Two manufacturing companies which have the following operating details decide to merge:
| Particulars | Company No. 1 | Company No. 2 |
| Capacity utilization % | 90 | 60 |
| Sales (Rs. Lakhs) | 540 | 300 |
| Variable cost (Rs. Lakhs) | 396 | 225 |
| Fixed cost (Rs. Lakhs) | 80 | 50 |
Assuming that the proposal is implemented calculate: (i) Break-even sales of the merged plant and the capacity utilization at that stage. (ii) Profitability of the merged plant at 80% capacity utilization. (iii) Sales turnover of the merged plant to earn a profit of Rs. 75 lakhs. (iv) When the merged plant is working at a capacity to earn a profit of Rs. 75 lakhs what percentage increase in selling price is required to sustain an increase of 5% in fixed overheads.
Ans: (i) Break- even point in terms of sales value = Fixed cost * Sales / Contribution
Merged plant Fixed cost = 80 + 50 = 130 lakhs
Merged plant variable cost = 621 lakhs
Merged plant sales = 840 lakhs
Contribution = Fixed cost + Profit
Profit = Sales – Total cost
= 840 – (130 + 621)
= 840 – 751 = 89 lakhs
Contribution = 130 + 89 = 219 lakhs
BE point = 
840 = 498.63 lakhs (ii) At 90 % capacity utilization sales value of company No.1 = 540 lakhs
At 100% capacity utilization of company No. 1 sales value = 
100 = 600 lakhs
100 = 600 lakhs At 60% capacity utilization sales value of company No. 2 = 300
At 100% capacity utilization of company No. 2 sales value = 
100 = 500
100 = 500 Merged plant capacity utilization = 
= 73.33%At 80% capacity utilization = 
= 916.41lakhs
= 916.41lakhs Profit = Sales value – (FC +VC) = 916.41 – 751
= 165.41 lakhs
(iii) Profit = 75 lakhs
Total cost = 751 lakhs
Sales value = Profit + Total cost
= 75 + 751 = 826 lakhs
(iv) Profit = 75 lakhs
Increase in fixed price is 5% = 130 + 130*5/100= 136.5 lakhs
Total cost = FC + VC = 621 + 136.5 = 757.5 lakhs
Sales = 75 + 757.5 = 832.5
Increase in sales = 832.5 – 826 = 6.5 lakhs
Percentage increase in selling price = 6.5*100/826 = 0.78%
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