LOVELY PROFESSIONAL UNIVERSITY

ASSIGNMENT-04

MBA

SUBMITTED TO SUBMITTED BY
MRS. MANU KALIA NITIN KUMAR

REG.NO.11006508

ROLL NO.A02

SEC – S1003
OBJECTIVE-

The objective of the Assignment is as follow:

a) To imbibe the habit of analysis.

b) To inculcate the habit of technically analyzing he given problem.
c) To analyse the Marginal Costing, CVP, and Pricing Decision

Q1. A manufacturing Company’s 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-

PHYSICAL SALES VOLUME RATIO= CONTRIBUTION/ SALES *100

=1, 80,000 / 3, 00,000*100

= 60%

B.E POINT= FIXED COSTS/ PHYSICAL SALES VOLUME RATIO

=1, 50, 000/60%

= 1, 50,000*100/60

=2, 50,000
Margin of safety= Actual costs- Breakeven point

= 3, 00, 000 (-) 2, 50, 000

= Rs 50,000

1. Increase in physical volume will increase proportionately with the variable costs.

Here, Physical volume ratio= contribution/sales *100

10% increase = 180000*10%

= 18,000

Contribution= 180000+18000

=1, 98,000

Where sales= 300000*10%

= 30,000

So, sales= 300000+30000

= 3, 30, 000

Therefore,

Physical volume ratio= 1, 98, 000/ 3, 30, 000*100

= 60%

Breakeven point = fixed costs/physical volume ratio

= 1, 50, 000/60%

= Rs 2, 50,000

And,

Margin of safety= Actual Sales – B.E.P

= 3, 30, 000 – 2, 50, 000

= 80,000

2. 10% decrease in sales volume

Physical volume ratio= contribution/ sales *100

= 1, 62, 000/2, 70, 000*100

= 60%

Breakeven point= fixed costs/ physical volume ratio

= 1, 50, 000*60%

= 2, 50, 000

Margin of safety= Actual sales – Breakeven point

= 2, 70, 000 – 2, 50, 000

= 20,000

3. 5 % increase in variable costs

Physical volume ratio= Contribution/sales *100

= 1, 74, 000/3, 00,000*100

= 58%

Breakeven point= 1, 50,000/58%

= 2586.20 or 2, 58,621

Margin of safety= 3, 00,000-258621

= Rs 41,379

4. 5% decrease in variable costs

Physical volume ratio=Contribution/sales*100

=1, 86,000/3, 00,000*100

= 62%

Breakeven point= 1, 50,000/62%

= 2, 41,935

Margin of safety= 3, 00,000 – 2, 41,935

= 58,065

5. 10% increase in fixed costs

Physical volume ratio= Contribution/sales*100

=1, 80,000/3, 00,000*100

= 60%

Breakeven point= fixed costs/ physical volume ratio

= 1, 65,000/60%

= Rs 2, 75,000

Margin of safety= 3, 00,000 – 2, 75,000

= Rs 25000

6. 10 % decrease in fixed costs

Physical volume ratio= Contribution/sales*100

= 1, 80,000/3, 00,000*100

= 60%

Breakeven point= 1, 35,000/60%

= 2, 25,000

Margin of safety= 3, 00,000 – 2, 25,000

= Rs 75,000

7. Rs 15000 decrease in variable costs and Rs 45000 increase in fixed costs

Physical volume ratio= Contribution/sales*100

= 1, 95,000/3, 00,000*100

= 65%

Breakeven point = Fixed costs/Physical Volume Ratio

= 1, 95,000 / 65%

=Rs 3, 00,000

Therefore,

Margin of Safety = 3, 00,000 – 3, 00,000

= Nil

Q2. 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.

Solution-

Physical volume ratio= selling price- variable costs per unit/ selling price*100
= 60 – 48/60*100
= 20%

In units sold (in 1996)

Breakeven point= fixed costs/ contribution per unit

= 3, 60,000/12
=30,000 units

Margin of safety is 40%, therefore, breakeven point is 60% of the units sold

Or

No. of units sold= B.E.P/60%

= 30,000 units/60%
= 50,000

In profit earned in 1996,

Profit= total contribution- fixed costs
= 50,000 units*12 per unit (-) 3, 60,000
= 6, 00,000 (-) 3, 60,000
= 2, 40,000

