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