= $200,000 |
= 20,000 units |
|
If fixed sales decrease by 3% and desire profit is $4,000, find out BEP sales units and BEP in amount
New SPPU = 10 @ 97% = $9.70
BEP in units |
BEP in amount |
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU) |
= BEP in units x SPPU |
= ($30,000 + $4,000) ÷ ($9.7 – $8) |
= 20,000 x $9.7 |
= $34,000 ÷ $1.7 |
= $194,000 |
= 20,000 units |
|
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TU Questions and Solutions
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2060/S Modified
AK Firm purchased certain item for $80,000 and sold the same to a customer for $100,000. Firm charged a profit of 10% on sales value
Required: (1) Profit volume ratio; (2) Fixed cost; (3) BEP in Rs
(4) Required sales volume to earn after tax profit of $18000, if tax rate is 40%.
[Answer: (a) 20%; (b) $10,000; (c) $50,000; (d) $200,000]
SOLUTION
Profit volume ratio
= (Fixed cost + Net profit) ÷ Sales revenue
= ($10,000 + $10,000) ÷ $100,000
= $20,000 ÷ $100,000
= 0.20 or 20%
Fixed cost
Sales |
= FC + VC +Profit |
$100,000 |
= FC + $80,000 + $10,000 |
Fixed cost |
= $10,000 |
BEP in amount
= Fixed cost ÷ P/V ratio
= $10,000 ÷ 0.20
= $50,000
Sales to earn $18,000 at 40% tax
= Fixed cost + [Desired profit after tax ÷ (1 – Tax)] ÷ P/V ratio
= $10,000 + [{$18,000 ÷ (1 – 0.40)] ÷ 0.20
= $10,000 + $30,000 ÷ 0.20
= $40,000 ÷ 0.20
= $200,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2061/S Modified
The income statement of AJ Company has been given below:
Particulars |
Amount |
|
Sales unit |
20,000 units |
|
Sales revenue |
$600,000 |
|
Less: Cost of goods sold: |
|
|
Variable manufacturing cost |
300,000 |
|
Fixed manufacturing cost |
200,000 |
|
Total cost of goods sold |
500,000 |
|
Gross margin |
100,000 |
|
Less: Variable selling cost |
100,000 |
|
Fixed selling cost |
+ 50,000 |
(150,000) |
Net profit (loss) before tax |
(50,000) |
Required: (1) Profit volume ratio; (2) Break even sales volume in amount; (3) Sales volume (units) to earn 20% profit on sales;
(4) Sales volume (in rupees) to earn $100,000 after tax profit; tax rate 50%
[Answers: (1) 1/3 or 33.33%; (2) $7,50,000;
(3) 37,000 units; (4) $13,50, 000]
SOLUTION
Given and working note:
Sales revenue |
= $600,000 |
Fixed cost manufacturing |
= $200,000 |
|
Sales units |
= 20,000 units |
Fixed cost S&D |
= $50,000 |
|
SPPU |
= $600,000 ÷ 20,000 = $30 |
Total fixed cost |
= $250,000 |
|
|
|
|
|
|
|
|
|||
Variable cost manufacturing |
= $300,000 |
|
||
Variable cost S&D |
= $100,000 |
|
||
Total |
= $400,000 |
|
||
|
|
|
||
VCPU = $400,000 ÷20,000 units |
= $20 |
|
||
Profit volume ratio
= (SPPU – VCPU) ÷ SPPU
= ($30 – $20) ÷ $30
= 1/3 or 33.33%
BEP in Rs
= Fixed cost ÷ P/V ratio
= $250,000 ÷ 1/3
= $750,000
Sales units to earn @ 20% profit on sales value
Desire profit = 600,000@20% = $120,000
Contribution = Selling price per unit – Variable cost per unit = $30 – $20 = $10
= (Fixed cost + Desired profit) ÷ Contribution
= ($250,000 + $120,000) ÷ $10
= $370,000 ÷ $10
= 37,000 units
Sales to earn $100,000 at 50% tax
= Fixed cost + [Desired profit after tax ÷ (1 – Tax)] ÷ P/V ratio
= $2,50,000 + [{$1,00,000 ÷ (1 – 0.50)] ÷ 1/3
= $2,50,000 + $2,00,000 ÷ 1/3
= $4,50,000 ÷ 1/3
= $13,50,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2062 Modified
The sales and cost data of AH Company are presented below:
|
Year I |
Year II |
|
Sales unit |
20,000 units |
40,000 units |
|
Sales revenue |
500,000 |
1,000,000 |
|
Less: Cost of sales: |
550,000 |
850,000 |
|
Operating profit |
(50,000) |
150,000 |
|
Required: (1) Profit volume ratio; (2) Cost volume ratio; (3) Fixed cost for the year; (3) Break even sales volume;