Selling price to be fixed in 1997

Variable cost per unit =52.80 (Rs 48+4.80)
Fixed costs= Rs 3, 78,000 (3, 60,000+18,000)
Physical volume ratio by 20%
Since physical volume ratio in 20% variable costs is 80%

Hence,

The required selling price=

= 52.80/80%
= Rs 66

No. of units to be produced and sold in 1997 to earn the same profit as in 1996.
Profit in 1996= Rs 2, 40,000
Fixed costs in 1997= Rs 3, 78,000
Desired contribution in 1997= 2, 40,000+3, 78,000
= 6, 18,000
Contribution per unit in 1997
Selling price (-) variable costs per unit
= 60 (-) 52.80
= 7.20

No. of units to be produced and sold in 1997= fixed costs/ contribution per unit
= 3, 78,000/7.20
= 52,500 Units

Q4. This price structure of a gas cooker made by super frame company Ltd is as
follows:

Per gas cooker

Materials 30

Labor 10

Variable overheads 10

50

Fixed overheads 25

Profit 25

Selling price 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
Q5. 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 Profit

Rs Rs

I 1, 20,000 9,000

II 1, 40,000 13,000

Solution-
a.

Period Sales Profit

I 1, 20,000 9,000

II 1, 40,000 13,000
 Increase in sales or 20,000 4,000
output

1. Increase of Rs 20000 in sales

2. Increase of Rs 4000 in profit

Physical volume ratio= contribution/ sales*100

= 4000 / 20000 *100
= 20%

b. Breakeven point
Sales =Rs 120000
Contribution = 20% of sales
Rs 24,000
24000=fixed costs + profit
24000= fixed costs+9000
Fixed costs= Rs 15000

Breakeven point= fixed costs / 1(-) variable cost/sales

= 15000 / 1 (-) 96000/120000
= 15000 / 1 (-) 4/5
=15000*5
= 75000
(Breakeven point by formula fixed costs / PV ratio)

c. Profit when sales are Rs 1, 00,000

Sales= Rs 1, 00,000

Contribution = 20% sales (Above)

Total contribution = 20% of 1, 00,000

= Rs 20,000

Profit = Contribution (-) Fixed Costs

= Rs 20,000 (-) 15,000

= Rs 5,000

d. Sales required to earn a profit of Rs 20,000

Fixed costs + profit = Contribution Required

15000 + 20000 = Rs 35,000

When contribution is Rs 35,000,

There will be a profit of Rs 20,000 as in (a) above

That is for;

Contribution = Rs 20

Sales Required = Rs 100

And,

When,

Contribution is Rs 35000

Sales Required= 100 * 35000 / 20

= Rs 1, 75,000

e. Safety Margin = Sales (-) breakeven point

Sales in period 1, is Rs 1, 40,000

Breakeven point (-) sales of Rs 75000 as in (b) above

And

Margin of safety = Rs 1, 40,000 (-) 75,000

= Rs 65,000

Q7. A Ltd company has three departments. The following data relates to the
period ending 31 st December 2006.

Department A Department B Department C

Sales ( Rs) 80000 40000 60000

Marginal cost:

Direct material 10,000 5000 10000

Direct labor 4000 5000 10000

Variable 10000 5000 20000

overhead

Fixed overheads 20000 10000 20000

Total cost 44000 25000 66000

 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-

There are two cases in this case, because the concerned company has three department, but
Department (c) is making loss, but it is actually not the loss because,

Sales = Rs 60,000

Marginal cost= Rs 46,000

Therefore,

Profit after marginal cost = 60,000 (-) 46,000

= 14,000

And, loss after fixed cost = 14,000 (-) 20,000

= (6000)

Where, fixed cost is Rs 20,000.

Q8. 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 Rs 2.75 each

Labor Rs 1.75 each

Other variable costs Rs 0.5 each

Fixed cost 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-

Case (a),

Marginal cost of making

Materials = 2.75

Labour = 1.75

Variable expenditure = 0.50

Total =5.00

And same components providing in markets costs Rs 5.75

Thus, buying will not be profitable and the concerned component should be manufactured in
respect because fixed costs is unchanged in every case.

Case (b),

Marginal cost of component = Rs 5.00

Cost of buying = Rs 4.55

Total = Rs 9.55

Therefore, in this case the manufacturer will not be in a situation to earn profits and he will
only profitable only if he buys the component.