Question 1

Shalimar Limited sells two products. Details are as under:

A B
Selling Pricess 400 250
CM Ratio 30% 40%
Ratio in units 1 2

Following is the profit and loss account for last year:

Sales 4,860,000
Cost of Goods Sold (3,644,870)
Operating Costs (1,483,510)
Loss before tax (268,380)
Tax @ 30% 0
Net Loss (268,380)

1. The copmany wishes to earn a profit of Rs 490,000 (post tax)

2. No changes expected in selling prices, variable cost per unit and selling price

Required
Calculate the sales required to achive an after tax target profit mentioned above.

Solution

Weighted average CM Ratio

A B
Selling Price 400 250
Variable Cost (280) (150)
CM 120 100
CM Ratio 30% 40%
Ratio in units 1 2
Ratio in Rupees 400 500 900
WA CM 120 200 320
CM Ratio weighted average 35.56%

Sales 4,860,000
Variable Cost 3,132,000 4860k x 64.46%

Total Cost (COGS+Op Cost) 5,128,380

Variable Cost (3,132,000)
Total Fixed Costs 1,996,380

Taregt Profit post tax 490,000

Target profit grossed up 700,000 490,000 / 70%
Total CM to be covered
Fixed Costs 1,996,380
Target Profit 700,000
Total CM to be covered 2,696,380
CM Ratio 35.556%
Sales required to achive profit 7,583,569

To prove

Sales 7,583,569
Variable Cost (64.46%) (4,887,189)
CM (35.56%) 2,696,380
Fixed Costs (1,996,380)
Profit before tax 700,000
Tax @ 30% (210,000)
Net Profit after tax 490,000

Question 2

Calculate Weighted average CM Ratio:

A B C
Selling Prices 700 800 450
CM Ratio 40% 25% 60%
Ratio in units 6 7 3

Solution

A B C
Selling Prices 700 800 450
Variable Cost (Bal) (420) (600) (180)
CM 280 200 270
Ratio in units 6 7 3
Ratio in Rs 4,200 5,600 1,350 11,150
CM Ratio 40.00% 25.00% 60.00%
Weighted CM 1,680 1,400 810 3,890
Weighted average CM Ratio 34.888%