Cost & Management Accounting Practice Manual (March 2023)

Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

CHAPTER 1 BREAKEVEN ANALYSIS/ COST VOLUME PROFIT ANALYSIS

Question 1:
Selling Price Rs.25 per unit
Material Rs.10 per unit
Labour Rs.2 per unit
Overhead Rs.3 per unit
Fixed Overhead Rs. 40,000

Required:
Calculate Breakeven Point.
Prepare profit and loss statement at Breakeven point.

Answer 1
Selling price 25
Material (10)
Labor (2)
OH (3)
CM 10

Breakeven point 4,000 (40,000/10)

Profit and loss statement

Sales 100,000 (4,000 * 25)
Material (40,000) (4,000 * 10)
Labor (8,000) (4,000 * 2)
Overheads (12,000) (4,000 * 3)
40,000

Question 2
Fixed OH Rs.120,000
Fixed Selling OH Rs.24,000
Variable Manufacturing Rs.24 per unit
Variable Selling Rs.6 per unit
Selling price Rs.36 per unit

Required:
Calculate Breakeven Point.
Prepare profit and loss statement at Breakeven point.

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Answer 2
Selling price 36
Manufacturing cost (24)
Selling cost (6)
CM 6

Breakeven point 24,000 units

(120,000 + 24,000)/6

Profit and loss statement

Sales 864,000
Manufacturing cost (576,000)
Selling cost (144,000)
CM 144,000
Fixed cost (144,000)
-

Question 3
ABC limited produces a single product. Details of production, selling cost and sales price is as
under:
(Rs per unit)
Selling price 460
Variable production Cost 240
Variable Selling cost 130

(Rs per year)

Fixed Production Cost 4,520,000
Fixed Admin Cost 1,150,000

Required:
a) Calculate Breakeven Point.
b) Prepare profit and loss statement at Breakeven point.
c) Calculate MOS if expected Sales is 88,500 units

Answer 3
Selling price 460
Var. prod cost (240)
Var. selling cost (130)
CM 90

Breakeven point 63,000 units (4,520,000 + 1,150,000)/90

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Profit & Loss statement

Sales 29,980,000
Var. prod cost (15,120,000)
Var. selling cost (8,190,000)
CM 5,670,000
FC (5,670,000)
Profit -

Total Sales 40,710,000 (460 * 88,500)

Breakeven sales (28,980,000)
MOS sales 11,730,000
OR
MOS sales 11,730,000 (88,500 63,000)*460

Question 4
Fixed Overheads 359,640
Direct Material Rs.12 Per unit
Direct Labor Rs.10 Per unit
Variable Overheads 80% of Direct Labor
List price per unit Rs.45
Trade Discount 10%

Required:
Calculate Breakeven Point.
Prepare profit and loss statement at Breakeven point.

Answer 4
Selling price 45
Discount (10%) (5)
Net selling price 41
Direct material (12)
Direct labout (10)
VPOH (8)
CM 11

Breakeven point 34,251 Units

(359,640/10.5)

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Profit and loss statement

Sales 1,541,314
Discount (10%) (154,131)
Net sales 1,387,183
Direct material (411,017)
Direct labout (342,514)
VPOH (274,011)
CM 359,640
FC (359,640)
-

Question 5
2016 2017
Selling Price 40 Increase by 10%
Variable Cost 24 Increase by 5%
Fixed Cost 400,000 522,640
Expected Sales (units) 35,000 32,500

Required:
Calculate Breakeven and MOS for both years.

Answer 5
2016 2017
Selling price 40 44 (40*1.1)
Variable cost (24) (25) (24*1.05)
CM 16 19

Fixed cost 400,000 522,640

Breakeven units (25,000) (27,800)

Total units 35,000 32,500
MOS units 10,000 4,700

160,000 88,360

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 6
Selling Price Rs.80 per unit
Variable Cost Rs.48 per unit
Fixed Cost Rs. 600,000

Required:

Answer 6
Selling price 80
Variable cost (48)
CM 32

CM Ratio 40%

18,750 (600,000/32)
1,500,000 (600,000/40%)

Question 7
Selling Price Rs.120 per unit
Variable Cost Rs.90 per unit
Fixed Cost Rs. 720,000

Required:

Answer 7
Selling price 120
Variable cost (90)
CM 30

CM Ratio 25%

24,000 (720,000/30)
2,880,000 (720,000/25%)

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 8
Selling Price Rs.70 per unit
Variable Cost Rs.56 per unit
Fixed Cost Rs. 210,000

Required:

Calculate Profit if Expected Sales is Rs.1,600,000.

Answer 8
Selling price 700
Variable cost (56)
CM 14
CM Ratio 20%
Fixed Cost 210,000

15,000 (210,000/14)
1,050,000 (210,000/20%)

Expected sales 1,600,000

VC (80%) (1,280,000)
CM 320,000
Fixed cost (210,000)
110,000

Question 9
Break Even Sales Rs.500,000
MOS Sales Rs.200,000
CM % 40%

Required:
Calculate Profit.

Answer 9
Total sales 700,000
VC (60%) (420,000) (500,000 + 200,000)
CM 280,000
FC (200,000) (500,000*40%)
Profit 80,000
Breakeven * CM% = Fixed cost

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 10
2020
Sales Rs.400,000
Variable Cost Rs.300,000

Next year:
Volume increase by 20%.
Selling price reduce by 5%.
Variable Cost decrease by 10%.

Required:
Calculate Contribution margin for the year 2021.

Answer 10
2020 2021
Sales 400,000 456,000 (400,000*1.2*95%)
VC (300,000) (324,000) (300,000*1.2*90%)
CM 100,000 132,000

Question 11
2020
Sales Rs.200,000
Variable Cost Rs.125,000
Fixed Cost Rs.40,000

Next year:
Volume increase by 40%.
Selling price reduce by 5%.
Variable Cost decrease by 10%.
Fixed Cost increase by Rs.10,000.

Required:
Calculate Profit for the year 2021.

Answer 11
2020 2021
Sales 200,000 266,000 (200,000*1.4*0.95)
Variable cost (125,000) (157,500) (125,000*1.4*0.9)
CM 75,000 108,500
Fixed cost (40,000) (50,000) (40,000+10,000)
Profit 35,000 58,500
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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 12
2016
Breakeven Sales Rs. 680,000
MOS Sales Rs. 320,000
CM% 40%

Next year:
Selling price reduced by 5%.
Volume increase by 30%.
Variable Cost decrease by 10%
Purchase a Van on Loan of Rs. 300,000 (Life 20 years)
Interest 4% per annum

Required:
Calculate Profit for both year 2016 & 2017.

Answer 12
2016 2017
Total sales 1,000,000 1,235,000
Var. Cost (60%) (600,000) (702,000)
CM 400,000 533,000
Fixed cost (272,000) (299,000)
Profit 128,000) 234,000

Next year fixed cost

Last year FC 272,000
Depreciation 15,000
Interest 12,000
Next year FC 299,000

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 13 (September 2014 Auto Industries)

Auto Industries Limited (AIL) manufactures auto spare parts. Currently, it is operating at 70%
capacity. At this level, the following information is available:
Break-even sales Rs. 125 million
Margin of safety Rs. 25 million
Contribution margin to sales 20%

AIL is planning to increase capacity utilization through the following measures:

i. Selling price would be reduced by 5% which is expected to increase sales volume by 30%.
ii. Increase in sales would require additional investment of Rs. 40 million in distribution
vehicles and working capital. The additional funds would be arranged through a long-term
loan at a cost of 15% per annum. Depreciation on distribution vehicles would be Rs. 5
million.
iii. As a result of increased production, economies of scale would reduce variable cost per
unit by 10%.
Required
a) Prepare profit statements under current and proposed scenarios.
b) Compute break-even sales and margin of safety after taking the above measures.

Answer 13 (September 2014)

(a) Auto industries Limited
Profit Statement
Current Proposed
Rs. In million
Sales (125+25), 150*1.3*0.95 150.00 185.25
Variable cost of sales (150*80%), 120*90%*1.3) (120.00) (140.40)
Contribution margin 30.00 44.85
Fixed cost (125x20%), 25+5+(40*15%) (25.00) (36.00)
Net profit 5.00 8.85
(b)
Breakeven sales (185.25/44.85)x36 148.70
Margin of safety (185.25-148.7) 36.55

Question 14
Selling Price Rs.50 per unit
Variable Cost Rs.32 per unit
Fixed Cost Rs.720,000

Required:
Calculate Expected Sales if Target profit is Rs. 180,000.

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Answer 14
SP 50
VC (32)
CM 18

CM Ratio 36%
FC 720,000

Question 15
Selling Price Rs.80 per unit
Variable Cost Rs.48 per unit
Fixed Cost Rs. 800,000
Tax 40%

Required:
Calculate Expected Sales if Target profit is Rs. 300,000.

Answer 15
SP 80
VC (48)
CM 32

CM Ratio 40%
FC 800,000
Expected Sales = 3,250,000 ((300,000/.6)+(800,000))/40%

Question 16
Selling Price Rs.245 per unit
Variable Cost 60%
Fixed Cost Rs. 2,581,320
Tax 40%
Target Profit Rs 2,143,750

Required:
Sales to achieve Target Profit.

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Answer 16
SP 245
VC (60%) (147)
CM 98

CM Ratio 40%
FC 2,581,320

Expected Sales = 15,385,592 ((2,143,750/60%)+(2,581,320))/40%)

Profit & Loss Statement

Sales 15,385,592
VC (9,231,355)
CM 6,154,237
FC (2,581,320)
PBT 3,572,917
Tax @ 30% (1,429,167)
PAT 2,143,750

Question 17
Selling Price Rs.120 per unit
CM Ratio 25%
Fixed Cost Rs.4,068,000
Target Profit 10% of Sales

Required:
Sales to achieve Target profit.

Answer 17
Selling price 120
Var. Cost (75%) (90)
CM 30

CM Ratio 25%
Expected Sales 27,120,000 ((4,068,000)+(10%S))/25%)=S

Question 18
Selling Price Rs.360 per unit
CM Ratio 24%
Fixed Cost Rs. 1,728,000
Target Profit 5% of Sales

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Required:
Calculate Sales to Achieve Target profit if:
a) No Tax Exist.
b) Tax Rate of 25% is applicable.

Answer 18
Selling price 360
Var. Cost (75%) (274)
CM 86

CM Ratio 24%

No tax exist:
Expected sales = 9,094,737 = ((1,728,000)+(5%S))/24%)=S

If tax rate of 25% is applicable:

Expected sales = 9,969,233 = ((1,728,000)+((5%/.75)S))/24%

Question 19
Sales for 2019 6,000,000
Total Cost (8,500,000)
Loss before tax (2,500,000)
Tax @ 25% -
Net Loss (2,500,000)

CM Ratio is 40%

Required
Calculate Breakeven point.
Calculate Sales required to achieve a profit after tax of Rs. 1.2 million.

Answer 19
Sales 6,000,000
Variable cost (60%) (3,600,000)
CM 2,400,000
FC (4,900,000) (3,600,000-8,500,000)
Net loss (2,500,000)

CM ratio 40%

12,250,000 (4,900,000/40%)

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Target profit:
Expected sales 16,250,000 ((4,900,000)+(1,200,000/75%))/40%

Question 20
Sales for 2018 2,850,000
Total Cost (3,795,000)
Loss before tax (945,000)
Tax @ 25% -
Net Loss (945,000)

CM Ratio is 30%

Required
Calculate Breakeven point.
Calculate Sales required to achieve a profit after tax of Rs. 600,000.

Answer 20
Sales 2,850,000
Variable cost (60%) (1,995,000)
CM 855,000
FC (1,800,000)
Net loss (945,000)

CM ratio 30%

6,000,000 (4,900,000/40%)

Target profit:
Expected sales 8,666,667 ((1,800,000)+(600,000/.75))/30%

Question 21
ANDA BREAD
Selling Price (per unit) 10 15
Variable Cost (per unit) 6 6
Ratio (units) 2 1

Fixed Cost Rs.260,000

Required:
Calculate Breakeven Point in Packets.

