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Learning Objectives: The students are expected to learn and apply the cost-volume-profit analysis.

 

Scenario:

 

              Aini & Alex (Pvt.) Limited launched its fashion accessories in ladies’ purses few years back in Karachi with the aim to let them handle their necessities with comfort. Now, its brands are famous for stylish and affordable accessories.  

 

At the start of new financial year, the sales manager of the Aini & Alex (Pvt) limited has to plan about future sales of its bags section, consisting of two product lines - leather handbags and clutch purses. To plan about future sales, the sales manager is in need of data about per unit cost and profit for each product line from the company’s accountant.

 

Accountant demonstrates the per unit data that shows currently the company is selling leather handbags at Rs. 300 per unit and clutch purse at Rs 190 per unit respectively. Other cost data is as follows:

Details

    Leather Handbags  

  Clutch Purses

 

           

Rs. P/U          

Rs. P/U

 

Variable cost  

130.00

110.00

 

Fixed cost       

144.00

52.50

 

Profit  

26.00  

27.50

 

 

 

 

Considering the above mentioned information, answer the following:

 

a)   Determine per unit contribution margin, contribution margin ratio for each of the product.

 

b)   If the sales manager of Aini & Alex (Pvt.) Limited decides to increase production substantially any of the above two products (manufactured units are expected to be sold in the market), determine which product will be more profitable for the company to produce assuming that cost behavior pertains remain unchanged.

 

c)    Support your answer in part (b) based on logical reason.

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Replies to This Discussion

Part (A)

CM ratio leather handbags

Contribution margin = s - v.c

  CM   =   s – c.v

CM     =  300-130 =170

CM ratio = CM / s

CM ratio = 170/300 =0.567

CM ratio for Clutch purses

Formula

CM   =   S  -  V.C

CM   =  190 – 110

CM  =  80

CM ratio  = CM / S

CM ratio  =  80 / 190

Cm ratio  =  0.421

Part ( B )

leather handbags is more profitable because its contribution margin ratio is high clutch purses.leather handbags per unit sale is higher than the clutch purses.its mean that Aini & Alex pvt. Increase the production of leather handbags and increase the profit margin ratio.example coted china production.china large number of units produce less profit margin earn.same in that question Aini & Alex pvt. Large number units produce leather handbags an earn a profit.

 

thanks a lot tarik bhai

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