Question 1

Sunrise Limited produces cans for food processing companies. Cans are of standard
size and has been accepted as "best quality". Following are the costs and revenue
involved:

Total Production for Pakistan 40,000 Units

Material Costs 280,000 Fully Variable

Labour Cost 200,000 Fully Variable
Production Overheads 340,000 Rs 180,000 fixed Cost
Sales and Admin Overheads 180,000

Selling Price is set to ensure a markup of 20% on cost.

The company is expecting next year to be awarded with an export order of 16,000 units.
All variable costs per unit would remain the same, whereas no increase will be observed in
annual fixed costs.

Required
Calculate the new selling price after getting export order.

Solution

Variable Costs
Cost Units Per unit Cost
Material Costs 280,000 40,000 7.00
Labour Cost 200,000 40,000 5.00
Production Overheads 160,000 40,000 4.00
Sales and Admin Overheads 60,000 40,000 1.50
Variable cost per unit 17.50

Fixed Costs
Cost Units Per unit V.Cost
Production Overheads 180,000 40,000 4.50
Sales and Admin Overheads 120,000 40,000 3.00
Fixed cost per unit 7.50

Total Cost per unit (Variable + fixed) (17.5+7.5) 25.00

Markup (25% on cost) 6.25
Selling price per unit for Pakistan 31.25
After export Order

Variable cost per unit 17.50

Units total (Pakistan + Export) 56,000
Total Variable Cost 980,000
Total Fixed Cost (180,000+120,000) 300,000
Total cost for 56,000 units 1,280,000
Units total (Pakistan + Export) 56,000
Cost per unit 22.86
Markup 5.71
Selling Price 28.57

Discount
Previous Selling Price 31.25
New Selling Price -28.57
Discount 2.68
Question 1
Orlando Limited sells standard size relaxing chairs for the last 10 years. The company
sells goods through distributors which charge a commission of 10% on selling price.

Details of manufacturing costs and selling price is as under:

Direct Material per unit Rs 60

Direct Labour per unit Rs 48
Var overheads per unit Rs 60% of labour
Selling Price per unit 200
43
Fixed Costs include:
Depreciation of equipment 216,000
Insurance of Building 64,800
Marketing campaign 172,800

Required
1. Calculate Break even point (units and Rs)
2. Calculate margin of safety in units and profit if the company is expecting
to sell 18,960 units next year.

Solution

Selling Price 200.00

Commission (10%) (20.00)
Direct Material (60.00)
Direct Labour (48.00)
VOH (28.80)
CM per unit 43.20
CM Ratio 21.60% ('43.2/200)

Fixed Costs
Depreciation of equipment 216,000
Insurance of Building 64,800
Marketing campaign 172,800
Total Fixed Costs 453,600

Break Even in Units 10,500 453,600/43.2

Break Even in Rs 2,100,000 453,600/21.60%

Margin of safety
Expected sales (units) 18,960
Break even units (10,500)
Margin of Safety units 8,460
CM per unit 43.20
Profit (Rs) 365,472 MOS x CM/unit
Question 2

Kim Limited is preparing its budgets for the year 2022. Actual (for 2021) and expected data (for 2022)

2021 2022
Selling Price per unit 360 Not to be increased
Material per unit 90 Inflation rate expected to be 10%
Labour cost per unit 36 Inflation rate expected to be 8%
Variable OH per unit 72 Inflation rate expected to be 12%

Fixed Cost - Production 576,720 Inflation rate expected to be 10%

Fixed Cost - Sales 751,680 Inflation rate expected to be 5%

Expected sales (Units) 12,000 14,500

Required
1. Calculate break even for 2021 and 2022
2. MOS for 2021 and 2022
3. Units required to be sold in 2022 to earn same profit as in 2021

Solution
2021 2022
Selling Price per unit 360.00 360.00
Material per unit (90.00) (99.00)
Labour cost per unit (36.00) (38.88)
Variable OH per unit (72.00) (80.64)
CM per unit 162.00 141.48

Fixed Cost - Production 576,720 634,392

Fixed Cost - Sales 751,680 789,264
Total Fixed Cost 1,328,400 1,423,656

BE Units 8,200 10,063

Expected Sales 12,000 14,500
MOS (Units) 3,800 4,437

Profit 615,600 627,804

Units to get same profit

Fixed cost in 2022 1,423,656
Target profit of 2021 required in 2022 615,600
Total Coverage required 2,039,256
CM per unit 141.48
Units required to achieve target profit 14,414
Question 1

Volume (units produced) in 2014 16,000

Volume (units produced) in 2015 19,680

Calculate increase in volume (%)