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Answer 21
ANDA BREAD
Selling price 10 15
Variable Cost (6) (6)
CM 4 9

Ratio 2 1

CM Per Packet 17 (4*2)+(9*1)

Fixed Cost 260,000

Breakeven is packets 15,294 Packets

Question 22
ABC Limited produces 2 products. They are sold in the ratio of 1:2. Details the costs are prices
are as under:
A B
Selling Price (Per unit) 400 150
Variable Cost (Per unit) 270 90

Fixed Cost Rs.4,000,000

Required:

Answer 22
A B
Selling price 400 150
Variable cost (270) (90)
Contribution margin 130 60

Packet
Selling price 700 (400*1)+(150*2)
Var. Cost (450)
CM 250 (130*1)+(60*2)

CM ratio per packet 36%

16,000
11,200,000

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Cost & Management Accounting Practice Manual (March 2023)
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Question 23

Products Burger Fries Coldrinks Ice-cream

Selling Price 150 80 40 100
Variable Cost 90 32 30 55
Ratio (in units) 6 8 5 2

Fixed Cost Rs.40,000,000

Expected Sales Rs. 200,000,000

Required:
Calculate Profit of Packet.

Answer 23
Burger Fries Cold-drink Ice-cream
Selling price 150 80 40 100
Variable cost (90) (32) (30) (55)
Contribution margin 60 48 10 45

Ratio 6 8 5 2
Packet
Selling price (per packet) 1,842 (150*6)+(80*8)+(40*5)+(100*2)
Variable cost (1,001)
CM 841 (60*6)+(48*8)+(10*5)+(45*2)

CM Ratio 46%

Expected sales 200,000,000

VC (108,686,211)
CM 91,313,789
FC (40,000,000)
Profit 51,313,789

Question 24
Sales 300,000
COGS (200,000)
Operating Expense (150,000)
Loss (50,000)
Tax @ 25% -
Net Loss (50,000)

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Cost & Management Accounting Practice Manual (March 2023)
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A B
Selling Price 25 50
Variable Cost (15) (25)
CM 10 25

Ratio (Units) 2 1

Required
a) Calculate Breakeven point of Packet.
b) Calculate Sales to achieve Target Profit of Rs. 200,000.

Answer 24
Packet
Selling price 100 (25*2)+(50*1)
VC (55)
CM 45 (10*2)+(25*1)

CM Ratio 45%

Profit & Loss statement

Sales 300,000
VC (55%) (165,000)
CM (45%) 135,000
FC (185,000) (165,000-350,000)
Net Loss (50,000)

4,111
411,111

Target Profit 1,003,704 ((185,000)+(200,000/0.75))/45%

Question 25
ABC Limited deals in manufacturing of tables and chairs. The profit and loss account of the
company for the year ended 30 June 2014 is as follows:

Sales 243,000
Cost of goods sold (211,500)
Gross profit 31,500
Operating Expense (57,300)
Net Loss before Taxation (25,800)
Taxation -
Net Loss after Taxation (25,800)

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Cost & Management Accounting Practice Manual (March 2023)
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Additional Information:
a) Selling Price per table and chair is Rs. 22,000 and Rs. 8,000 per unit having contribution
margin of 35% and 30% respectively. Tables and Chairs are sold in the ratio of 1:4.
b) The corporate tax rate is applicable @ 34% while no tax is required to pay in case of loss.
c) The Share Capital of Company is Rs. 180 million.
d) 80% of the operating expense are fixed while the remaining expense are directly
attributable to the number of units sold.

Required
a) Determine the Breakeven sales revenue.
b) Determine the number of tables and chairs that need to be sold if the Company ways to pay a
dividend of 10% and retain profit amounting to 4% of Sales.

Answer 25
Tables Chairs
Selling price 22 8
Variable Cost (14) (6)
CM (Per unit) 8 2

Ratio 1 4

Composite
Selling price 54
VC (37)
CM 17

CM Ratio 32%

Fixed Cost:
Total Cost 268,800
VC (165,150) (243,000*76%)
FC 103,650

a)
b) Target Cost:
Dividend 27,273 ((180,000*10%)/0.66)
FC 103,650
4% of sales 0.0606 S (4%S/0.66)

Total sales 504,007 ((27,273+103,650+0.0606S/32%)=S

Number of Tables & Chairs

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Sales Ratio Sales Per Sell. Price

Tables 22,000 205,336 9,337 (205,336/22)
Chairs 32,000 298,671 37,334 (298,671/8)
54,000 504,007

Question 26 (September 2019 Macchiato Limited)

Macchiato (Private) Limited (MPL) is planning to launch a new business of manufacturing carpets
and rugs. The extracts from the projected statement of profit or loss of the new business are
given below:

Sales 500,000
Cost of goods sold (360,000)
Gross profit 140,000
Operating Expense (90,000)
Profit before Taxation (50,000)
Taxation @ 35% (17,500)
Profit after Taxation (32,500)

Selling prices of carpets and rugs would be Rs. 24,000 and Rs. 4,000 per unit with contribution
margin of 25% and 20% respectively. Carpets and rugs would be sold in the ratio of 1:4.

Required
(a) Compute the sales revenue at break-even and the margin of safety in units.
(b) Determine the number of carpets and rugs that must be sold if MPL wishes to maintain profit
after taxation equivalent to 10% of sales.

Answer 26 (September 2019)

(a)

Sales [given] 500,000

Less: Variable costs (W-1) (385,000)
Contribution 115,000
Combined CM [Contribution/Sales] 23.0%
Fixed costs (W-3) 65,000
Breakeven sales [Fixed costs/Combined CM] 282,609

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Cost & Management Accounting Practice Manual (March 2023)
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Sales at BE Existing Sales Safety Units

Carpets Breakeven sales/ DxB (W-2) 7,065 12,500 5,435
Rugs Breakeven sales/ DxB (W-2 28,261 50,000 21,739
(b)

Sales revenue to yield desired net margin [65,000 (W-3)/0.0762 (W-4)] 853,018,373
Carpets Sales/DxB 21,325
Rugs 21,325x4 OR Sales/DxB 85,300

WORKINGS:
W-1: Variable costs
Carpets Rugs Total
Selling price per unit [given] 24,000 4,000
Contribution [selling price x CM%] (6,000) (800)
Variable cost per unit 18,000 3,200
Number of units sold (W-2) 12,500 50,000
225,000 160,000 385,000

Question 27
P Q
Variable Cost 80 70
Fixed Cost 200,000 280,000

Required:
Calculate Point of Indifference.

Answer 27
Point of indifference = 8,000 = (280,000 200,000)/(80-70)

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 28
Noureen Industries Limited produces and sells sports goods. The management accountant has
developed the following budget for the year ending June 30, 2011.

Budgeted Income Statement

Sales 80,000
Variable costs 44,800
Fixed overheads 6,500
51,300
Gross profit 28,700
Selling and admin expenses
Sales commission 8,000
Depreciation on assets 700
Fixed administrative costs 2,200
10,900
Net operating income 17,800
Finance costs (80% is fixed) 750
Net profit 17,050

The company has a policy of hiring salesmen on commission basis. The rate of commission varied
with the increase in sales. However, recently the sales team had informed the management that
they would be willing to work only if the rate of commission is fixed at 20% irrespective of the
amount of sales.

The only other alternative available to the company is to establish a full-fledged sales
department. It has been estimated that the annual cost of this department would be as follows:

Salaries Sales Manager 1,200

Salaries Sales Persons 2,400
Advertising 1,600
Travel for promotion 1,200
Training costs 600

In addition, a commission of 5% would also be payable to the sales team.

Required
Determine the volume of sales beyond which the company would be inclined to establish a sales
department instead of meeting the demand of the current sales force.

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Cost & Management Accounting Practice Manual (March 2023)
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Answer 28
Noureen Industries Limited

Contribution Margin Increased commission 20% Own sales department

--------- ---------
Sales 80,000 80,000
Less: Variable expenses
Manufacturing costs 44,800 44,800
Sales commission 16,000 4,000
Finance cost 150 150
Total Variable Expense 60,950 48,950
Contribution margin 19,050 31,050
Contribution margin as % of sales 23.8 38.8
Fixed expenses:
Fixed overheads 6,500 6,500
Depreciation 700 700
Fixed admin costs 2,200 2,200
Finance cost 600 600
Fixed marketing costs 7,000
Total Fixed Cost 10,000 17,000

Equal net income level:

Let the required sales level be x.
Net operating income with increased commission = 0.238x 10,000
Net operating income with own sales force = 0.388x 17,000
Both will be equal at:
0.388x 17,000 = 0.238x 10,000
0.15x = 7,000
X = 46,667
It would be beneficial for NIL to establish a full-fledged sales department if sales exceed Rs.
46,667,000.

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Cost & Management Accounting Practice Manual (March 2023)
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Question 29
The following particulars relates to ARM Company where no change is observed in the sales price,
variable cost per unit and fixed cost (total):

Particulars Total Sales Total Cost

Year 2009 2,223,000 1,983,600
Year 2010 2,451,000 2,143,200

Required
Compute the following:
1. Breakeven point
2. CM ratio
3. Margin of safety
4. Fixed Cost

Answer 29

2009 2010 Difference

Sales 2,223,000 2,451,000 228,000
Cost (1,983,600) (2,143,200)
Profit 239,400 307,800 68,400

CM Ratio = 30% = (228,000/68,400)

2009 2010
Sales 2,223,000 2,451,000
VC (1,556,100) (1,715,700)
CM (30%) 666,900 735,300
FC (427,500) (427,500)
Profit 239,400 307,800

Total 2,223,000 2,451,000

Breakeven (1,425,000) (1,425,000)
MOS Sales 798,000 1,026,000

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Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question 30
The following information is given by Z Ltd:
Margin of Safety Rs. 187,500
Total cost Rs. 1,937,500
Margin of safety 7,500 units
Break-even sales 2,500 units

Required
Calculate Profit, P/V Ratio, BEP Sales (in rupees) and fixed cost.

Answer 30
Margin of safety (Rs) 187,500 a
Margin of safety (units) 7,500
Selling price per unit 25.00
Breakeven units 2,500
MOS units 7,500
10,000
Total Sales 250,000
Total Cost (193,750) b
Profit 56,250
Profit is CM in MOS

CM ratio (b/a) 30%

CM at breakeven is fixed cost

Breakeven units 2,500
Breakeven sales (Rs) 62,500
CM 18,750
Fixed cost is CM at BE

Total cost 193,750

Fixed cost (18,750)
Variable cost 175,000

To check
Selling price 25.00
VC (Bal Fig) (17.50)
CM per unit 7.50

Fixed costs 18,750

Breakeven 2,500

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Cost & Management Accounting Practice Manual (March 2023)
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Total Sales (10,000 units) 250,000

VC (175,000)
Fixed Cost (18,750)
Profit 56,250

Question 31
Variable Cost Rs. 160
Contribution margin 40% of Net Selling price
Commission 5%

Required:
Determine Gross Selling Price.

Answer 31
Selling price 281 (267/95*100)
Commission 5% (14)
Net selling price 267 (160/60*100)
Variable cost (160) 60%
Contribution margin 107

Question 32
Variable Cost Rs.60 per unit
FC Rs.15 per unit
Commission 5% of sales
CM 40% of NSP
Expected Output 40,000 units

Required:
Determine Breakeven point.
Determine MOS.