(5) Sales volume to earn after tax profit of $150,000. Tax rate 50%
[Answers: (1) 40%; (2) 60%; (3) $250,000; (4) $625,000;
(5) $13,75,000] * C/V Ratio = 1 – P/V Ratio]
SOLUTION
Profit volume ratio
= Difference in profit ÷ Difference in sales
= [$150,000 – (-50,000)] ÷ ($10,00,000 – 5,00,000)
= $200,000 ÷ $500,000
= 0.40 or 40 %
Cost volume ratio
= 1– P/V Ratio
= 1– 0.40
= 0.60 or 60%
Fixed cost
P/V Ratio |
= (Fixed cost + Net profit) ÷ Sales |
40% |
= (Fixed cost + $1,50,000) ÷ $10,00,000 |
FC + $1,50,000 |
= $10,00,000 × 40% |
FC + $1,50,000 |
= $4,00,000 |
Fixed cost |
= $4,00,000 – 150,000 |
|
= $2,50,000 |
BEP in amount
= Fixed cost ÷ P/V ratio
= $250,000 ÷ 0.40
= $625,000
Sales to earn profit $150,000 at 50% tax
= Fixed cost + [Desired profit after tax ÷ (1 – Tax)] ÷ P/V ratio
= $2,50,000 + [{$1,50,000 ÷ (1 – 0.50)] ÷ 0.40
= $2,50,000 + $3,00,000 ÷ 0.40
= $5,50,000 ÷ 0.40
= $13,70,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2063 Modified
AG Company sells its energy base product to wholesale supermarket for $45 per price in which it incurred $20 as variable cost. The annual fixed costs of company amount to $100,000.
Required: (1) Profit volume ratio; (2) Determine the BEP sales units;
(3) Determine the rupee sales volume required to earn profit of $120,000
(4) Determine the sales volume in units to earn 20% return on sales
(5) If the company can sell 5,500 units of its product, what price would it have to charge to earn $120,000 profit?
[Answer: (1) 5/9; (2) 4,000 units; (3) $396,000;
(4) 6250 units; (5) SPPU = $60]
SOLUTION
Profit volume ratio
= (SPPU – VCPU) ÷ SPPU
= ($45 – $20) ÷ $45
= $25 ÷ $45
= 5/9 or 55.60%
Determine BEP sales units
= Fixed cost ÷ (SPPU – VCPU)
= $100,000 ÷ ($45 – $20)
= $100,000 ÷ $25
= 4,000 units
Sales required earning profit $120,000
= (Fixed cost + Desire profit) ÷ P/V ratio
= ($100,000 + $120,000) ÷ 5/9
= $220,000 ÷ 5/9
= $396,000
Sales units to earn 20% profit on sales (20% of SPPU)
Profit = $45 × 20% = $9
= Fixed cost ÷ (SPPU – VCPU – Profit per unit
= $100,000 ÷ ($45 – $20 – $9)
= $100,000 ÷ $16
= 6,250 units
Company sells 5,500 units to earn $120,000; selling price per unit (SPPU)
Sales units |
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU) |
5,500 units |
= ($100,000 + $120,000) ÷ (SPPU – $20) |
5,500 units |
= $220,000 ÷ (SPPU – $20) |
5,500 units (SPPU – $20) |
= $220,000 |
5,500 x SPPU – $110,000 |
= $220,000 |
5,500 x SPPU |
= $220,000 + $110,000 |
5,500 x SPPU |
= $330,000 |
SPPU |
= $330,000 ÷ 5,500 units |
|
= $60 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2064 Modified
AF Company sells its product at $20 per unit in which it incurred variable cost of $7.60 per unit. The annual fixed costs of company amounted to $49,600.
Required: (a) Profit volume ratio; (2) Sales unit to earn after tax profit of $30,000 if tax rate is 45%
(3) Compute BEP value assuming that fixed cost will increase by 20%.
(4) Compute the contribution margin ratio assuming that variable cost is reduced to $7.50 per unit.
(5) If the company can sell 5,200 units what price would it have to charge to earn a profit of $18,000 ?
[Answers: (1) 62%; (2) 8,399 units; (3) $96,000; (4) 62.50%; (5) $20.58]
SOLUTION
Profit volume ratio
= 1 – (VCPU ÷ SPPU)
= 1 – ($7.60 ÷ $20)
= 0.62 or 62%
Sales units after tax @ 30% to earn profit $30,000
Contribution = SPPU – VCPU = $20 – 7.60 = $12.40
= Fixed cost + [Desired profit after tax ÷ (1 – Tax)] ÷ Contribution
= $49,600 + [{$30,000 ÷ (1 – 0.45)] ÷ $12.40
= $49,600 + $54,545 ÷ $12.40
= $104,145 ÷ $12.40
= $13,70,000
= 8,399 units approx.