Solution
Volume for 2015 19,680
Volume for 2014 (16,000)
Increase in volume 3,680

% increase 23.000% 3,680 / 16,000

Question 2

Jarar Limited produces and sells electronic gadgets. Details foe last year are as under:

Break-even sales 640,000

Margin of safety 450,000
Profit 135,000

Plans and budgets for next year:

The company is planning to reduce the selling price by 6%. This will result in the following changes:

1 Sales volume would increase by 30%

2 Variable cost per unit would reduce by 8% due to economies of scale.
3 80% fixed cost would increase by 10% and remaining 20% of fixed cost would
increase by 6%.
4 The company would have to hire a new plant for next year . Annual rental of
this plant would be Rs 14,500

Required
a) Prepare profit and loss accounts for current and next year
b) Calculate break even and margin of safety for next year

Solution

Current Yr. Next Yr.

Sales (640+450) 1,090,000 x94%x1.3 1,331,980
Variable Cost (763,000) x92%x1.3 (912,548)
CM 327,000 419,432
192,000x80%x1.1 +
Fixed Cost Bal Figr (192,000) 192,000x20%x1.06 (209,664)
Profit 135,000 209,768
We know that CM in MOS = Profit
So CM% x MOS = Profit
CM% x 450,000 = 135,000
CM% 30.00%

Breakeven and MOS (Rs)

CM Ratio for next year CM/Sales 31.49%

Fixed Cost 209,664
Break even (FC/CM ratio) 665,825

Expected sales 1,331,980

Break even sales (665,825)
Margin of safety 666,155

Question 3
2019 2020
Sales 190,000 Selling Price would increase by 5%
Variable Cost (114,000) VC would increase by 6%
CM 76,000
Fixed Cost (102,000) Fixed Cost would increase by 10%
Net Loss (26,000)

Required
Calculate break even sales (Rs) in 2020

Solution

Assuming no change in volume

Sales for 2020 199,500 190,000x1.05

Variable Cost (120,840) 114,000x1.06
CM Rupees 78,660
CM Ratio (CM / Sales) 39.429%

Fixed Cost 112,200 102,000x1.1

Break even in 2020 (Rs) 284,565

Question

Suleman Limited produces three products. Details are as under:

A B C
Selling Price 140 80 210
Variable Cost 70 44 147
Expected sales 12,500 17,500 10,000

Annual fixed costs per anum are expected to be Rs 1,110,200.

Required
calculate break even in Units and in Rs

Solution
A B C
Selling Price 140 80 210
Variable Cost per unit (70) (44) (147)
CM per unit 70 36 63
CM Ratio 50.00% 45.00% 30.00%
Ratio in Units 12.50 17.50 10.00
Ratio in Rs 1,750 1,400 2,100

Break Even in Units

CM of a Comp Unit 875 630 630 2,135

Fixed Cost 1,110,200

Composites (Break-Even) 520

Units in a comp Total Units
A 12.50 6,500 12.5x520
B 17.50 9,100 17.5x520
C 10.00 5,200 10.0x520

Break Even in Rupees

CM of a Comp Unit 875 630 630 2,135

(1750x50%) (1,400x45%) (2,100x30%)

Total Sales in a composit (Rs) (1,750+1,400+2,100) 5,250

Weighted average CM Ratio for the company (2,135/5250) 40.667%

Fixed Cost 1,110,200

Break even in Rupees 2,730,000

Ratio in Rupees Rupees to BE

A 1,750.00 910,000 2.73x1750/5250
B 1,400.00 728,000 2.73x1400/5250
C 2,100.00 1,092,000 2.73x2100/5250
5,250.00 2,730,000

Question 2

Following is the budgeted sales of 3 products of Jamal and copmany:

X Y Z Total
Sales (Rs) 5,100,000 6,750,000 3,150,000 15,000,000
Variable Cost 2,320,500 3,543,750 1,496,250 7,360,500
Annual Fixed Cost 5,831,485

Required
Calculate break even point in Rs.