Answer 32
Selling price 105 (100/95*100)
Commission 5% (5)
Net selling price 100 (60/60*100)
Variable cost (60)
Contribution margin 40

CM Ratio 38%
Fixed Cost (40,000*15) 600,000

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1,578,947
15,000

Total units 40,000

Breakeven units (15,000)
MOS Units 25,000

Question 33 (March 2015 KPK Dairies Limited)

KPK Dairies Limited (KDL) is planning to introduce three energy flavored milk from 1 July, 2015.
In this respect, following projections have been made:

C-Plus I-Plus V-Plus

Planned Production (No. of packets) 540,000 275,000 185,000
Sales (No. of packets) 425,000 255,000 170,000
Production cost per packet: --------------- Rupees ----------------
Direct material 100 98 97
Direct labor 15 13 12
Variable overheads 23 19 16
Fixed overheads 25 22 20
Selling and distribution cost per packet
Variable overheads 12 8 10
Fixed overheads 5 5 5
Total cost per packet 180 165 160
KDL will sell its products through a distributor at a commission of 5% of sale price and expects to

Required
Compute break-even sales in packets and rupees, assuming that ratio of quantities sold would be
as per projections.

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Answer 33 (Spring 2015)

KPK Dairies Limited
C-Plus I-Plus V-Plus Total
-In total No. of packets (H/G) A 287,660
-Product wise No. of packets (AxC) B 143,830 86,298 57,532 287,660
-product wise Rupees (BxD) 37,850,303 20,893,609 13,625,879 72,369,791

W.1: Sales quantity ratio

------------------------- Liters -------------------------
Projected sales 425,000 255,000 170,000 850,000
Sales quantity ratio C 0.5 0.3 0.2 1.0

W.2: Contribution margin per combo

------------------------- Rupees -------------------------
Gross sales price per unit (E/0.57*) D 263.16 242.11 236.84
Commission at 5% of sales (13.16) (12.11) (11.84)
Variable cost per unit E (150.00) (138.00) (135.00)
(100+15+23+12) (98+13+19+8) (97+12+16+10)

Contribution margin (CM) per unit F 100.00 92.00 90.00

CM in sales quantity ratio (CxF) G 50.00 27.60 18.00 95.60
VC% to sales: (100-5%)x60%=57%*

W-3: Fixed overheads

Production fixed overheads 13,500,000 6,050,000 3,700,000 23,250,000
(540,000x25) (275,000x22) (185,000x20)

Selling and distribution fixed 2,125,000 1,275,000 850,000 4,250,000

(425,000x5) (255,000x5) (170,000x5)
overheads
H 27,500,000

Question 34
A B C
Variable Cost 160 190 210
Fixed Production Cost 40 45 50
Fixed Selling Cost 10 10 10
Planned Production 10,000 8,000 6,000
Planned Sales 9,000 7,000 5,200

Contribution margin 40% of Net Selling Price

Commission 5% of sales

Required
Determine breakeven point.

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Answer 34
A B C
Selling price 281 334 368
Commission 5% (14) (17) (18)
Net selling price 267 317 350
Variable cost (60%) (160) (190) (210)
Contribution Margin 107 127 140

Sales Ratio 9 7 5.2

COMPOSTIE: A B C Total
Selling price 2,526 2,338 1,914 6,778
CM 960 887 728 2,575

CM Ratio 38%

Fixed Cost:
Production cost Selling cost Total
A 400,000 90,000 490,000
B 360,000 70,000 430,000
C 300,000 52,000 352,000
1,060,000 212,000 1,272,000

3,348,592

Question 35
Budget
Sales (5,000 units) 600,000
COGS (Includes FC of Rs. 100,000) (400,000)
Op. Exp (Includes FC of Rs. 25,000) (50,000)
Profit 150,000
Tax @ 30% (45,000)
105,000
2 Months Later:
Selling Price (per unit) 115
VPC (per unit) 62
Units produced 400

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Remaining 10 Months:
Selling price (per unit) 115
VPC (per unit) 62
Marketing 40,000
Target Dividend 7,000
Dividend Restriction 80% of Profit After Tax

Required
Calculate the minimum number of units sold in remaining 10 months.

Answer 35
Budget
Total

Sales 600,000 120

Var. Cost production (300,000) (60)
Var. Cost operating (25,000) (5)
CM 275,000 55
Fixed. Cost production (100,000)
Fixed. Cost operating (25,000)
Profit 150,000

Total fixed cost 125,000

Actual Results
Selling price 115
Var. Cost production (62)
Var. Cost operating (5)
CM per unit 48
Units produced 400

CM earned in 2 months 19,200

Remaining 10 months:

Fixed Cost 125,000

Marketing 40,000
Dividend (W-1) 12,500
CM of 2 months (19,200)
Remaining FC 158,300
CM per unit 48
Number of units to be sold 3,298 (158,300/48)

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Working-1:
PBT 12,500 (8,750/70%)
Tax @ 30% (3,750)
PAT 8,750 7,000/80%)
Dividend 7,000 80%

Question 36 (March 2018 Washington Limited)

Washington Limited (WL) is a listed company having paid-up capital of Rs. 140 million. WL deals
in the manufacturing of washing machines. Following are the extracts from the budgeted
statement of profit or loss for the year ending 31 December 2018:

Sales revenue (Rs. 10,000 per unit) 168,000

Cost of goods sold (including fixed cost of Rs. 21.2 million) (127,000)
Gross profit 41,000
Operating Expenses (including fixed cost of Rs. 4.5 million) (16,000)
Profit before Taxation (25,000)
Taxation @ 30% (7,500)
Profit after Taxation (17,500)

Additional Information:
(i) An analysis of actual results for the first two months of the year 2018 shows that:
Due to change in import duty structure, imported products have become available in the
market at much cheaper prices. Consequently, it was decided to reduce the selling price
to Rs. 9,500 per unit with effect from 1 January, 2018.
1,500 washing machines were sold during the period.
Due to increase in raw material prices with effect from 1 January, 2018, variable cost of
sales has increased by 5%.
(ii) To boost the sales, WL has decided to launch a promotion campaign at an estimated cost of
Rs. 5 million.
(iii) The directors of WL wish to pay 5% dividend to its ordinary shareholders. However, according
to the agreement with the bank, WL cannot pay dividend exceeding 80% of its profit after
taxation.

Required
Calculate the minimum number of units to be sold in the remaining 10 months to enable WL to
pay the desired dividend.

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Answer 36 (March 2018)

Washington Limited Rupees
Dividend needs to pay 140,000,000 x 5% 7,000,000

Profit after tax (required) (7,000,000/0.8) 8,750,000

Required contribution margin in remaining 10 months

Profit before tax (required) 8,750,000/70% 12,500,000
Add: Fixed cost (Jan-Dec) (21,200,000+4,500,000) 25,700,000
Add: Promotion campaign Given 5,000,000
Contribution margin required 43,200,000
Contribution margin recovered in 1st two months (W-1) (3,304,464)
Required contribution in remaining 10 months 39,895,536

Forecasted sales revenue to earn in next 10 months 39,895,536/23.19% (W-1) Rs. 172,037,670

Number of units to be sold 172,037,670/9,500 18,109

W-1: Actual results of first two months of 2018 Rupees
Sales 1,500 x 9,500 14,250,000.00
Variable manufacturing cost (127,000,000-21,200,000/*16,800x1.05x1,500) 9,918,750.00
Variable operating cost (16,000,000-4,500,000)/16,800x1,500 1,026,785.71
Contribution margin 3,304,464.29

Contribution margin % 23.19%

*Budgeted number of units to be sold 168,000,000/10,000 16,800

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Question 37
Sales 500 (80% of breakeven sales)
CM 40%

Variable Cost: Fixed Cost:

Direct Material 40% Includes Depreciation 15
Direct Labor 40%
VOH 20%

Next Year:
Direct Labor:
Direct Material: Wage Increase 10%
Discount 5% Efficiency increase 8%
Consumption decrease 8%
Volume Increase 40%
FOH
VOH Depreciation increase Rs. 4
Inflation 5% Inflation 10%

Required
Calculate profit for Next Year.

Answer 37
Current year Next year
Sales 500 700 (500*1.4)
Direct material 40% (120) (147) (120*1.4*0.95*0.92)
Direct labor 40% (120) (170) (120*1.4*1.1*0.92)
VOH 20% (60) (88) (60*1.4*1.05)
CM (40%) 200 295
FC (500/0.8)*0.4 (250) (278) ((250-15)*1.1)+19
Net loss (50) 17

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Question 38 (September 2017 Digital Industries Limited)

Digital Industries Limited (DIL) incurred a loss for the year ended 30 June, 2017 as it could achieve
sales amounting to Rs. 89.6 million which was 80% of the breakeven sales. Contribution margin
on the sales was 25%. Variable costs comprised of 45% direct material, 35% direct labor and 20%
overheads.

During a discussion on the situation, the Marketing Director was of the view that no increase in
sales price was possible due to severe competition. However, sales volume can be increased by
reducing prices. The Production Director was of the view that since the plant is quite old, the
production capacity cannot be increased beyond the current level of 70%.

Accordingly, the management has developed the following plan:

(i) A new plant would be installed whose capacity would be 20% more than installed
capacity of the existing plant. The cost and useful life of the plant is estimated at Rs.
30 million and 10 years respectively. The funds for the new plant would be arranged
through a long-term bank loan at a cost of 10% per annum. Capacity utilization of 85%
is planned for the first year of the operation.

The new plant would eliminate existing material wastage which is 5% of the input and
reduce direct labor hours by 8%.

The existing plant was installed fifteen years ago at a cost of Rs. 27 million. It has a
remaining useful life of three years and would be traded in for Rs. 2 million.

DIL depreciates its fixed assets on straight line basis over their estimated useful lives.

(ii) To sell the entire production, selling price would be reduced by 2%.
(iii) Material would be purchased in bulk quantity which would reduce direct material cost
by 10%.
(iv) Direct wages would be increased by 8% which would increase production efficiency
by 10%.
(v) Impact of inflation on overheads would be 4%.

Required
Compute the projected sales for the next year and the margin of safety percentage after
incorporating the effect of the above measures.

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Answer 38 (September 2017)

Digital Industries Limited
Projected sales and margin of safety % for the next year

Rs. In million
Projected sales for the next year (89.6/0.7)x1.2x0.85x0.98) A 127.95

Margin of safety % to projected sales (A-B)/Ax100 15%

Breakeven sales [A/(A-C)xD] B 108.72

Variable cost:
Variable cost 2017 level of 75% [127.95(A)/0.98]x0.75 97.92
Variable cost on incorporating impact of changes:
Direct material (97.92x0.45)x0.95x0.9 37.67
Direct labor (97.92x0.35)x0.92x0.9x1.08 30.65
Overheads (97.92x0.20)x1.04 20.37
Variable cost projected (C) 88.69
Fixed cost projected:
Fixed cost 2017 (equal to CM for breakeven sales) (89.6/0.8)x0.25 28.00
Depreciation old plant 27/(15+3) (1.50)
26.50
Impact of 4% 26.5x4% 1.06
Depreciation new plant 30/10 3.00
Long-term loan interest at 10% (30-2)x10% 2.80
(D) 33.36

Question 39 (September 2015 Hope Limited)

The following information pertains to Hope Limited for the latest financial year:

Rupees
Sales price per unit 1,600
Direct labor per unit 240
Variable cost (other than direct labor) per unit 960
Fixed cost (no labor cost included) 850,000

Volume of sales and production was 6,000 units which represent 80% of normal capacity. The
management of the company is planning to increase wages of direct labor by 15% with effect
from the next financial year.

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Required
(a) Calculate the number of units to be sold to maintain the current profit if the sales price
remains at Rs. 1,600 and the 15% wage increase goes into effect.
(b) The management believes that an additional investment of Rs. 760,000 in machinery (to be
depreciated at 10% annually) will increase total capacity by 25%. Determine the selling price in
order to earn a profit of Rs. 2 million assuming that all units produced at increased capacity can
be sold and that the wage increase goes into effect.