BEP in amount with revised fixed cost
Revised fixed cost = $49,600 + $49,600@20% = $59,520
= Revised fixed cost ÷ P/V ratio
= $59,520 ÷ 0.62
= $96,000
Revised contribution margin ratio (P/V Ratio) if VCPU is $7.50
= 1 – Revised VCPU ÷ SPPU
= 1 – $7.50 ÷ $20
= 1 – 0.375
= 0.625 or 62.5%
Revised SPPU unit to earn profit $18,000 if sales units are 5,200
Sales units |
= (Fixed cost + Desired profit) ÷ (SPPU – VCPU) |
5,200 units |
= ($49,600 + $18,000) ÷ (SPPU – $7.6) |
5,200 units |
= $67,600 ÷ (SPPU – $7.6) |
5,200 units (SPPU – $7.6) |
= $67,600 |
5,200 x SPPU – $39,520 |
= $67,600 |
5,200 x SPPU |
= $67,500 + $39,520 |
5,200 x SPPU |
= $107,020 |
SPPU |
= $107,020 ÷ 5,200 units |
|
= $20.58 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2065 Modified
The accountant of AD Company made available the following information:
Annual fixed cost $90,000
Materials cost per kg is $3 and 7 kg of input materials is consumed by one unit of output
Each unit needs 4 DLH and wages per hour is $4
The variable overhead is 50% of direct labour cost
The sales price per unit is $60
Required: (1) P/V Ratio; (2) BEP in rupees; (3) Sales units to realize $3 per unit profit
(4) Sales in rupees to realize after tax profit of $36,000 at a tax rate 40%
[Answer: (1) 25%; (2) $360,000; (3) 7,500 units; (4) $600,000]
* VCPU = 7×3 + 4×4 + 4×4@50% = $45]
SOLUTION
Given and working note:
Fixed cost |
= $90,000 |
|
Variable cost |
= Materials + Direct labour + Overhead |
|
|
= 7 kg x $3 + 4 DLH x $4 + (4 DLH x $4 @ 50%) |
|
|
= 21 + 16 + 8 |
|
|
= $45 |
|
|
|
|
Selling price per unit (SPPU) = $60 |
Profit volume ratio
= (SPPU – VCPU) ÷ SPPU
= ($60 – $45) ÷ $60
= 0.25 or 25%
BEP in amount
= Fixed cost ÷ P/V ratio
= $90,000 ÷ 0.25
= $360,000
Sales units to earn $3 per unit
= Fixed cost ÷ (SPPU – VCPU – Profit per unit)
= $90,000 ÷ ($60 – $45 – $3)
= $90,000 ÷ $12
= 7,500 units
Sales to earn profit $36,000 at 40% tax
= Fixed cost + [Desired profit after tax ÷ (1 – Tax)] ÷ P/V ratio
= $90,000 + [{$36,000 ÷ (1 – 0.40)] ÷ 0.25
= $90,000 + $60,000 ÷ 0.25
= $150,000 ÷ 0.25
= $600,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2066 Modified
AS Company provides the following trading result:
Year |
Sales amount |
Total cost |
|
Y1 |
$2,00,000 |
$1,60,000 |
|
Y2 |
$2,40,000 |
$1,80,000 |
|
Required: (1) Profit volume ratio; (2) Annual fixed overhead; (3) Margin of safety for year 1 and year 2;
(4) Sales to earn a profit of $80,000
[Answer: (1) 0.50 or 50%; (2) $60,000;
(3) $80,000 and $120,000; (4) $280,000]
SOLUTION
Given and working note:
Year |
Sales amount |
Total cost = VC + FC |
Profit = Sales – TC |
1 |
$200,000 |
$160,000 |
$40,000 |
2 |
$240,000 |
$180,000 |
$60,000 |
Different |
$40,000 |
|
$20,000 |
Profit volume ratio (P/V Ratio)
= Different in profit ÷ Different in sales
= $20,000 ÷ $40,000
= 0.5 or 50%
Annual fixed overhead
Sales |
= (Fixed cost + Profit) ÷ P/V ratio |
$200,000 |
= (Fixed + $40,000) ÷ 0.50 [base year 1] |
0.50 ($200,000) |
= (Fixed + $40,000) |
$100,000 |
= (Fixed + $40,000) |
Fixed cost |
= $100,000 − $40,000 |
|
= $60,000 |
Margin of safety for year 1 and year 2 (MOS)
Margin of safety = Profit ÷ P/V ratio
For year 1 = $40,000 ÷ 0.50 = $80,000
For year 2 = $40,000 ÷ 0.50 = $120,000
Sales to earn a profit of $80,000
= (Fixed cost + Desired profit) ÷ P/V ratio
= ($60,000 + $80,000) ÷ 0.50
= $140,000 ÷ 0.50
= $280,000
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2067 Modified
The following extracted information is given to you AB Company:
Particulars |
Amount |
|
Sales revenue |
100,000 |
|
Less: Variable cost |
60,000 |
|