Total Sales 15,000,000

Total Variable Cost (7,360,500)
Total CM in Rupees 7,639,500
CM Ratio for the company 50.93%

Annual Fixed Cost 5,831,485

Break Even in Rupees 11,450,000

Breakup
A B C
Ratio 34.00% 45.00% 21.00% (Sales/Total Sales)

BE Sales in Rupees 3,893,000 5,152,500 2,404,500 11,450,000

Question
A B C
-------------Rupees-----------
Sales 2,500 1,600 900
Direct Material (1,100) (640) (324)
Direct Labour (200) (180) (120)
Selling and distrib (200) (150) (125)
Admin (All Fixed) (120) (65) (42)

Factory overheads amounted to Rs 450 which include:

1. Indirect Labour of Rs 60 (83.33333% is variable and vary as per direct labour)
2. Power cost of Rs 120 (90% is variable and vary as per direct labour)

Selling and distribution expenses include:

1. Commission of 3%, 4% and 5% of sales of A, B and C.
2. Distribution expense of 2% for A and B and 4% for C
3. All others are fixed

Required
Break even in Rs

A B C
A B C Total
Sales 2,500 1,600 900 5,000
Direct Material (1,100) (640) (324) (2,064) Total CM 1,980
Direct Labour (200) (180) (120) (500) Total Sales 5,000
Indirect (60x83.33%) (20.00) (18.00) (12.00) (50) CM Ratio 39.60%
Power (36.00) (32.40) (21.60) (90)
Commission (3/4/5) (75.00) (64.00) (45.00) (184)
Distribution (2/2/4) (50) (64) (18) (132)
CM 1,019.00 601.60 359.40 1,980

Overheads Allocation of Indirect Labour

Indirect Labour Cost 60 A 50x200/500 20.00

Variable Part (83.33333%) (50) B 50x180/500 18.00
Fixed Cost 10 C 50x120/500 12.00
Variable indirect Labour 50.00
Power Cost Total 120
Variable part (90) Allocation of Variable Power Cost
Fixed Cost 30
A 90x200/500 36.00
Overhead VC FC B 90x180/500 32.40
Indirect Labour 50.00 10.00 C 90x120/500 21.60
Power Cost 90.00 30.00 Variable Power Cost 90.00
Other Cost 270.00
Fixed Overheads 310.00

Selling Overtheads VC FC
Commission 184.00 0.00
Distribution Cost 132.00 0.00
Other Cost 159.00 200+150+125-184-132
Fixed Overheads 159.00

Total Fixed Costs

Overheads 310.00
Selling and Distribution 159.00
Admin OH 227.00
Total Fixed Cost 696.00

Break Even Point

Fixed Cost 696.00

CM Ratio 39.60%
BE Rupees 1,757.58
Question

Following is the profit and loss statement of Ujala Limited for the year ended 31
Dece,nber 2022:

A B C Total
Sales 460,000 280,000 796,000
Variable Cost (276,000) (140,000) (517,400)
Contribution Margin 184,000 140,000 278,600 602,600
Fixed Cost (353,086)
Net Profit 249,514

Projections for 2023

1. Selling prices of A,B and C will increase by 10%, 6% and 11% in 2023
2. Variable costs will increase by 8% for all the products
3. Fixed Cost will increase by 20%.

Required
Calculate total sales required to achive a profit of Rs 600,000
Question 1

Shansha Limited has incurred a loss in 2020. Following is the profit and loss account for the company;

(Rupees)
Sales 800,000
Less Cost of Goods Sold (650,000)
Operating Expenses (250,000)
Profit before tax (100,000)
Tax @ 30% 0
Net Profit after tax (100,000)

Other information
1. 40% of cost of goods sold is fixed
2. 25% of operating cost is variable

Next year the company wishes to earn an after tax profit of Rs 175,000

Required
Calculate the sales required to achieve the target profit

Solution

Sales 800,000
FC VC
Cost of Goods Sold (260,000) (390,000)
Operating Cost (187,500) (62,500) (452,500)
Contribution Margin 347,500
CM % 43.438%

Fixed Cost 447,500

Target Profit 250,000 175,000/70%
CM Required 697,500
CM Ratio 43.44%
Break Even (Rs) 1,605,755

Proof

Sales 1,605,755
VC (56.56%) (908,255)
CM 697,500
Fixed Cost (447,500)
Profit before tax 250,000
Tax @ 30% (75,000)
PAT 175,000
Question 2
Suleman Limited is considering to change the pricing strategy for its only
product "Digitech". Details of the last year results and next year projections are
as under:
2021
Sales 2,500,000
Cost of Goods Sold (1,450,000)
Operating cost (975,000)
PBIT 75,000
Interest (105,000)
PBT (30,000)
Tax @ 40% -
Net Loss (30,000)

Other Information
2. 60% of cost of goods sold and 55% of operating costs are variable.
3. All other costs are fixed

Strategy for next year

1. Selling price to reduce by 10% which would increase the volume by 36%
2. All variable costs would reduce by 10% per unit
3. Fixed cost related to COGS will increase by 16% where as the Fixed operating cost
will increase by 12%. Interest Expense will increase by 5%.