Answer 39 (September 2015)

(a) Units to be sold to maintain the current profit:
Rs.
Sales (6,000 units x 1,600) 9,600,000
Variable cost [6,000 x (960+240)] (7,200,000)
Contribution margin A 2,400,000
Revised contribution margin per unit [1,600-960-(240x1.15)] B 364
Units to be sold A/B 6,593 Units

(b) Selling price per unit to earn a profit of Rs. 2 million:

Revised capacity (6,000/0.8 x 1.25) Units 9,375
Revised fixed cost 850,000 + (760,000 x 10%) Rs. 926,000
New selling price = + (240x1.15)+ 960 Rs. 1,548

Question 40 (September 2016 Ideal Chemicals)

working at 70% capacity. To utilize its idle capacity, IC is planning to acquire rights to product and
market a new brand of chemical namely Z-13 on payment of fee of Rs. 160,000 per month.
In this respect, the relevant information is summarized as under:

(i) Z-13 would be produced using the existing plant whose cost is Rs. 81 million.
Processing would be carried out in batches of 2,000 liters of raw-materials. Production
costs per bath are estimated as under:
Raw material: Imported 1,200 liters @ Rs. 1,500 per liter
Raw material: Local 800 liters @ Rs. 900 per liter
Direct Labor 4,000 hours @ Rs. 165 per hour
Variable production overheads @ Rs. 120 per direct labor hour
1,700 liters of Z-13 produced from each batch. 100 liters are lost by way of
evaporation whereas 200 liters of input is converted into solid waste. The
approximate weight of the solid waste is 225 kg per batch.
(ii) Net volume of each bottle of Z-13 would be 1.25 liters.
(iii) The solid waste would be refined to produce a by-product, polishing wax. Refining
would cause an estimated loss of 2% of by-product output.

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(iv) Cost of refining and sales price of wax would be Rs. 250 and Rs. 400 per kg
respectively. Net sales revenue (sales less refining cost) from sale of wax is to be
deducted from the cost of the main product.
(v) Variable selling overheads are estimated at Rs. 175 per unit.
(vi) The plant is depreciated at 10% per annum. It is estimated that production of Z-13
would utilize 20% capacity of the plant.
(vii) To introduce Z-13, IC plans to launch a sales campaign at an estimated cost of Rs. 3.5
million.
(viii) IC wishes to sell Z-13 at a contribution margin of 40% on sales.

Required
Determine Z- price per unit and annual units to be sold, if IC intends to earn an
incremental profit before tax of Rs. 10 million from its sale.

Answer 40 (September 2016)

Units
Finished units per batch 1,700/1.25 (A) 1,360
By-product units per batch 225/1.02 221
Variable production cost per unit: Rupees
Material: Imports 1,200x1,500 1,800,000
Local 800x900 720,000
Direct labor 4,000x165 660,000
Variable production overheads 4,000x120 480,000
Net sales revenue from sale of by-product 221x(400-250) (33,150)
(B) 3,626,850
Variable production cost per unit 2,666.80
Variable selling overheads per unit (B/A) 175.00
Variable cost per unit (C) 2,841.80

Sales price per unit to earn 40% contribution on sale D=(C/0.6) 4,736.33

No. of sale units to earn annual profit before tax of Rs. 10,000,000
Incremental fixed overheads and profit:
-Fee for blending and marketing of Z-13 160,000x12 1,920,000
-Sales promotion expenses 3,500,000
-Required incremental profit before tax 10,000,000
(E) 15,420,000

Required annual sales units No. of units E/(D-C) 8,139

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Question 41 (Spring 2017 Sword Leather Limited)

Sword Leather Limited (SLL) produces and sells shoes. The following information pertains to its
latest financial year:
Rs. In million
Sales (62,500 pairs) 187.5
Fixed production overheads 35.0
Fixed selling and distribution overheads 10.0
Variable production cost (in proportion of 40:35:25 60% of sale
for material, labor and overheads respectively)
Variable selling and distribution cost 15% of sale
To increase profitability, SLL has decided to introduce new design shoes and discontinue the
existing designs. In this regard it has carried out a study whose recommendations are as follows:
(i) Replace the existing fully depreciated plant with a new plant at an estimated cost of Rs. 50
million. The new plant would:
Reduce material wastage from 10% to 5%.
Decrease direct wages by 5%; and
Increase variable overheads by 6% and fixed overheads by Rs. 15 million (including
depreciation on the new plant).
(ii) Improve efficiency of the staff by paying 1% commission to marketing staff and annual bonus
amounting to Rs. 1.5 million to other staff.
(iii) Introduction of new designs would require an increase in variable selling and distribution cost
by 2%.
(iv) Sell the newly designed shoes at 10% higher price.
(v)

Required
Compute the budgeted production for the first year if the budgeted sale has been determined
with the object of maintaining 25% margin of safety on sale.

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Answer 41 (Spring 2017)

Sword Leather Limited
Budgeted production of the new design shoes for the first year
Rs. Per unit
Sales 187,500,000/62,500x1.1 (A) 3,300.00
Variable costs:
Direct material (3,000x0.6x0.4)/1.1x1.05 (687.27)
Direct wages 3,000x0.6x0.35x0.95 (598.50)
Production overheads 3,000x0.6x0.25x1.06 (477.00)
Selling and distribution 3,000x0.15x1.02 (459.00)
Sales commission to marketing staff 3,300x1% (33.00)
(B) (2,254.77)
Contribution margin (C) 1,045.23
Total fixed cost (Rs.) (35+10+15+1.5) (D) 61,500,000

Budgeted production: No. of pairs

Breakeven sales D/C (E) 58,839
Margin of safety on sales at 25% E/0.75x0.2 19,613
Budgeted sales (F) 78,452
Inventory F/12 6,538
Budgeted production 84,990

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ADDITIONAL PAST PAPERS

Question 42 (September 2018 Basketball Private Limited)

Basketball (Private) Limited (BPL) is in the process of planning for the next year. BPL is currently
operating at 70% of the production capacity. The management wants to achieve an increase of
Rs. 36 million in profit after tax of the latest year.
The summarized statement of profit or loss for the latest year is as follows:

Rs. In million
Sales 567
Cost of sales (60% variable) (400)
Gross profit 167
Operating expenses (40% variable) (47)
Profit before tax 120
Tax (25%) (30)
Profit after tax) 90

(i) Selling price of all products would be increased by 8%. However, to avoid and adverse
impact of price increase, 10% discount would be offered to the large customers who
purchase about 30% of the total sales. Additionally, distributor commission would be
increased from 2% to 3% of net selling price.
(ii) Average variable costs other than distributor commission are projected to increase by
4% while fixed costs other than depreciation are projected to increase by 5%.
(iii) Depreciation for the latest year was Rs. 90 million and would remain constant.

Required
(a) Compute the amount of sales required to achieve the target profit.
(b) Determine the production capacity that would be utilized to achieve the sales as computed
in (a) above.

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Answer 42 (September 2018)

Basketball Private Limited

(a) Budgeted sales to achieve target profit

[361.11m (W-1)/53.7%(W-2)] Rs. In million
672.46
W-1: Contribution margin required in next year
Total existing fixed cost including depreciation (400m x 40%)+(47m x 60%) 188.20
Add: increase in fixed costs in next year (188.2m-90m)x5% 4.91
Add: Target profit for the next year (90m+36m)/75% 168.00
Total contribution margin required in next year 361.11
W-2: Budgeted contribution margin (next year) Rs. In million
Budgeted sales [567m x 1.08] 612.36
Less: Discount @ 10% on 30% of sales [612.36m x 10% x 30%] (18.37)
Net average sales 593.99
Less: Distributor commission on net average sales [593.99m x 3%] (17.82)
Less: Variable cost [247.46m (W-3)x1.04] (257.36)
Budgeted contribution margin 318.81

Budgeted contribution margin ratio (318.81m/593.99m) 53.7%

W-3: Variable cost (existing) Rs. In million
Distributor commission (567m x 2%) 11.34
Variable cost {{(400m x 60%) + (47m x 40%)} 11.34m] 247.46
(b) Average increase in selling price
(1.08x30%x90%)+(1.08x70%) OR [1.08-(1.08x10%x30%)] = A = 1.0476
Capacity to be utilized during next year
[(672.46m (part a)/A)/(567m/70%)] = 79.25%

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Question 43 (Autumn 2021 Red Limited)

Red Limited (RL) manufactures and sells plastic chairs. The relevant details at different demand
levels are as follows:
Demand in units 16,000 14,000 11,800 9,300
---------------------- Rupees -----------------------
Sale price (net of 3% distributor 2,850 2,945 3,040 3,135
commission) per unit
Material 20,520,000 18,900,000 15,930,000 12,555,000
Conversion cost 11,403,600 10,750,000 9,374,000 8,299,000
Operating expenses 3,500,000 3,500,000 3,500,000 3,500,000
The management is considering manufacturing either 14,000 chairs or 16,000 chairs. In the above
table, fixed conversion cost increases by 10% if number of chairs manufactured exceeds 13,000.
Further, material cost and variable conversion costs reduce by 5% and 3% respectively, if number
of chairs manufactured exceeds 15,000.
In order to achieve the desired level of sales, RL is also considering to offer 5% sale discount on
bulk order of 25 chairs and 10% sale discount on bulk order of 50 chairs. The sales mix after
introduction of discount is estimated to be in the ratio of 60:30:10 for normal sale, 5% sale
discount and 10% sale discount respectively. It is estimated that introduction of discount would
result in increase in distributor commission by 1% on bulk sale of 25 chairs and 2% on bulk sale
of 50 chairs.

Required
(a) Determine the breakeven revenue and margin of safety units at the demand level of 14,000
and 16,000 chairs.
(b) Briefly discuss and conclusion which may be drawn from your calculation in (a) above.

Answer 43 (Autumn 2021)

Red Limited
Breakeven revenue
Demand in units 14,000 16,000

------------ Rupees ------------

Selling price per unit (W-1) 2,858 2,765
Variable cost per unit (W-2) (1,780) (1,700)
Contribution margin per unit 1,078 1,065
CM/Selling price ratio 0.38 0.39

Fixed cost (4,730,000(W-2.1)+3,500,000) (8,230,000) (8,230,000)

Breakeven revenue (fixed cost/ c/ s ratio) 21,657,895 21,102,564

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------------ Units ------------

Breakeven units [fixed cost/ contribution margin] 7,635 7,728

Margin of safety [demand breakeven units] 6,365 8.272

Conclusion
Since the margin of safety at production level of 16,000 is higher and breakeven point could be
reached at 48% (7,728/16,000) of the targeted sales, it is better to set production level at 16,000.

W-1: Price before Commission Net selling Ratio Weighted

commission price average price
At 14,000 units
Normal selling price 3,036 (91) 2,945 0.60 1,767
(2,945/0.97)
Price @ 5% discount 2,884 (115) 2,769 0.30 831
(2,945/0.97)x0.95)
Price @ 10% discount 2,732 (137) 2,595 0.10 260
(2,945/0.97)x0.9)
2,858
At 16,000 units
Normal selling price 2,938 (88) 2,850 0.60 1,710
(2,850/0.97)
Price @ 5% discount 2,791 (112) 2,679 0.30 804
(2,850/0.97) x 0.95
Price @ 10% discount 2,644 (132) 2,512 0.10 251
(2,850/0.97) x 0.9
2,765

W-2: 14,000 units 16,000 units

Material cost per unit [18,900/14], [20,520/16] 1,350 1,283
Variable conversion cost per unit [W-2.1] 430 417
1,780 1,700

W-2.1: Fixed costs by using high-low method: Rupees

Variable conversion cost at 14,000 demand level = 430
Fixed cost [8,299,000-(430x9,300)] 4,300,000
Revised fixed cost [4,300,000x1.1] 4,730,000
Variable conversion cost at 16,000 demand level (430x97%) 417

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Question 44 (March 2019 Saffron Limited)

Following information has been extracted from the projected results of Saffron Limited (SL) for
the year ending 31 March, 2019.
Sales Rs. 160 million
Contribution Margin 30%
Margin of safety 25%

Information for the next year ending 31 March, 2020:

(i) SL is planning to increase its sales by reducing sales prices by 5% and launching a sales
campaign at a cost of Rs. 5 million.
(ii) Cost efficiency measures planned for the next year are expected to reduce variable
cost per unit by 10%.
(iii) Inflation impact on all costs would be 8%, except depreciation. At present,
depreciation is 40% of the total fixed cost.
(iv) Margin of safety would be maintained at 25%.

