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
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