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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

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Replies to This Discussion

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 +♥ ÁŔZỠỠ ♥ 1WELCOM SIS

realy yah correct hai :)

 ATiFSUbHaNI g pa g its really correct

g

Units sold increased = original units +units increased

                                    = 200 + (200*30%)

                                        = 200+60

                                            = 260

Sales price per unit decrease = original price – decrease

                                                     = 150 – (10%*150)

                                                      = 150 -15

                                                      = 135

PARTICULARS

COMPUTATION OF 200 UNITS

TOTAL AMOUNT

PER UNIT

Sales

30,000

150

Variable Cost

17,500

87.5

Contribution Margin

12,500

62.5

Fixed Cost

5,000

 

Profit Before Tax

7,500

 

40%Tax:7,500×40%

(3000)

 

Net Profit

4500

4500/200=22.5

In 260 Units( increased case)

PARTICULARS

30%INCREASE IN SALES

PER UNIT

Sales

260x135=35,100

35,100÷260=135

Variable cost

260x87.5=22,750

22,750÷260=87.5

Contribution margin

12,350

12,350÷260=47.50

Fixed cost

5,000

 

Profit before tax

7,350

 

40% tax =7500*40%

7350x40%=(2940)

 

Net profit

4410

4410/260=16.96

 

 

 

REQUIREMENTS:

(1)Change in the net sales;

 

 Sales increased =Increased sales –original sales

35100-30000

5100 RS

(2)Change in the contribution margin in total &per unit;

 

Change in Contribution Margin in total (12,350-12,500) =150RS

Increased by 150 RS

Change in Contribution Margin in perunit (47.50-62.5) =15RS

Decreased by 15 RS

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

 

PROFIT AFTER TAX 40%:

With 200 UNITS: 4500÷200=22.5

With 260 UNITS: 4410÷260=16.96

Change in per unit net profit after tax40 %( 22.5-16.96) =-5.54

Decreased by 5.54

PROFIT BEFORE 40%TAX:

At original units 7,500 Rs÷200 units=37.5Rs

At increased units =7,350RS÷260units=28.26RS

(4) Would you recommended the proposed sale price and why?

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