Required
(a) Prepare budgeted statement of profit or loss for the year ending 31 March, 2020 based
on the above projections.
(b) Compute the percentage increase in sales volume.

Answer 44 (Spring 2019)

(a) Saffron Limited
Budgeted statement of profit or loss for the year ending 31 March, 2020
Rs. In million
Sales 152(W-2)/43.14x56.97 200.73
Variable cost Balancing (143.76)
Contribution margin (CM) [42.73(W-1)/0.75] 56.97
(at a safety margin of 25% and fixed cost of Rs. 42.73 million)
Fixed cost (W-1) (42.73)
Net profit 14.24
W-1: Fixed Cost
- For 2019 (160x0.3x0.75) 36.00
- For 2020:
Depreciation (36x0.4) 14.40
Other fixed cost (36-14.40)x1.08+5 28.33
42.73
W-2: CM on revision of sales price and variable cost Rs. In million
Sales (160x0.95) 152.00
Variable cost (160x0.7)x1.08x0.9 (108.86)
Contribution margin 43.14

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(b) Increase in sales volume %:

Budgeted sales of 2019-20 at 2018-19 prices (200.73/0.95) 211.29
Increase in sales volume (%) (211.29-160)/160 32.06%

Question 45 (Spring 2016)

Himalayan Rivers (HR) is planning to install a new plant. Planned production from the plant for
the next year is 150,000 units. Cost of production is estimated as under:

Rs. In million
Direct material 6.00
Direct labor 5.00
Production overheads 10.29

Production overheads include the following:

(i) Factory premises would be acquired on rent at a cost of Rs. 1.8 million per annum.
(ii) Indirect labor has been budgeted at 30% of direct labor cost, 50% of which would be
fixed.
(iii) Depreciation of the plant would be Rs. 0.5 million.
(iv) Total power and fuel cost has been budgeted at Rs. 3 million. 80% of power and fuel
cost would vary in accordance with the production.
(v) All remaining production overheads are variable.

The sales and marketing budget includes the following:

(i) Employment of two sales representative at a monthly salary of Rs. 25,000 each and a
sales commission of 2% on sales achieved.
(ii) Hiring of a delivery van at Rs. 70,000 per month.
(iii) Launching an advertisement campaign at a cost of Rs. 1.5 million.

Required
Calculate the breakeven sales revenue and quantity for the next year if HR expects to earn a
contribution margin of 40% on sales, net of 2% sales commission.

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Answer 45 (Spring 2016)

Himalayan Rivers
Breakeven sales revenue and quantity
Rs. In million
Breakeven sales revenue 6.59(W-2)/[(100-2)x40%] 16.81
Breakeven sales quantity [16,810,000/200(W-1)] Units 84,050

W-1: Sales price per unit Rs. In million

Variable overheads (excluding 2% sales commission)
Direct material 6.00
Direct labor 5.00
Variable overheads 10.29-3.65 (W-2) 6.64
17.64
Variable overheads % to sales [100-(100-2)x40%]-2% 58.80%

Sales price per unit (17.64/58.8%)/150,000 Rs. 200.00

W-2: Fixed cost Rs. In million

Production overheads:
Rent factory premises 1.80
Indirect labor 5 x 30% x 50% 0.75
Depreciation of plant 0.50
Power and fuel 3 x 20% 0.60
3.65
Sales and marketing expenses:
25,000 x 2 x 12 0.60
Delivery van 70,000 x 12 0.84
Advertisement campaign 1.50
Total fixed overheads 6.59

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Question 46 (Spring 2014)

Orient Stores Limited (OSL) operates retail outlets at various petrol pumps across the city. The
average monthly performance of these outlets is as under:

Sales 1,500
Rent expense 50
Other fixed costs 150

OSL earns contribution margin of 15% on items on which retail prices are printed. These items
constitute 40% of the total sales. All other items are sold at the contribution margin of 25%.
Sohaib Enterprises (SE) has offered OSL to establish an outlet at one of its petrol pumps located
imates that:
At the proposed location, the sales volumes would be 20% lower than average.
Being a posh area, OSL would be able to charge 10% higher prices on items on which retail
prices are not printed.
Other fixed costs would be the same as the average of the existing outlets.

Required
(a) Determine the breakeven sales under the assumptions that SE would monthly charge:
Option I: rent of Rs. 75,000.
Option II: rent of Rs. 50,000 plus 5% commission on total sales.
(b) Which of the above options would you recommend and why?

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Answer 46 (Spring 2014)

(a) Breakeven sales for the new outlet
Option I Option II

Sales retail price printed (1,500x40%x0.8) 480.00 480.00

Sales retail price not printed (1,500x60%x0.8x1.1) 792.00 792.00
5% commission on sales to the outlet owner - (63.60)
Net sales A 1,272.00 1,208.40
Variable cost of sales Retail price printed (480x85%) (408.00) (408.00)
Variable cost of sales retail price not printed (1,500x60%x0.8x75%) (540.00) (540.00)
Contribution margin B 324.00 260.40
Fixed costs including rent (150+75), (150+50) C (225.00) (200.00)
Profit 99.00 60.40
Contribution margin % D (B/A) 25.47% 21.55%
Breakeven sales (C/D) 883.39 928.07

(b) I would recommend option I as under option I, profit on expected sales is much higher and
the breakeven sales is also lower than option II.

Question 47 (Spring 2014)

ABC Limited deals in manufacturing and marketing of perfumes. The company has three brands
to cater for different classes of customers. The selling prices and contribution margins for the
year 2013 were as follows:

A B C
---------- Rs. Per unit ----------
Sale price 10,000 8,000 5,000
Contribution margin 5,000 3,000 2,000
Total sale for the year 2013 was Rs. 15,600 million and sales volume ratio for A, B and C was 2:3:5
respectively.
The following estimates pertain to the year ending 31 December, 2014.
The following sale prices and variable costs for the next year are expected to increase by
14% and 8% respectively.
The normal market growth is estimated at 5% per annum. However, the company plans
to launch an aggressive marketing campaign for which additional advertising budget of
Rs. 250 million has been approved. With increased advertisement, increase in sales
volume for A, B and C has been forecasted at 15%, 12% and 10% respectively.
Required
Compute the projected contribution margin for the year 2014 and the impact of advertising on
profit of the company.

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Answer 47 (Spring 2014)

Projected contribution margin (CM) A B C Total
for 2014
Projected CM on sales for 2014 (after CxK 3,120 2,827 3,058 9,005
advertising)
Rs. In million

CM on normal sales growth rate of 5%. CxH 2,850 2,649 2,920 8,419
Rs. In million
Additional CM due to advertising 586
Advertising cost (250)
Net increase in profit due to
advertising
Rs. In million 336

Working:
Sale price per unit Rs. A 10,000 8,000 5,000
CM per unit Rs. 5,000 3,000 2,000
Variable cost per unit Rs. B 5,000 5,000 3,000

Revised sales price with 14% increase (A x 1.14) 11,400 9,120 5,700
Rs.
Revised variable cost with 8% increase (B x 1.08) (5,400) (5,400) (3,240)
Rs.
Projected CM per unit for 2014 Rs. C 6,000 3,720 2,460
Sales quantities for 2013 and 2014
Sales volume ratio D 2 3 5 10
Sales ratio E(A x D) 20,000 24,000 25,000 69,000
Total sales Rs. In million F(E/69x15.6) 4,522 5,426 5,652 15,600

Total sales quantities for 2013 Units in G(F/A) 0.452 0.678 1.130
million

Sales quantities for 2014 at estimated H(G x 1.05) 0.475 0.712 1.187
normal growth of 5% Units in million
Sales volume increase % for 2014 with J 15% 12% 10%
advertising
Sale quantities for 2014 having K 0.520 0.760 1.243
advertising effect units in million [Gx(1+J)]

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Question 48 (Spring 2013)

Altar Limited (AL) produces and markets a single product. Following information is available from

Sales Price Rs. 26 per unit

Direct material (2kg at Rs. 5 per kg) Rs. 10 per unit
Direct labor Rs. 2 per unit
Variable overheads Rs. 4 per unit
Fixed overheads Rs. 3.50 per unit
Selling expenses Rs. 295,000
Administration expenses Rs. 101,400
Production (Good units) 175,000 units
Closing inventory 30,000 units

Additional information:
(i) Inspection is performed at the end of production and defective units are estimated at
20% of the inspected units. The defective units are sold as scrap at Rs. 5 per unit.
(ii) Fixed overheads per unit are calculated on the basis of good units produced.
(iii) As compared to last month, selling expenses in February 2013 have decreased by Rs.
42,000.
(iv) In January 2013, AL produced and sold 180,000 units.

Required
Assuming there was no inventory at the beginning of February 2013, calculate break-even sales
in quantity for the month of February 2013.

Answer 48 (Spring 2013)

Breakeven sales in quantity for the month of February 2013:
Units produced [175,000/0.80] 218,750
Less: Defective units [218,750 175,000] OR [218,750 x 20%] (43,750)
Good units produced 175,000
Less: closing inventory (30,000)
Number of units sold 145,000

Per Unit* Rupees*

Variable Costs:
Direct material (218,750x5x2) 10.00 2,187,500
Direct labor (218,750x2) 2.00 437,500
Variable overheads (218,750x4) 4.00 875,000
Less: Defective units sold (43,750x5) 5x20% (1.00) (218,750)
Total variable cost of production 15.00 3,281,250
Variable cost per good unit (3,281,250/175,000) 15/0.8 18.75

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Calculation of variable selling expenses per unit [using high-low method]:

= 1.20
Fixed costs
-Fixed overheads (175,000x3.5) 612,500
-Selling expenses 295,000 (145,000x1.2) 121,000
-Administrative expenses 101,400
Total fixed costs 834,900

Contribution margin per unit (26-18.75-1.2) 6.05

Breakeven quantity (834,900/6.05) 138,000

Question 49 (Autumn 2012)

Zodiac Limited (ZL) produces a single product and has a maximum production capacity of 300,000

(i) Direct material Rs. 12 per unit.

(ii) Direct labour Rs. 8 per unit. However, based on guaranteed wages, the minimum total
cost of labour is Rs. 150,000 per month.
(iii) Variable overheads Rs. 6 per unit.
(iv) Semi-variable overheads Rs. 450,000 per annum up to 55% capacity. An additional
amount of Rs. 180,000 per annum is estimated for every 20% increase in capacity or
a part thereof.
(v) Fixed overheads Rs. 750,000 per annum.
During the first five-months of the year 2012, ZL utilized 70% of its production capacity. However,
it is expected to utilize 92% capacity during the remaining seven-months. The actual selling price
during the first five-months was Rs. 34 per unit.

Required
Compute selling price per unit which should be charged by ZL for the remaining seven-months to
earn a total profit of Rs. 936,000 for the year 2012.

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Answer 49 (Autumn 2012)

Zodiac Limited (ZL)
Statement of cost and sales for the year 2012
Maximum production capacity = 300,000 units per annum
Particulars 5 months 7 months
Capacity utilized 70%
Production
= 87,500 units = 161,000 units
Rs. Rs.
Sales @ Rs. 34 per unit 2,975,000 (1,932,000)
Direct materials @ Rs. 12 per unit (1,050,000) (1,288,000)
Direct wages @ 8 per unit or Rs. 150,000 per month (750,000)
whichever is higher

Overheads
Fixed (5:7) (312,500) (437,500)
Variable @ Rs. 6 per unit (525,000) (966,000)
Semi variable (W-1) (262,500) (472,500)
Total Cost (2,900,000) (5,096,000)
Profit during first 5 months 75,000
Desired profit during next 7 months 861,000
(Rs. 936,000 Rs. 75,000)
Sales required for next 7 months) 5,957,000

Required selling price per unit for last 7 months =

= Rs. = Rs. 37 per unit.