Contribution |
40,000 |
|
Less: Fixed cost |
30,000 |
|
Net income or profit |
10,000 |
|
Required: (1) P/V ratio; (2) BEP in Rs; (3) Margin of safety; (4) Required sales for after tax earnings $25,000 if tax rate is 40%
[Answer: (1) 40%; (2) $75,000; (3) $25,000; (4) $179,168;
SOLUTION
Profit volume ratio (P/V Ratio)
= (Sales – Variable cost) ÷ Sales
= ($100,000 – $60,000) ÷ $100,000
= $40,000 ÷ $100,000
= 0.40 or 40%
BEP in amount
= Fixed cost ÷ P/V ratio
= $30,000 ÷ 0.40
= $75,000
Margin of safety (MOS)
= Profit ÷ P/V ratio
= $10,000 ÷ 0.40
= $25,000
If profit earned $25,000 after tax 40%, find out sales
= Fixed cost + [Desired profit after tax ÷ (1 – Tax)] ÷ P/V ratio
= $30,000 + [{$25,000 ÷ (1 – 0.40)] ÷ 0.40
= $30,000 + $41,667 ÷ 0.40
= $71,667 ÷ 0.40
= $179,168
#####
Problems and Answers of Cost Volume Profit & Break-even Analysis |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2A
The following extracted information is given to you EP Company:
Years |
Sale amount |
Profit amount |
2020 |
$14,00,000 |
$1,50,000 |
2021 |
$16,00,000 |
$2,00,000 |
Required: (1) P/V Ratio; (2) Fixed cost for the period; (3) Variable cost for the year 2015
(4) Sales amount to earn $300,000 profit before tax; (5) If profit earned $175,000 after tax 30%, find out sales
[Answer: (1) 25%; (2) $200,000; (3) $12,00,000;
(4) $20,00,000; (5) $18,00,000]
PROBLEM: 2B
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
XYZ Manufacturing Company has following data:
Selling price per unit (SPPU) $90
Variable cost per unit (VCPU) $54
Fixed cost $400,000
Required: (calculate nearest units and rupees): (a) Profit volume ratio; (b) BEP in units and rupees;
(c) Determine rupee sales volume required to earn profit of $200,000
(d) Determine the sales volume in units to earn 20% return on sales price per unit
(e) If sales is $20,00,000 find out profit
[Answer: (a) 40%; (b) 11,111 units approx and $9,99,990;
(c) $15,00,000; (d) 22,222 units approx; (e) $400,000;
* Sales units = FC ÷ (SPPU – VCPU – Profit per unit)
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2C
The following data relates to ABC Manufacturing Company:
Cost per unit: |
|
Materials |
$90 |
Labour |
$45 |
Variable overheads |
$15 |
Selling price per unit |
$200 |
Fixed cost |
$135,200 |
Units sold during the year |
8,000 units |
Find out: (a) P/V Ratio; (b) Break-even point in units; (c) Break-even point in rupees; (d) Break-even ratio
[Answer: P/V Ratio = 25%; BEP units = 2,704 units;
BEP $= $540,800; BEP Ratio = 33.8%]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2D
The following data are obtained from the records of ABC Company:
Particulars |
First year |
Second year |
|
Sales |
$800,000 |
$900,000 |
|
Profit |
$100,000 |
$140,000 |
|
Required: (a) P/V Ratio; (b) Fixed cost; (c) Break-even-point; (d) Required sales in rupees for earn profit $180,000.
(d) Find out the profit if sales amount is $15,00,000.
[Answer: P/V Ratio = 40%; Fixed cost = $220,000; BEP = $550,000;
Sales = $10,00,000; Profit = $380,000]
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
PROBLEM: 2E
Himalayan Chemicals (P) Ltd manufactures washing shop. Its fixed cost has been budgeted for period is $1,80,000. The company expects to earn $60,000 profit. The variable cost per unit is $6 and profit-volume ratio is 0.6
Required: (a) Selling price per unit; (b) Break-even point in units; (c) Amount of sales made during the year.
(d) Required sales for earning $60,000 profit after VAT, if VAT rate is 13%.
[Answer: (a) $15; (b) 20,000 units; (c) $4,00,000; (d) $414,943]
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