Advanced Management Accounting

Techniques and Applications

From Study Materials
CVP Analysis under certainty
DETERMINISTIC MODELS
Single Product Revenue and Costs linear
1. Transistor radios are sold at a unit price of Rs.95. the Variable cost is Rs.55 and total
fixed cost is Rs.1,60,000.
Determine:
i.
Break-even sales volume in units and rupee value
ii.
Sales volume to achieve a profit goal of Rs.40,000 (pre-tax and post-tax). Tax rate is
40%.
iii.
The Margin of Safety if sales are expected to be 6,000 units.
iv.
If the selling price is lowered by 10%, how this will affect the BEP?
v.
If out of the fixed cost of Rs.1,60,000. Rs.20,000 represent non-cash expenses, find
the cash BEP.
Single Product Revenue and Costs Nonlinear
2. Consider a product for which the revenue and cost functions are as given under:
TR (X) = 200X - 4X2
TC(X) = 400 + 15X - 2X2 + .02X3
Find BEP.
CVP Analysis under uncertainty
Single Product; Sales probabilistic
1. The sales of a product is expected to be normally distributed with a mean of M = 70,000
units and standard deviation of S = 20,000 units. The price of Rs.24, the variable cost of
Rs.15 and the fixed costs of Rs.3,50,000 are all known to be the exact estimates. Find the
probability distribution of the profit volumes and hence derive the probability:
- that the product will not break-even
- that the product will earn at least Rs. 2 lakh profit
- that the profit will not exceed Rs.7 lakhs
Single Product; Sales and Cost probabilistic assumed to be normally distributed
2. A Company wishes to launch a new product, but it is not certain as to the first year sales
off take, the selling price that may have to be set, the variable cost and the incremental
fixed costs.
Managers concerned have given the following information:
Mean
Standard Deviation
Sales in units
X
60,000
3,000
Price Rs./Unit
p
50
8
Variable Cost/Unit
V
24
6
Fixed Costs Rs.
F
6
1.2
Lakhs
Each of the above elements may be assumed to be normally distributed and independent
of one another.
(i) Find the first year expected profit volume.
(ii) Find the probabilities that on the first year sales:
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the product will not break-even

the profit volume will not be less than Rs.4 lakhs
the profit volume will not exceed Rs.12 lakhs

Single Product; Sales and Cost probabilistic Discrete Empirical Distributions

3. Consider that in respect of a new product to be launched the uncertainties in the Sales,
Price and Costs over the first year can be expressed only in the following manner.
Sales Off
X
Units
20,000
22,000
24,000
26,000

take
Prob.
0.25
0.35
0.25
0.15

Selling Price
P
Rs./Unit Prob.
30
0.35
32
0.40
34
0.15
36
0.10

Variable
V
Rs./Unit
12
14
16
18

Cost
Prob.
0.26
0.34
0.30
0.10

Fixed Cost
F
Rs. L
Prob.
2
0.30
3
0.40
4
0.30

Using the following random numbers, simulate the operating conditions for 12 iterations
and assess the expected profit and the probabilities:
i) the product will break-even
ii) the profit volume will exceed Rs.2 lakhs
iii) the profit volume will be under Rs.4 lakhs
Random Numbers
547347 689288 181479 737483 211897 541891 842145 340648 858845 929334
958886 731624 178173 479867 780647 535483 587407 765532
Multiple Products Single Constraint
4. Consider the case of four products produced in a department using the same machine.
The data on the products are:
PRODUCTS
1
2 3
4
Unit Price Rs.
1
1 2 32
2
8 6
Variable Cost Rs.
6
9 1 18
4
Contribution Rs.
6
9 1 14
2
Machine Hour Used
1. 2 4
5
2
Contribution per Machine 5 4. 3 2.
Hour
5
8
Multiple Products Multiple Constraints
5. A Company produces and sells three types of products A, B and C. The Company is in
process of formulating the budget for the coming year. Data on Sales, Costs, Profits of
current year based on the known actual and past estimates are displayed below:
Current Year
PRODUCTS
Particulars
A
B
C
Sales Units
50,0
20,0
10,0
00
00
00
Price per Unit
28.0
14.0
42.0
Rs.
0
0
0
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Cost per Unit