Required
a) Calculate the sales required to achieve a target profit of 250,000.
b) Calculate whether the company would achieve the target profit in the above case

Solution

We know that if selling price and variable cost change by same % CM ratio does
not change. So CM ratio for 2021 will also be applicable for 2022

Cost breakup
VC FC Total
COGS (870,000) (580,000) (1,450,000)
Operating Cost (536,250) (438,750) (975,000)
Interest (105,000) (105,000)
(1,406,250) (1,123,750) (2,530,000)

Sales for 2021 2,500,000

Variable Cost 2021 (1,406,250)
CM for 2021 1,093,750
CM Ratio 43.750%
Fixed Costs 2021 2022
COGS (580,000) x1.16 (672,800)
Operating Cost (438,750) x1.12 (491,400)
Interest (105,000) x1.05 (110,250)
Fixed Cost for 2022 (1,274,450)

Target Profit - After Tax 250,000

Target Profit - Before Tax 416,667

Sales required to achieve target profit

Fixed Costs 1,274,450

Profit before tax 416,667
CM to be generated 1,691,117
CM Ratio 43.75%
Sales required 3,865,410

b) Expected sales in 2022

Sales for 2021 2,500,000

Volume impact 36% up
Price impact 10% down
Sales for 2022 3,060,000

Sales required to achieve profit 3,865,410

Expected sales in 2022 3,060,000
Shortfall (805,410)

By dropping the selling price to 90% to achieve an increase in sales of

36% will not be sufficient to achieve the target profits
Question 1
Jabir bin Hayyan Limited produces three products. Details pertaining to last year
are as under:
A B C
Sales (Rs) 520,000 360,000 760,000
Variable Cost (Rs) (312,000) (180,000) (486,400)
Allocation of Fixed Cost (119,088) (79,392) (198,480)
Net Profit 88,912 100,608 75,120
Tax @ 25% (22,228) (25,152) (18,780)
Net profit after tax 66,684 75,456 56,340

The company wish to double the profit next year.

Required
Assuming that no changes are expected in selling prices, variable costs and fixed
costs of all the products, calculate sales required to achieve the target profit

Solution

Weighted average CM Ratio

A B C Total
Sales (Rs) 520,000 360,000 760,000 1,640,000
Variable Cost (Rs) (312,000) (180,000) (486,400)
Total CM 208,000 180,000 273,600 661,600
Contribution margin ratio 40.341%

Total Fixed Cost 396,960

Target profit (LY x 2 / 75%) 529,280 198,480x2 / 75%
CM to be generated 926,240
CM Ratio (unchanged for next year) 40.34%

Sales required to achieve target profit 2,296,000

Products Ratio Sales

A 520/1,640 728,000
B 360/1,640 504,000
C 760/1,640 1,064,000
2,296,000
Question 2

Following are the products sold be YUMM Limited:

A B
Selling price per unit 640 500
Variable cost per unit (320) (300)
Ratio of sales in units 2 3

Last year's profit and loss account is as under:

Sales 13,900,000
Total Cost (10,370,000)
Profit before tax 3,530,000
Tax (882,500)
Net Profit 2,647,500

Required
1. Calculate break even revenue
2. Calculate additional sales required to achieve a profit of Rs 3 million

Solution

A B
Selling price per unit 640 500
Variable cost per unit (320) (300)
CM per unit 320 200
CM Ratio 50% 40%
Ratio of sales in units 2 3
Ratio of sales in Rs 1,280 1,500 2,780
WA CM 640 600 1,240
WA CM Ratio 44.60% 1,240/2,780

Last year sales 13,900,000

CM Ratio 44.60%
CM Total Earned last year 6,200,000
Variable Cost (Sales - CM) 7,700,000

Total Cost last year 10,370,000

Variable Cost (7,700,000)
Fixed Costs 2,670,000

Break even
Fixed Cost 2,670,000
CM Ratio 44.60%
Break even sales (Rs) 5,985,968

Sales for target profit

Fixed Cost 2,670,000

Target profit 4,000,000 3,000,000/75%
CM to be covered 6,670,000
CM Ratio 44.60%
Break even sales (Rs) 14,953,710

Tax working
Tax paid last year 882,500
Profit before tax 3,530,000
Tax rate 25%

To Prove

Sales 14,953,710
VC (Bal figr) (8,283,710)
CM 6,670,000
Fixed Cost (2,670,000)
PBT 4,000,000
Tax (1,200,000)
PAT 2,800,000
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%