Problem: The Sunmoon Ltd is the distributor for a foreign product.

The product sells in the market for

Tk.200.00 per unit with a variable selling expense of Tk.20.00 and a item based commission of Tk.40.00 per
item. The Company’s cost of import at its godown is Tk.90.00 Fixed selling and administrative expenses are
Tk.2,00,000.00 per year.

Required:
1) What is Break-even point in unit and taka;
2) What sales level in unit is required to earn an annual before tax profit of Tk.1,50,000.00
3) What sales level must be achieved to have the same level of after tax profit as above, if tax rate is 40%.
4) What sales level must be achieved to have the after tax target profit Tk.3,00,000.00. If tax rate is 30%.
5) What is the Margin of safety and after tax profit for sales level of 10,000 units, if tax rate is 40%.
Solution:
Calculation of unit contribution:
Variable cost of the product/unit:
Variable Selling expenses : 20.00
Commission :40.00
Cost of import :90.00
Variable cost per unit = 150.00 Taka
Selling price per unit = Tk.200
So, Unit Contribution = Selling price per unit – Variable Cost per unit = 200-150=Tk.50.00
Required 1:
BEP in units = FC/Contribution per unit = 2,00,000/50
=4000 units
Therefore BEP in sales = 4,000*200 = 8,00,000 Taka
Required 2:
Level of Sales = (Fixed Cost + expected profit)/(Contribution Margin per unit) =
(2,00,000+1,50,000)/50=7,000 units
Required 3:
Required sales Level = Fixed Cost+(Profit after tax)/(1-tax rate)
Contribution Margin per unit
= 2,00,000 + (1,50,000)/(1-0.40)
50
= 2,00,000 + 2,50,000
50
= 9,000 units
Required 4:
Required sales level = Fixed cost + Profit after tax/(1-tax rate)
Contribution Margin per unit
= 2,00,000 + (3,00,000)/(1-0.30)
50
= 2,00,000 + 3,00,000/0.70
50
= 2,00,000 + 4,28,571.42
50
= 6,28,571.42
50
= 12,571.43 units
= 12572 units (approx.)
Required 5:
Margin safety in units = Sales – BEP=10,000-4,000=6000
Marginal safety in Tk. = 6000*Selling price per unit
= 6000*200 = 12,00,000 Taka
Profit of marginal safety =6000*50 = 3,00,000
Less, Tax (40% of 3,00,000)= 3,00,000*0.40= 1,20,000
Now, Profit after tax =1,80,000
Problem: Philips Company manufactures and sells its own brand of cameras. It sells each camera for
Tk.28. The company’s account shows the following data:-
Manufacturing cost:
Variable Tk. 12 per unit
Fixed Tk. 1,00,000 per year
Selling and Administrative cost:
Variable Tk. 4 per unit
Fixed Tk. 44,000 per year

Required:
1) Use the per unit contribution margin (CM) approach to determine the Break-even point in unit and in
Taka.
2) Use the per unit contribution margin (CM) approach to determine the level of sales in units and in Taka
required to obtain a Tk.84,000 profit.
3) Suppose that variable selling and administrative cost could be eliminated by having a salaries sales force.
If the company could sale 20,000 units, how much could it pay in salaries for the sales people and still have a
profit of Tk.84,000.

Solution:
Total VC = Tk.12+4=Tk.16
Total FC = Tk.1,44,000
Sell price = Tk. 28
Contribution margin = 28-16 = 12

Required 1:
BEP in unit = TFC/CM per unit
= 1,44,000/12=12,000 units
BEP in sale volume = Tk. 12,000*28 = Tk.3,36,000

Required 2:
Required sales (in unit)
= (F/C+Target profit) / Contribution Margin
= 1,44,000 + 84,000 / 12 = 19,000 units
Required in sales volume = Tk.19,000*28
=Tk. 5,32,000
Required 3:
New VC = Tk.12/unit
Total sell price = 20,000*28 = Tk.5,60,000
New CM = 28-12 = 16

Target profit = Tk.84,000

Target sales = 20,000 units

Suppose salaries = ‘X’

So, FC = (1,44,000 + X)

Target sales = (FC + Profit) / CM per unit

Or 20,000 = (1,44,000+X+84,000)/16
Or 20,000*16 = 2,28,000+X
Or X = 3,20,000 – 2,28,000
Or X = 92,000.

So, Salaries will stand = Tk. 92,000