W-1 Semi-variable overheads

(a) For first 5 months at 70% capacity = Rs. (450,000 + Rs. 180,000) x 5/12
= Rs. 262,500
(b) For remaining 7 months at 92% capacity = Rs. (450,000 + Rs. 360,000) x 7/12
= Rs. 472,500

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Question 50 (Spring 2012)

Chrome Limited (CL) manufactures two products A and B in small and large packs. Following

A B
Large Pack Large Pack
Contribution margin per unit (Rs.) 120 150
Ratio of quantities (small pack : large pack) 3:5 2:3
Annual production and sales (units) 250,000 225,000

Following information is also available:

(i) Product-A:
The variable cost of the large pack of product-A is 75% of its selling price.
The variable cost of the small pack of product-A is 67.5% of the variable cost
of large pack.
The ratio of the selling price of both the packs of product-A are same as the
ratio of their quantities.
The annual sales of the small pack of product-A is estimated at 150,000 units.
(ii) Product-B:
The ratio of contribution margin to variable cost for the large pack of product-
B is 2:3.
The selling price of the small pack of product-B is 64% of the price of its large
pack.
(iii) Fixed overheads are estimated at Rs. 7,600,000 per month.

Required
Assuming CL is able to sell the budgeted quantities of both packs of product-A and large pack
of product-B:
(a) How many units of the small pack of product-B should be sold to achieve break-even?
(b) How many units of the small pack of product-B should be sold to earn a net income of Rs.
10,530,000? Applicable tax rate for the company is 25%.
(c) Based on the results of (b) above, prepare a product wise and consolidated income
statement for the period ending 31 December 2012.

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Answer 50 (Spring 2012)

(a) Calculation of breakeven point of sales in units:
Small pack of product-B
Required contribution margin
Rupees
Annual fixed cost (Rs. 7.6 million x 12) 91,200,000
Less: Estimated contribution margin
Product-A Large pack [250,000 units x Rs. 120] (30,000,000)
Product-A Small pack [150,000 units x Rs. 45] (6,750,000)
Product-B Large pack [225,000 units x Rs. 150] (33,750,000)
(70,500,000)
Required contribution from small pack of Product-B 20,700,000

Units
Breakeven sales in units (Rs. 20,700,000/Rs. 90) 230,000

Working Notes
Product-A
Rs. Per unit
Large Pack
Sales price [120/(1-0.75) 480
Less: Variable cost [Rs. 480 x 75%] (360)
Contribution margin 120
Small pack
Sales price [Rs. 480 x 3/5] 288
Less: Variable cost [Rs. 360 x 67.5%] (243)
Contribution margin 45
Product-B
Large pack
Sales price [Rs. 150/0.4] OR [225 + 150] 375
Less: Variable cost [Rs. 375 Rs. 150] OR [150 x 3/2] (225)
Contribution margin 150
Small pack
Sales price [Rs. 375 x 0.64] 240
Less: Variable cost [Rs. 225 x 2/3] (150)
Contribution margin 90

(b) Sales in units of small pack of product-B to produce net income of Rs. 10,530,000

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Rupees
Desired net income 10,530,000
Applicable tax rate 25%
Income before tax [Rs. 10,530,000/(1-0.25)] 14,040,000
Add: fixed cost [7,600,000 x 12] 91,200,000
Required total contribution margin from all packs of A and B 105,240,000
Less: Contribution margin of both packs of Product-A and large pack of B (70,500,000)
Contribution margin from Product-B 34,740,000
Contribution margin per unit of the small pack of product-B 90
Required number of units of small pack of product-B to earn desired income 386,000

Question 51 (Spring 2011)

Emerald Limited (EL) is engaged in the manufacture and sale of a single product. Following
statement summarizes the performance of EL for the first two quarters of the financial year
20X2:
Quarter 1 Quarter 2
Sales volume in units 580,000 540,000

Sales revenue 493,000 464,000

Cost of Goods sold
Material (197,200) (183,600)
Labor (98,600) (91,800)
Factory overheads (84,660) (80,580)
Gross Profit 112,540 108,420
Selling and distribution expenses (26,500) (25,500)
Administrative expenses (23,500) (23,500)

Net Profit 62,540 59,420

In the second quarter of the year EL increased the sale price, as a result of which the sales
volume and net profit declined. The management wants to recover the shortfall in profit in
the third quarter. In order to achieve this target, the product manager has suggested a
reduction in per unit price by Rs. 15.

The marketing director however, is of the opinion that if the price of the product is reduced
further, the field force can sell 650,000 units in the third quarter. It is estimated that to
produce more than 625,000 units the fixed factory overheads will have to be increased by Rs.
2.5 million.

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Required
(a) Compute the minimum number of units to be sold by EL at the reduced price, to recover
the shortfall in the second quarter profits.
(b) Determine the minimum price which could be charged to maintain the profitability
calculated in (a) above, if EL wants to sell 650,000 units.

Answer 51 (Spring 2011)

(a) Revised (reduced) Selling price (Rs. 464,400/540,000 x 1,000)-15 = Rs. 845

Shortfall in profit of last quarter 3,120

Profit for the 1st quarter 62,540
Target profit for the third quarter 65,660
Add: Fixed cost
Administrative cost 23,500
Fixed factory overhead (W-1) 25,500
Fixed selling and distribution expense (W-1) 12,000
61,000
Targeted contribution margin 126,660

Contribution margin per unit (845-637) (W-2) Rs. 208

No. of units to be sold 608,942

W-1: Computation of fixed factory overhead using high-low method

Factory overheads Selling and distribution expenses

At 580,000 volume 84,660,000 26,500,000
At 540,000 volume A 80,580,000 25,500,000
Difference B 4,080,000 1,000,000
Variable cost per unit C 102 25
Fixed cost [A-(540,000 x C)] 25,500,000 12,000,000

W-2: Computation of variable cost per unit

Rupees
Material (183,600/540,000)x1,000 340
Labor (91,800/540,000)x1,000 170
Factory overheads 102
Selling and distribution expenses 25
637

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(b) Minimum price that should be charged if EL wants to sell 650,000 units

Required contribution as above 126,660

Additional fixed cost 2,500
129,160
No. of units to be sold 650,000

Required contribution margin per unit 198.71

Variable cost per unit 637.00
Minimum price 835.71

Question 52 (Autumn 2010)

Naseem (Private) Limited (NPL) is a manufacturer of industrial goods and is launching a new
product. The production will be carried out using existing facilities. However, the capacity of a
machine would have to be increased at a cost of Rs. 3.0 million.

The budgeted costs per unit are as under:

Imported material 1.3kg at Rs. 750 per kg
Local material 0.5kgg at Rs. 150 per kg
Labor 2.0 hours at Rs. 300 per hour
Variable overheads Rs. 200 per labor hour
Selling & administrative cost - variable Rs. 359

Other relevant details are as under:

(i) Net weight of each unit of finished product will be 1.6 kg.
(ii) During production, 5% of material input will evaporate. The remaining waste would
be disposed off at a rate of Rs. 80 per kg.
(iii) The cost of existing plant is Rs. 10 million. The rate of depreciation is 10% per annum.
(iv) Administration and other fixed overheads amount to Rs. 150,000 per month. As a
result of the introduction of the new product, these will increase to Rs. 170,000 per
month. The management estimates that 20% of the facilities would be used for the
new product.
(v) The company fixes its sale price at variable cost plus 25%.
(vi) Applicable tax rate for the company is 35%.

Required
Compute the sales quantity and value, required to achieve a targeted increase of Rs. 4.5 million
in after tax profit.

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Answer 52 (Autumn 2010)

Variable cost per unit:
Quantity Rate Cost per unit
Kg Rupees
Imported raw material 1.30 750 975.00
Local material 0.50 150 75.00
Total input 1.80 1,050.00
Sale of wastage {1.8-1.6-(0.05*1.8)} 0.11 80 (8.80)
Cost of material per unit 1,041.20
Skilled labor (2 hours @ Rs. 300) 600.00
Overheads (2 hours @ Rs. 200) 400.00
Selling and administration cost 359.00
2,400.20
Required contribution margin:
Fixed overheads
-Depreciation on cost of additional capacity (3,000,000*10%) 300,000
-Incremental administration and other fixed overheads (170,000-150,000)*12 240,000
Required profit after tax Rs. 4,500,000
Gross profit required before tax (4,500,000/0.65) 6,923,077
Total contribution margin 7,463,077

Sales price per unit at variable cost plus 25% (2,400.20*1.25) Rs. 3,000.25

Contribution margin per unit sale (3,000.25-2,400.20) Rs. 600.05

Sales in units (7,463,077/600.05) Units 12,437

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Question 53 (Autumn 2009)

Solvent Limited has two divisions each of which makes a different product. The budgeted data
for the next year is as under:

Product A Product B
Rupees
Sales 200,000,000 150,000,000
Direct material 45,000,000 30,000,000
Direct labor 60,000,000 45,000,000
Factory overheads 35,000,000 15,000,000
Price per unit 20 25

Details of factory overheads are as follows:

(i) Product A is stored in a rented warehouse whose rent is Rs. 0.25 million per month.
Product B is required to be stored under special conditions. It is stored in a third party
warehouse and the company has to pay rent on the basis of space utilized. The rent
has been budgeted at Rs. 0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour
is fixed.
(iii) Depreciation for assets pertaining to product A and B is Rs. 6.0 million and Rs. 2.0
million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units
and the total cost has been budgeted at Rs. 4.0 million.
(v) All other overheads are fixed.

Required
Compute the break-even sales assuming that the ratio of quantities sold would remain the same,
as has been budgeted above.

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Answer 53 (Autumn 2009)

Solvent Limited
Product A Product B Total
Sale units 10,000,000 6,000,000 16,000,000
Sales price per unit 20 25
Sales in rupees 200,000,000 150,000,000 350,000,000
Less: Variable costs
Direct material 45,000,000 30,000,000 -
Direct labor 60,000,000 45,000,000 -
Variable overheads (Note 1) 5,600,000 5,340,000 -
110,600,000 80,340,000 190,940,000
Contribution margin Rs. 89,400,000 69,660,000 159,060,000
Contribution margin % to sales 45.446%
Breakeven sales:
Total 39,060,000/0.45446 85,948,699
A (Qty) 85,948,699/350,000,000*10,000,000 2,455,677
B (Qty) 85,948/350,000,000*6,000,000 1,473,406

Sales in Rs. 49,113,542 36,835,157

Note 1: Variable & fixed overheads

Total overheads as given 35,000,000 15,000,000 50,000,000
Variable overheads:
-Rent based on space utilized
120,000*12 - 1,440,000 -
-Indirect labor
60,000,000*20%*30% 3,600,000
45,000,000*20%*30% 2,700,000 -
-Electricity & fuel
(4,000,000*80%)/16,000,000*10,000,000 2,000,000 - -
(4,000,000*80%)/16,000,000*6,000,000 - 1,200,000 -
Variable overheads 5,600,000 5,340,000 10,940,000
Fixed costs (total overheads-variable overheads) 29,400,000 9,660,000 39,060,000

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ADDITIONAL PRACTICE QUESTIONS

Question 54
ABC Limited deals in a single product called HGV. It had prepared budget for the year ending
December 31, 2009 which was based on the following key assumptions:
Sales 504,000 units @ Rs. 430
Variable cost (40% is direct labor) Rs. 300 per unit
Fixed cost for the year (including depreciation @ 10%) Rs. 25,000,000
Cost of raw material per kg Rs. 56.25
Raw material consumption per unit of finished product 2 kgs
However, the position as shown by the management accounts prepared up to May 31, 2009 is
not very encouraging and depicts the following actual results:
105,000 units were sold @ Rs. 350 per unit.
Average cost of raw material used amounted to Rs. 90/- per unit of finished product.
Other variable costs were as per the budget.
The marketing department advised the management that the failure to achieve targeted sale is
because a competitor has introduced another product which has been very popular in the low-
income areas.
After due deliberations, the management has prepared a revised plan for the remaining period
of the financial year. The plan involves launching of a low-grade version of the existing product
named LGV, to capture the low-income market. Salient features of the plan are as under:
1) Sales mix of HGV and LGV is expected to be in the ratio of 1:2. Sales price of HGV
would be increased to Rs. 385, whereas sale price of LGV would be Rs. 270.
2) A new machine will have to be purchased for Rs. 1.2 million.
3) For LGV two different types of raw material i.e., A and B will be used in the ratio of
5:3. However, the total weight of raw material used shall be the same in case of both
products. Presently A is available at the rate of Rs. 25 per kg whereas B is available at
the rate of Rs. 25 per kg. The raw material consumption per unit of HGV shall continue
to be Rs. 90 per unit.
4) Production of HGV is carried out by skilled workers. However, only unskilled workers
would be required for the production of LGV. The wages of unskilled workers would
be 40% lower but labor hours per unit would be 10% higher than HGV.
5) Variable factory overhead cost per unit of LGV would be 10% lower than HGV.
6) Additional marketing cost would be Rs. 3 million.

