Question 1.

A company producing 500 units its variable cost $200 per unit and sale price 250 per unit, fixed expenses are $12,000 per month.

Required

Calculate BEP in units and sales and show profit at 90% capacity.

Answer

(i). BEP (units) = Fixed Expenses / C

= ($5,42,000 + $2,52,000) / 6

= 7,92,000 / 6 = 1,32,000 units

BEP (Sales) = 1,32,000 x 20 = $26,40,000

(ii) Sales for examining profit $60,000

BEP (units) = (Fixed Exp. + Desired Profit) / C

= (7,92,000 + 60,000) / 6

= 8,52,000 / 6

= 1,42,000 units

BEP Sales = 1,42,000 x 20 = $28,40,000

Question 2

How would you calculate the following:

(i). PVR (ii). BEP (Sales) (iii). Margin of Safety (iv). Profit

When sales are $80,000, variable costs $4,000 and Fixed Costs $ 4,000.

Answer

(i). PVR = (C / $) x 100 = (4,000 x 100) / 8,000 = 50%

C = 8,000 – (4,000) = $4,000

(ii). BEP (Sales) = Fixed Cost / PVR

= (4,000 x 100) / 50

= $8,000

(iii). MOS = Actual Sales – BEP Sales

= 8,000 – 8,000

= Nil

Or

MOS = Profit / PVR = 0 / 8,000 = Nil

(iv). Profit = Sales – Variable Cost – Fixed Cost

= 8,000 – 4,000 – 4,000

= Nil

Question 3

From the following information find out sales at BEP and PVR

Variable cost per unit = $15
Sales per unit = $20
Fixed expenses = $54,000

What should be the new selling price if BEP unit is brought down  to 6,000 units.

PVR = (C x 100) / S

Thus,

= ((20 – 15) x 100) / 20

PVR = 25%

BEP (Sales) = Fixed expenses / PVR

= (54,000 x 100) / 25

= $2,16,000

(iii). New selling price if BEP is brought down to 6,000 units.

New SP = (Fixed Exp. + Variable Cost ) / New BEP (units)

= (54,000 + 15) / 6,000

= $24

Answer

Question 4

Calculate (i). PV Ratio (ii) BEP (iii) Margin of Safety when:

Sales = $1,00,000
Total Cost = $80,000
Fixed Cost = $20,000
Net Profit = 80,000

Answer

(i). PVR = (C x 100) / S

C = Sales – Variable Cost

1,00,000 – 60,000 = 40,000

Variable cost = Sales – Profit – Fixed Cost

(1,00,000 – 20,000 – 20,000) = 60,000

Thus,

PVR =  (C / S) x 100

= (40,000 / 1,00,000) x 100

= 40%

(ii). BEP = Fixed Exp. / PVR

= 20,000 / 40%

= (20,000 x 100) / 40

= $50,000

(iii). Margin of Safety = Present Sales – Break-Even Sales

= 1,00,000 – 50,000

= 50,000

Profitability = (40 x 50,000) / 100

= $20,000

Question 5

The National Company has just been formed. They have a patented process which will make them the sole suppliers of Product A. During the first year the capacity of their plant will be 9,000 units and this is the amount they will be able to sell. Their costs are:

Direct Labor = $15 per unit
Raw material = $5 per unit
Other variable costs = $10 per unit
Fixed  costs = $2,40,000

(a). If the company wishes to make a profit of 2,10,000 during the first year, what should be the selling price? What is the contribution margin at this price?

(b). If at the end of first year, they wish to increase their volume and an increase or $1,00,000 in the annual fixed costs will increase their capacity to 50,000 units, how many units will they have to sell to realise a profit of $7,60,000, if their selling price is $70 per unit and no other costs change, except that invest $5,00,000 in advertising with a view to achieve this end?

Solution

(a). Calculation of selling price

Direct labor (9,000 x 15) = $1,35,000
Raw material (9,000 x 5) = $45,000
Other variable costs (9,000 x 10) = $90,000
Total variable costs (PU 30) = 2,70,000
Add: Fixed Cost = 2,40,000
Profit = 2,10,000
Total sale value of 9,000 units @ $80 per unit = 7,20,000

(b). Sales in Units

(Fixed expenses + Desired profit) / (Sales – Variable cost)

Thus,

Fixed Expenses = 2,40,000 (given) + 1,00,000 (extra) + 50,000 (advertisement cost)

= 8,40,000 + Desired Profit (7,60,000) = $16,00,000

= 16,00,000 / (70 – 30) = 40,000 units