You are required to chow the effect of each of the following changes on profit and Break-Even. Volume from information given below:
Sales 50,000 units Rs. 5.00 per unit
Variable cost Rs. 3.00 per unit
Fixed cost Rs. 70,000
Changes:
i) Price changes by 20%
ii) Volume decreased to 40,000 units
iii) Variable cost increases to Rs. .3.50 per unit.
iv) Rixed cost decrease by 10%
Sol. 3 Sales 50,000 × 3.00 = 1, 50, 000
Fixed cost: = 70, 000
Fixed cost = 70,000
So, Here the profit will be:
Profit = contribution – FC
= 1, 00,000 – 70, 000 = 30,000
(Contribution = Total sale – variable cost)
2,50,000 – 1, 50, 000 = 1, 00, 000
Break Even = Fixed cost / contribution per unit
= 70,000 / 2 = 35, 000
(Contribution per unit = 1,00,000 / 50, 000 = 2)
i) Now In first adjustment
Price changes by 20%
Suppose price rise by 20%
Then sales will be 3,00,000 (2,50,000 = 20%)
Variable cost = 1,50,000
Fixed cost = 70, 000
So,
Profit = 1,50,000 – 70,000 = 80,000
(Contribution = 3,00,000 – 1, 50,000 = 1,50,000)
Break Even point = 70,000/3 = 23333.
ii) In second, adjustment volume decrease to 40,000 units
Now the sales will be 2,00,000
Variable cost = 1,20,000 (40,000 × 3 = 1,20,000 )
Fixed cost = 70,000
Profit = 80,000 – 70,000 = 10,000
(Contribution = 2, 00,000 – 1, 20,000 = 80,000)
Break Even Point = FC/contribution per unit = 70,000/2 = 35,000
iii) In this adjustment variable cost increase to 350 per unit
Variable cost will be = 1,75,000
Fixed cost = 70,000
Now the profit will be
Profit = 75,000 – 70,000 = 5000
(contribution = 2,50,000 – 1,75,.000 = 75,000)
Break Even point = 70,000/1.5 = 46666.
iv) In last adjustment fixed cost decrease by 10%
sale = 2,50,000
variable cost = 1,50,000
Fixed cost will be 63,000
Now the profit will be 1,00,000 – 63,000 = 37,000
(contribution = 2,50,000 – 1,50,000 = 1,00,000)
Break Even Point = 70,000/2 = 35, 000
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