Required
Compute the sales amount and quantities for the remaining period, to achieve a breakeven in
2009.

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Answer 54
ABC LIMITED
Actual Jan-May 2009
Rupees
Sales (105,000x350) 36,750,000
Variable Costs:
Raw Materials (105000x90) (9,450,000)
Direct Labor (300 x 0.4) x 105,000 (12,600,000)
Other Variable Costs (300-112.50-120) x 105,000 (7,087,500)

Contribution Margin 7,612,500

Revised Plan Jun-Dec 2009
LGV HGV Total

Sale price per unit 270 385.00

Variable Cost:
Raw material cost

A (25x2x5/8) (31.25)
B (45x3x3x8) (45x3x2)/8 (33.75)
(65.00) (90.00)
Direct labor cost (300x0.4) (120.00)
(120x0.6x1.1) (79.20)

Factory overhead cost (300-112.5-120) (67.50)

(67.5x0.9) (60.75)
Total variable cost (204.95) (277.50)
Contribution margin 65.05 107.50
65.05
Sales mix ratio 2 1 3
Aggregate contribution
margin Rs. 130.10 107.50 237.60
Fixed cost Jan-Dec:
Fixed cost for the year 25,000,000
Additional marketing cost 3,000,000
10% depreciation on machine cost Jun-Dec 2009 70,000
28,070,000
Contribution recovered Jan-May 2009 (7,612,500)
Required contribution for Jun-Dec 2009 20,457,500
Breakeven Sale quantity Jun-Dec 2009:
Breakeven quantity for:

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High grade
(20,457,500/237.60) 86,101
Low grade (86,101x2) 172,202
Breakeven Sale amount Jun-Dec 2009 46,494,540 33,148,885 79,643,425

Question 55
Spicy Foods Limited (SFL) offers three types of spices BX, BY and BZ. The profitability of SFL is
declining and it has incurred a loss during the year ended 31 March, 2012. The product wise
results are as under:
BX BY BZ
No. of units sold 400,000 600,000 300,000
Rupees in million
Sales 140 180 126
Cost of Sales (105) (135) (120)
Operating Cost (30) (49) (13)
Net profit/ (Loss) 5 (4) (7)

Other relevant information is as under:

1) Cost of sales includes fixed cost of Rs. 135 million. Fixed costs have been allocated to the
products on the basis of labor hours. BX, BY and BZ require 1.50, 175, and 2.00 labor hours
per unit respectively.
2) Variable operating costs of BX, BY and BZ are Rs. 45, Rs. 49 and Rs. 26 per unit respectively.
3) In order to increase sales and improve operating results, SFL is considering a proposal to

The Jumbo pack would consist of one packet of each three types of spices. It would
be sold at a price equivalent to 90% of the total price of the three packs. It has
been projected that on introduction of the Jumbo pack, the sale of the individual
packets would reduce by 20%.
The existing packing machine would need to be replaced. The new machine would
reduce the variable costs of production by 2%. However, annual fixed costs would
increase by Rs. 3 million.
To market the Jumbo pack, SFL plans to launch a sale campaign at a cost of Rs. 4
million.
Required
Calculate the number of Jumbo packs that should be sold during the year to achieve a net profit
of Rs. 5 million.

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Answer 55
Spicy Foods Limited
BX BY BZ TOTAL
Units sold (in millions) A 0.400 0.600 0.300 1.300
Labor hours per unit B 1.50 1.75 2.00
Labor hour (in millions) C AxB 0.600 1.050 0.600 2.250

Required CM from sale of Jumbo pack to earn a profit of Rs. 5 million

Rupees in million
Present sales D 140.000 180.00 126.00 446,000
Variable cost
Total cost of sales E 105.000 135.00 120.000 360,000
Fixed cost of sales 135/2.25xC (36.000) (63.000) (36.000) (135.000)
Variable cost of sales F 69.000 72.000 84.000 225.000
VC of sales reduced by 2% Fx98% 67.620 70.560 82.320 220.500
Variable operating costs G Ax45,49,26 18.000 29.400 7.800 55.200
Revised total variable costs H 85.620 99.960 90.120 275.700
CM from present sales J D-H 170.300
CM from reduced 80% (170.300/80%) 136.240
sales
Fixed COS and operating costs 135+(30+49+13-55.2) (171.800)
Additional fixed cost (3+4) (7.000)
Required profit for the year (5.000)
(47.560)
Number of Jumbo packs to earn a profit of Rs. 5 million:
Sales price per Jumbo pack (350+300+420)x90% 963.00
VC of sales per Jumbo pack H/A 214.05 166.60 300.40 (681.05)
CM per unit per Jumbo pack Rs. 281.95
Number of Jumbo packs to be (47,560,000/281.95) Units 168,682
sold

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Question 56
Twinkle Company Limited is expected to achieve a sale of Rs. 120 million during the current year.
The contribution margin is expected to be 20% whereas the margin of safety is estimated at 25%.
During the next year, the company intends to reduce its price by 5% and plans to market its
products vigorously to increase the sales volume.

Salaries constitute 40% of the total fixed costs and according to the union agreement an
increment of 20% is to be given to all staff. Other fixed costs are likely to remain constant.

Required
Compute the percentage of increase in sales volume that the company should achieve so as to
maintain a safety margin of 25%.

Answer 56
Rs. In million
Salaries [(15% x 40% x 120) x 1.2)] 8.64
Other fixed costs (15% x 60% x 120) 10.80
Total fixed costs 19.44
Sales [19.44 x 95/11.25 (W-1)] 164.16
Previous year sales at current price [120x (1-5%)] 114.00
% of volume increase 44.0%
W-1: Existing ratio Revised ratio
Sales (100-5%) 100.00 95.00
Variable costs (80% of 100) 80.00 80.00
Contribution margin 20.00 15.00
Margin of safety (25% of CM) 5.00 3.75
Fixed costs 15.00 11.25

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Question 57

70% capacity level:

Breakeven point Rs. 80 crores

P.V ratio 40%
Margin of safety Rs. 20 crores

The board at its last meeting have taken a decision to increase the output to 98% capacity level
with the following modifications:
1) Reduction in selling price by 5%.
2) Increase in fixed cost by Rs. 8 crores (including depreciation on addition but excluding
interest burden).
3) Reduction in variable cost by 5% of sales.
4) Additional finance for capital expenditure and working capital Rs. 20 crores.

Required:
a) You are required to determine the revised sales figure necessary to yield the existing
quantum of profit plus additional profit of Rs. 4 crores on account of increased activity
and 20% interest burden on fresh capital inputs.
b) Also determine the revised (i) breakeven point. (ii) P.V ratio. (iii) Margin of safety.

Answer 57
Existing position
BES x P.V ratio = Fixed cost
Fixed cost = Rs. 80 crores x 40% or Rs. 32 crores.
Sales-BES = Margin of safety
Sales Rs. 80 crores = Rs. 20 crores
Or Sales = Rs. 100 crores
If P.V ratio is 40%, variable cost is 60% of sales = Fixed cost
Variable cost = Rs. 100 x 60% or Rs. 60 crores

(Rs. Crores)
Sales 100
Variable cost 60
Contribution 40
Less: Fixed cost 32
Profit 8

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Question 58
ARM Company is considering launching a new monthly magazine which will have a selling price
of Rs. 1 per copy. Sales of the copies are expected to be 500,000 copies but it is possible that the
actual sales could differ quite significantly from this estimate.
Two different methods of producing the magazines are being considered and neither would
involve any capital expenditure. The estimated production cost for each of the two methods of
manufacturing together with additional marketing and distribution cost are summarized as
under:
Particulars Method A Method B
Variable Cost Rs. 0.55 per copy Rs. 0.50 per copy
Specific fixed costs Rs. 80,000 per month Rs. 120,000 per month
Semi Variable Cost

350,000 copies Rs. 55,000 per month Rs. 47,500 per month
450,000 copies Rs. 65,000 per month Rs. 52,500 per month
650,000 copies Rs. 85,000 per month Rs. 62,500 per month
It may be assumed that the fixed cost component of semi-variable costs will remain constant
throughout the range of activity shown.

Required
Calculate the point at which both methods will result in equal amounts of profits.
Calculate for each production method, the net increases in company profits which will result from
the introduction of new magazine, at each of the following activity levels.
450,000 copies
550,000 copies
600,000 copies

Answer 58

a) Method A:
Semi Variable Cost per unit =
Semi variable cost per unit =
Semi variable cost per unit = 0.1
Total cost = 55,000
Semi variable cost = (35,000) [(350,000 x 0.1)]
Fixed cost = 20,000

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Method B:
Semi variable cost per unit =
Semi variable cost per unit =
Semi variable cost per unit = 0.05
Total cost = 47,500
Semi variable cost = (17,500) [(350,000 x 0.05)]
Fixed cost = 30,000

Method A Method B
SP 1 1
VC (0.55) (0.5)
Semi VC (0.1) (0.05)
CM 0.35 0.45

Fixed cost:
Method A = 80,000 + 20,000 = 100,000
Method B = 120,000 + 30,000 = 150,000

POI => (SP-VC) × x FC = (SP VC) × x FC

(1-0.55-0.1) × x 100,000 = (1-0.5-0.05) × x 150,000
0.35x 100,000 = 0.45x 150,000
0.1x = 50,000
POI => 500,000 units
Net increase in Profits:
Method A:
450,000 copies:
Profit = 450,000 x 0.35
Profit = 157,500
550,000 Copies:
Profit = 550,000 x 0.35
Profit = 192,500.

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Question 59

details of sales prices are as under:

Particulars By Cycle Tri Cycle

Sales price 20 50
Variable Cost 15 31
Fixed overheads 11,500 20,000

Expected Sales 4,000 units 2,000 units

The fixed overheads can only be avoided if neither of the products is manufactured. Facilities are
fully interchangeable between the products.

By cycle is sold on cash while the Tri Cycle is sold on a credit term of three months. Bad debts and
administration and factoring costs are generally expected to reach 4%.
The company will be producing these products using manual processes. The company has an
option to go for automatic production mechanism. It will cut the variable cost by 15% but will
increase the fixed cost by Rs. 12,000 per month.
The company has a cost of capital of 2% per month.

Required:
Calculate the breakeven point of indifference between the two methods of production if
a. Only by cycle is sold.
b. By and tri cycle are sold in the ratio of 4:1.

