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COST-VOLUME-PROFIT ANALYSIS

 

Learning Objective: Students will be able to to learn and apply the cost-volume-profit analysis.

 

Scenario:


Modern Industries (PVT) Ltd. manufactures basketballs and sells them across the country. The company’s management is desirous to boost-up the yearly profits and considering a change in the sales price of its products in this regard. The company’s management accountant has developed following information using the recent year’s published accounts:

          

 

TOTAL  

   UNITS

Sales (200 units)                   

Rs. 30,000                    

Rs.150.00

Variable cost                            

17,500                        

087.50

Contribution margin                  

12,500                          

62.500

 

Fixed cost                                  

 5,000                          

 

Profit before tax                         

7,500                    

 

                       

The management accountant believes that a 10% reduction in selling price would increase the sales volume by 30%.

 

Required: Analyze the above information carefully and answer the following assuming no change in the fixed cost:                                                        
  i)     Change in the net sales;                                                                

ii)      Change in the contribution margin in total & per unit;                                             

iii)    Change in per unit net profit assuming 40% tax rate;

iv)     Would you recommend the proposed sale price and why?

 

Important Instructions:

 

1. The GDB will remain open for 3 working days/ 72 hours.

2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.

3. Obnoxious or ignoble answer should be strictly avoided.

4. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

 

Ø For Detailed Instructions please see the GDB Announcement

Views: 6430

Replies to This Discussion

Fighting Falcon Shakeel excellent work! please seperate option wise calculation show ker dijye. table me confusuion ho rhi ha. aur ye per unit 150(150-.1) ye kese liya ap ne.

10% decrease in price of 150= 150*10/100= 150*0.1=15

So, 150-15 = 135

sorry but i do not agree with the management accountant because per unit profit has declined.

Shariq Bhai, this what i am saying that according to these calculations one must not support the accountant's speculations and management should keep its present status

salam

i think question is so simple he says that if he reduction in sale price his total sale increase and when total sales increase his profit or revenue also increase when revenue increse then per unit profit also increase

profit or margin per unit can be determin through following way

                         = profit /units sale *100

so we can assess that per unit profit decline or increase

 3rd requirement solve karnny ka tareqa e bata dain ..

vu student Sis, Here is the solution of 3rd Requirement

Tax is deducted from gross profit. In this case Profit before tax is 7,500. 

So, 7500*0.4 = 3000

Thus, Net Profit = 7500 - 3000 = 4500

According to this per unit profit will be = 4500 / 200 = 22.2

Now with 30% increased volume

Tax = 7350*0.4 = 2940

Net Profit = 7350 - 2940 = 4410

In this case 260 units will be produced which will generate profit of 4410

Per unit profit  = 4410 / 260 = 16.96

Difference in per unit profit = 22.2 - 16.96 = 5.24 (decreased / less)

Friends, u all are calculating the 30% increase in units not on sales volume i.e Rs.30000. If u calculate 30% increase in sales then it will be 39000 and all calculations will change. 

Please discuss something on this aspect that which of the following is correct way of calculations

a. 200 Units = 200+(200*0.3) = 260

OR

b. Rs 30000 = 30000+(30000*0.3) = Rs 39000

sales volume is no or quantity of units sold . so we have to calculate percentage on on no of units

as it is done in handouts too.

a. 200 units= 200+(200*0.3) = 260 is correct

i)  5100

ii) CM IN TOTAL -150

CM PER UNIT  -15

iii) -5.54

iv) reject the proposal

 

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