Rs.
Materials
Direct Labour
Factory
Overheads
SDA expenses
Total Cost
Profit

9.80

5.25

2.80
7.00

1.40
3.50

4.20
23.8
0
4.20

2.10
12.2
5
1.75

23.2
5
4.90
12.2
5
6.30
46.7
0
(4.70
)

Factory Overheads are applied at a rate of 250% of labour cost (out of this, 1/5 part is
deemed to be variable)
SDA expenses are allocated at 15% of the price (out of which 1/3 is deemed to be
variable).
Information available:
- Marketing have indicated the potential sales (Units) for the coming year as under:
A
B
C
65,000
25,000
20,000
- the manufacturing operations require machine time from two departments D1 and D2.
the capacity available and the usage for the products are detailed below:
D1
(Hours/Unit)
D2
(Hours/Unit)

C
1/3

Capacity
35,000 hours

1/8

28,000 hours

As the machine utilization during current year has been below capacity, no capacity
increase in the offing. Subcontracting or working overtime are not feasible.
- a quick preliminary assessment by the Production Manager indicated that the capacity
available would be inadequate to meet the sales levels proposed by Marketing and some
lowering of the estimates would be needed. It was suggested by the Accounts Manager,
that as the product C is incurring a loss (and has been so far some time) this should be
dropped from next years sales plan. This as strongly resisted by the Marketing Manager,
who contended that unless some quantities of product C are supplied to major customers,
they may withdraw their support for other two products.
After discussion, it was agreed that the following minimum quantities of the products will
be manufactured to meet the major customer needs.
A
B
C
Minimum Units
35,000
15,000
6,000
While acceding to this suggestion, the Accounts Manager suggested that the capacity
remaining after meeting the above minimum production should be allocated to only
products A and B and that the units to be produced should be in proportion of 2.4A to 1B,
similar to their proportion of profits.
It was generally agreed to formulate the next years plan on the above guidelines.
- the Production Manger quickly computed the additional production in excess of the
marketing minimum as nearly 19,450 units of A and 8,100 units of B.
- the Accounts Manager quickly produced the following overall sales/profit profile:
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Sales Value
Total Costs
Operating Profits

Current Year
21,00,000
19,02,000
1,98,000

Coming Year Plan

21,00,000
18,64,685
2,35,315

Everybody was pleased that the plan is able to give higher profit on the same sales
turnover.
The Managing Director was skeptical of the approach used in formulating the budget plan.
He asked one of the young cost accountants who had studied quantitative methods, to
review the plan and explore scope, if any, for improvement.
Solved Problems
1. Using the information given below answer the questions:
Product: XYZ
Month: July
Particulars
Sales
Total Variable Costs
Fixed Factory Costs
Fixed SDA Costs
Unit Sales Price
Unit Variable Factory Cost
Unit Variable SDA Cost
Tax Rate

Rs.
2,25,000
1,50,000
27,500
17,500
11.25
6.25
1.25
40%

Determine:
a) Break-even volume for the month.
b) Operating profit for the month pre-tax and post- tax.
c) Sales quantity that will yield a pre-tax profit of 20% on sales value.
d) Sales value that will yield an operating profit of Rs.30,000.
e) Effect on break-even point if variable cost can be reduced by 10%, fixed cost
remaining unaltered.
2. A Company manufactures three products A, B and C in one department.
Data are given below:
A

Sales in Units
10 15
(000)
0
0
Sales Price
30 36
Rs./Unit
Variable Cost
18 14
Rs./Unit
The total fixed cost of the department is Rs.54 lakhs.

C
25
0
42

Tota
l
500

24

Assuming that the product mix would be the same at break-even point, compute the
break-even point in units and rupee value. Show the results by each product and in total.
Use the weighted average price, cost, with weights in proportion to the number of units
sold. A: B: C = 20:30:50.

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3. An electric goods manufacturer plans to introduce a new type of plug in the market for
which new machinery has to be installed. Two options of machines A and B are available
with the following operating data:
Annual Fixed Costs Rs.
Unit Variable Cost

A
3,60,000
3.5

B
6,60,000
1.4

The plug is expected to be sold at a price of Rs.8 each.

a)
the
b)
c)

Determine for each machine the minimum annual sales to recover the fixed costs of
machine.
The most profitable machine if the annual sales are expected to be 1,20,000 units.
If the sales are expected to be 2,00,000 units, then which machine would be better?

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