decion making ex sol h (1).xlsx - COST-VOLUME-PROFIT...

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COST-VOLUME-PROFIT ANALYSIS Q1 Borosil Ltd., a manufacturer of quality bowls, has a steady growth in sales for the Solution past four years. However, increase competition has led Mr. Aashish, the 1. Operating income = Revenues – Variable costs – Fixed costs president, to believe that an aggressive market campaign will be necessary next = Rs 10,00,000 - 5,50,000 – 2,70,000 revenue 1000000 year to maintain the company’s present growth. To prepare for next year’s = Rs 1,80,000 vc= 550000 marketing campaign, the company’s controller has prepared and presented Mr. fc= 270000 Aashish with the following data for the current year Variable Costs (per bowl) Income taxes = 0.40 x Rs 1,80,000 Direct material Rs 6.50 = Rs 72,000 Direct manufacturing labor 16 Variable overhead (manufacturing, marketing, distribution Net income = Operating income – Income taxes Total variable costs Rs 27.5 = Rs 1,80,000 – 72,000 Fixed costs = Rs 1,08,000 Manufacturing 50,000 Marketing, distribution and customer service 2,20,000 2. Breakeven units = Fixed cost/Contribution margin per unit Total fixed costs 2,70,000 Selling price Rs 50 Contribution margin per unit Expected sales, 20,000 units 10,00,000 = Rs 50 – Rs 27.5 Income tax rate 40% = Rs 22.5 Required: 1. What is the projected net income for the current year? BEP (units) = Rs 2,70,000/Rs 22.5 2. What is the break-even point in units for the current year? = 12,000 units 3. Let net income for next year = c 3. Mr. Aashish has set the revenue target for the next year at a level of Rs 11,00,000 Revenues – Variable costs – Fixed costs =Operating income = net income)/(1-t (or 22,000 bowls). He believes an additional marketing cost of Rs 22,500 for 22,000 x Rs 50 – 22,000 x 27.5 – (2,70,000 + 22,500) = c/(1-0.40) advertising in the next year, with all other costs remaining constant, will be necessary Rs 11,00,000 – 6,05,000 – 2,92,500 = c/0.60 to attain the revenue target. What will be the net income for the next year if the 2,02,500 x 0.60 = c additional Rs 22,500 is spent and the revenue target is met? c = Rs 1,21,500 Net income for next year will be Rs 1,21,500 4. What will be the break-even point in revenues for the next year if the additional Rs 4. New fixed costs = Rs 2,70,000 + 22,500 = Rs 2,92,500 22,500 is spent for advertising? Let Q be the number of units to break-even Rs 50 Q – Rs 27.5Q – Rs 2,92,500 = 0 22.5Q = Rs 2,92,500 Q = Rs 2,92,500/22.5 = 13,000 units Break-even revenues = 13,000 x Rs 50 = Rs 6,50,000 5
5. If the additional Rs 22,500 is spent, what are the required next year revenues for 5. Let S = Required sales units to equal current year net income. net income to equal current year’s net income. Rs 50S – Rs 27.5S – Rs 2,92,500 = Rs 1,08,000/(1-40) Rs 22.5S – Rs 2,92,500 = Rs 1,80,000 Rs 22.5S = Rs 1,80,000 + 2,92,500 S = Rs 4,72,500/22.5 = 21,000 units Revenues = 21,000 units x 50 = Rs 10,50,000 6. At a sales level of 22,000 units what maximum amount can be spent on advertising 6. Let A = Amount spent on adverting in next year if net income of Rs 1,20,000 is desired, next year? 22,000 x Rs 50 – 22,000 x Rs 27.5 – (2,70,000 +A) = Rs 1,20,000/(1-.40) Rs 11,00,000 – 6,05,000 – 2,70,000 – A = Rs 2,00,000 Rs 2,25,000 – 2,00,000 = A A = Rs 25,000 Q2 Ritu is a distributor of brass picture frames. For current year, she plans to purchase Solution frames for Rs 60 each and sell them for Rs 90 each. Ritu’s fixed costs for current

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