Answer 59
Manual Production Automatic Production
By cycle Tricycle By cycle Tricycle
SP 20 50 20 50
VC
VC (15) (32) (12.75) (26.35)
Bad debt - (2) - (2)
Finance cost - (3) - (3)
CM 5 14 7.25 18.65
CM/RE 0.25 0.28 0.3625 0.373
i)
Only by cycle is sold: Manual:
Breakeven =
Breakeven =

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Breakeven = 6,300 by cycles.

Breakeven =
Breakeven =
Breakeven = Rs. 126,000 Sales
Automatic:
Breakeven =
Breakeven =
Breakeven = 6,000 by cycles.
Breakeven =
Breakeven =
Breakeven = Rs. 120,000
Point of indifference =>
Profit function = (SP-VC) = -FC
POI => (20-15)x (11,500 + 20,000) = (20-12.75)x (11,500 + 20,000 + 11,200)
POI => 5x 31,500 = 725x 43,500
POI => x = 5,333 units.

ii)
By and Tri cycle are sold:
4B + 7T
Manual => 4x5 + 1x14 = 34/5 = 6.8 => Average CM
Automatic => 4x7.25 + 1x18.65 = 47.65/5 = 9.53 Average CM

Manual:
Breakeven =
Breakeven =
Breakeven = 4,362 units.

Automatic:
Breakeven =
Breakeven = 4,565 units

POI => (SP VC) × x FC

POI => 6.8 × x 31,500 = 9.53 × x 43,500
POI => 2.73x = 12,000
POI => x = 4,396 units

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Question 60
A company produces mineral water. Based on the projected annual sales of 40,000 bottles of
mineral water, cost studies have produced the following estimates:
Total annual costs (in rupees) Variable cost percentage
Material 193,600 100
Labor 90,000 70
Overhead 80,000 64
Administration 30,000 30
The production will be sold through dealers who would receive a commission of 8% of sales price.

Required
1. Compute the sales per bottle which will enable management to realize a profit of 10% of
sales.
2. Calculate the breakeven point in rupees if sales price is fixed at Rs. 11 per bottle.

Answer 60
Sales price per Bottle
Rs.
Total Cost: 193,600
Material 90,000
Labor 80,000
Overhead 30,000
Administration 393,600
Add: Commission x8 38,400
Total cost 432,000
Add: 10% profit on sale (432,000 x 10/90) 48,000
Sales value 480,000
Sales price / Bottle = 480,000/40,000 = Rs. 12

BEP (Rs.) if sales price is Rs. 11

Particular Variable cost Fixed cost
Material 193,600
Labor 63,000 27,000
Overhead 51,200 28,800
Administration 9,000 21,000
Commission (40,000 x 11 x 8%) 35,200
352,000 76,800
BEP (Rs.) = =

BEP (Rs.) = 384,000

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Question 61
Z plc operates a single retail outlet selling direct to the public. Profit statements for August and
September are as follows:
August September
Sales 80,000 90,000
Cost of Sales 50,000 55,000
Gross profit 30,000 35,000
Less:
Selling and distribution 8,000 9,000
Administration 15,000 15,000
Net Profit 7,000 11,000

Required
(a) Use the high and low points technique to identify the behavior of:
(i) Cost of sales
(ii) Selling and distribution costs
(iii) Administration costs
(b) Identify the monthly breakeven sales value and area of contribution.
(c)
profit.
(d) Z plc is now considering opening another retail outlet selling the same products. Z plc
plans to use the same profit margins in both outlets and has estimated that the specific
fixed costs of the second outlet will be Rs. 100,000 per annum.
Z plc also expects that 10% of its annual sales from its existing outlet would transfer to
this second outlet if it were to be opened.
Calculate the annual value of sales required from the new outlet in order to achieve the
same annual profit as previously obtained from the single outlet.

Answer 61
August (£) September (£) Change (£)
Sales 80,000 90,000 10,000
Cost of sales 50,000 55,000 5,000
Selling and distribution 8,000 9,000 1,000
Administration 15,000 15,000 Nil
The only activity measure that is given is sales revenue. An increase in sales of £10,000 results in
an increase in cost of sales of £5,000 and an increase in selling and distribution costs of £1,000.
It is therefore assumed that the increase is attributable to variable costs and variable cost of sales
is 50% of sales and variable selling and distribution costs are 10% of sales.
Fixed costs are derived by deducting variable costs from total costs for either month. The figured
for August are used in the calculations below:

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Total cost (£) Variable cost (£)

Fixed cost (Balance) (£)
Cost of sales 50,000 40,000 10,000
Selling and distribution 8,000 8,000 Nil
Administration 15,000 Nil 15,000
25,000
Total cost = £25,000 fixed costs + variable costs (60% of sales)
(b) The following items are plotted on the graph (Figure 3):
Variable cost Total cost
Zero sales Nil £25,000 Fixed cost
£80,000 sales £48,000 (60%) £73,000
£90,000 sales £54,000 (60%) £79,000
£50,000 sales £30,000 (60%) £55,000
£100,000 sales £60,000 £85,000
Breakeven point = = £62,500 sales

Figure 3 (Contribution breakeven graph)

A
Sales
Breakeven point Total Costs
90 (£62,500)
B Variable
Costs
60

30

0 10 50 80 90 100

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Question 62
From the following particulars, you are required to calculate:
(i) P/V ratio
(ii) BEP for sales
(iii) Margin of safety
(iv) Profit when sales are Rs. 200,000
(v) Sales required to earn a profit of Rs. 40,000
Year Sales (Rs.) Profit (Rs.)
I 240,000 18,000
II 280,000 26,000

(a) 20% decrease in sales quantity

(b) 20% decrease in sales quantity accompanied by 10% increase in sales price and reduction
Rs. 3,500 in fixed costs.

Answer 62

1) PV Ratio =
PV Ratio =
PV Ratio = 20%
2) CM Ratio =
0.2 =
CM = 48,000

CM = 48,000
Net profit = (18,000)
FC = 30,000
Breakeven =
Breakeven =
Breakeven = 150,000
3) MOS = Expected sales Breakeven
Year 1
MOS = 240,000 150,000
MOS = 40,000
Year 2
MOS = 280,000 150,000
MOS = 130,000

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4) CM/Re =
0.2 =
CM = 40,000

CM = 40,000
FC = (30,000)
Net profit = 10,000

5) Breakeven =
Breakeven =
Breakeven = Rs. 350,000
(a)
Sales = 280,000 x 0.8
Sales = 224,000
CM/Re =
0.2 =
CM = 44,800

CM = 44,800
FC = (30,000)
Net profit = 14,800

b)
Fixed cost = 30,000 3,500
Fixed cost = 26,500

Sales = 280,000 x 80% x 1.1

Sales = 246,400

Change in sales = 224,000 246,400

Change in sales = 22,400

CM = 44,800 + 52,400
CM = 67,200
CM = 67,200
FC = (26,500)
Net profit = 40,700

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Cost & Management Accounting Practice Manual (March 2023)
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Question 63
The following particulars related to ARM Company where no change is observed in the sales
price, variable cost per unit and fixed cost (total):
Particulars Total Sales Total Cost
Year 2009 2,223,000 1,983,600
Year 2010 2,451,000 2,143,200

Required
Compute the following:
1. Breakeven point
2. CM Ratio
3. Margin of safety
4. Fixed Cost

Answer 63
2009 2010 Difference
Sales 2,223,000 2,451,000 228,000
Cost (1,983,600) (2,143,200)
Profit 239,400 307,800 68,400

CM Ratio = 30% (228,000/68,400)

2009 2010
Sales 2,223,000 2,451,000
VC (1,556,100) (1,715,700)
CM (30%) 666,900 735,300
FC (427,500) (427,500)
Profit 239,400 307,800

Total 2,223,000 2,451,000

Breakeven (1,425,000) (1,425,000)
MOS Sales 798,000 1,026,000

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Question 64
Selling price 540
Variable Cost 324

Fixed Cost 8,640,000

Target profit 4,320,000 and 4% of sales
Tax rate 40%

Required
Sales to achieve target profit.

Answer 64
Selling price 540
Variable cost (324)
CM per unit 216

CM Ratio 40.00% To check

Target profit % Gross -6.67% Sales 47,520,000
33.33% VC (28,512,000)
CM 19,008,000
Target Profit (Abslt) 7,200,000 Fixed Cost (8,640,000)
Fixed cost 8,640,000 Profit 10,368,000
Target CM 15,840,000 Tax (4,147,200)
Profit after tax 6,220,800
Target Sales 47,520,000 Absolute profit (4,320,000)
Units 88,000.00 Relative target profit 1,900,800
Percentage of sales 4.00%
Target profits are divided by 60% to gross them up for income tax.

Question 65
A B
Selling price 300 200
Variable Cost 150 110

Fixed Cost 4,680,000

Target Profit 5,200,000 along with 5% of sales
Tax Rate 30%

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Answer 65
A B
Selling price 300 200
Variable cost (150) (110)
CM 150 90
CM ratio 0.50 0.45 To check
Ratio in units 2 1 Sales 29,102,146
Ratio in Rs. 600 200 VC (1-WACM Ratio) (14,914,850)
CM 14,187,296
WACM 48.75% Fixed cost (4,680,000)
Grsd up Trgt prft (%) -7.14% Profit 9,507,296
Adjusted CM 41.61% Tax (2,852,189)
Profit after tax 6,655,107
Target profit (Abslt) 7,428,571 Absolute profit (5,200,000)
Fixed cost 4,680,000 Relative Target Profit 1,455,107
Target CM 12,108,571 % of sales 5.00%

Target sales 29,102,146

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LATEST 2 ATTEMPT PAST PAPERS:

Question (Spring 2022):
Rio Limited (RL) operates donut shops in different parts of Karachi and has average monthly
sales of Rs. 4.5 million per shop. RL earns contribution margin of 20%.

RL is now planning to open a shop in Lahore. In this respect, following two rental options are
under consideration:
(i) Annual rent of Rs. 2.52 million payable in advance.
(ii) Monthly rent of Rs. 0.1 million plus 2% commission on total sales, payable at the end of
each month.

Additional information:
(i) RL would introduce customized donuts, in addition to the regular range. The price of
customized donuts will be 15% higher than the regular ones.
(ii) Average monthly sales volume of this shop is expected to be 30% higher than
existing sales. 20% of the sales volume will consist of customized donuts.
(iii) Variable costs consist of 75% cost of making regular donuts which would increase by
5% in case of customized donuts. The remaining variable costs represent packaging
cost of all donuts which is expected to increase by 4%.
(iv) Fixed costs (other than rent) is estimated at Rs. 0.8 million per month.
(v) RL can borrow the required funds at 14% per annum.

Required:
Compute net profit per month and margin of safety percentage under both options and
recommend the most suitable option to RL.

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Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Answer (Spring 2022):

Cost And Management Accounting | Page 79 of 686

Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Question (Autumn 2022):

Uranus Limited (UL) manufactures and sells two products, X1 and Y1. Following is the latest
information pertaining to X1 and Y1:
X1 Y1
------------------------Units---------------------
Sales Volume 5000 2500
---------------------Rupees---------------------
Selling price per unit 4,400 2,200
Variable cost per unit 3,000 1,500
Fixed factory overheads 5,400,000
Fixed selling and distribution overheads 4,500,000

Rs. 300,000
on advertisement and reducing selling price by 5%. Sales volume of X1 is expected to increase
by 20% as a result of adopting his suggestions.

Required:
a) Compute the existing overall break-even sales revenue and margin of safety units.
b) Advise UL whether it should go ahead with his suggestion or not.

Cost And Management Accounting | Page 80 of 686

Cost & Management Accounting Practice Manual (March 2023)
Compiled by: Sir Ahmed Raza Mir (FCA) & Sir Kashif Saleem (ACCA)

Answer (Autumn 2022):

Cost And Management Accounting | Page 81 of 686