alculate: (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.

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

                At 60% capacity    utilization sales value of company No. 2 = 300

At 100% capacity utilization of company No. 2 sales value = 100 = 500

  Merged plant capacity utilization = = 73.33%

At 80% capacity utilization =  = 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%

You are required to chow the effect of each of the following changes on profit and Break-Even. Volume from information given below:

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

Sale = 2,50,000

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

Calculate the break-even volume of activity both in units and in rupees.

XYZ Ltd. manufactures a product that it sells for Rs. 125.  The variable cost to manufacture the product is Rs. 70 per unit and the variable cost to market and distribute the product is Rs. 15 per unit.  The company has fixed manufacturing costs of Rs. 12,00,000 and fixed selling and administrative costs of Rs. 4,00,000.  Management’s current profit objective is to earn Rs. 1,20,000 of income.  The new finance manager proposed a target income of 15 per cent on sales.

You are required to:

a)                 Calculate the break-even volume of activity both in units and in rupees.

b)                 Calculate the required volume of sales in units and in rupees to earn the firm’s current target income.

Ans.                                                          Fixed Cost

a)                Break Even Point (BEP) (Units) = ------------------------------

     Contribution Per Unit

(Sales Price - Variable Cost)

16,00,000

= -------------------

125 – (85)

= 40,000

(BEP) Volume                     = 40,000 x Variable Cost

= 40,000 x 85

= 34,00,000

Fixed Cost + Desired Profit

b)                Sales for Desired Profit                = ------------------------------------

   Contribution Per Unit

16,00,000 + 1,20,000

                                                    = --------------------------------

      40

= 43,000

                        = 43,000 x 85

                              In Rs.             = 36,55,000