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FINANCIAL DECISION MAKING – II

Unit I
Problems on Decision Analysis

1. Calculate BEP, when variable cost per unit is Rs. 2, total fixed cost are Rs. 40,000 and
selling price per unit is Rs. 3.

2. Find the amount of variable cost from the following information.

Sales Rs. 2,85,000
Fixed Cost Rs. 50,000
Profit Rs . 60,000

3. Calculate Break Even Point from the following figures :

Sales Rs. 3,00,000
Fixed Expenses Rs. 75,000
Direct Material Rs. 1,00,000
Direct Labour Rs. 60,000
Direct Expenses Rs. 40,000

4. A company’s turnover in a year was Rs. 50 lakhs and its profit Rs. 5 lakhs. Its p/v
ratio was 40 %, what was the BEP ?

5. From the following data, find out BEP and the selling price per unit, if the BEP is
brought down to 2,000 units.
Fixed Expenses = Rs. 20,000
Selling Price per unit = Rs. 25
Variable Cost per unit = Rs. 20

6. From the following figures, calculate the sales required to earn a profit of Rs. 1,20,000.
Sales Rs. 6,00,000
Variable Cost Rs. 3,75,000
Fixed Cost Rs. 1,80,000

7. When sales are Rs. 1,00,000, total costs Rs. 80,000, fixed costs Rs. 20,000 and the
net profit Rs. 20,000, calculate the P/V Ratio, BEP and MOS.

8. From the following data, calculate the break even point :

Selling price per unit Rs. 20
Direct material cost per unit Rs. 8
Direct labour cost per unit Rs. 2
Direct expenses per unit Rs. 2
Variable overhead per unit Rs. 3
Fixed overheads (total) Rs. 20,000
If sales are 20 % above break even point, determine net profit.
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9. You are required to calculate BEP from the following information :

Fixed Cost = Rs. 80,000
Variable Cost per unit = Rs. 4
Estimated Sales = Rs. 2,00,000
Selling Price per unit = Rs. 2

10. You are given the following data for the year 1978 of ‘X’ company.
Variable Costs 6,00,000 60 %
Fixed Costs 3,00,000 30 %
Net Profit 1,00,000 10 %
10,00,000 100 %
Find out (a) Break Even Point (b) P/V ratio and (c) Margin of Safety Ratio.

11. Find out (a) BEP and (b) Profit from sales of Rs. 40,000, when selling price is Rs. 5,
marginal cost is Rs. 3 and fixed expenses are Rs. 10,000.

12. Suppose the break even sale is Rs. 10,00,000, fixed costs Rs. 4,00,000, Compute

(a) Contribution - Sales Ratio

(b) Sales price per unit if variable cost are Rs. 12 per unit.
(c) Margin of safety if 80,000 units are sold.

13. Given P/V Ratio as 40 %, profit Rs. 2,00,000 and sales Rs. 10,00,000. Calculate (a)
Fixed cost (b) variable cost (c) BEP and (d) MOS.

14. Find P/V ratio and margin of safety when Sales, Variable Costs and Fixed Costs are Rs.
Ten lakhs, Four lakhs and four lakhs respectively.

15. From the following information, calculate the BEP and turnover required to earn a profit
of Rs. 3,00,000. Fixed Overheads Rs. 2,10,000, variable cost per unit Rs. 20, selling
price per unit Rs. 50. If the company is earning a profit of Rs. 3,00,000, express the
margin of safety available to it.

16. Calculate the P/V Ratio, BEP and Sales required to earn a profit of Rs. 1,20,000.

Details First Year Second Year

Sales Rs. 4,50,000 Rs. 5,10,000
Profit Rs. 60,000 Rs. 75,000

17. Given :
2015 2016
Sales 10,00,000 12,00,000
Profit 2,00,000 2,50,000
Calculate (a) P/V Ratio and (b) BEP
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18. The following figures for profit and sales are obtained from the accounts of X Co., Ltd.
Sales Profit
2018 20,000 2,000
2019 30,000 4,000
Calculate (a) P/V Ratio (b) Fixed Cost (c) Break Even Sales (d) Profit at Sales of
Rs. 40,000, and (e) Sales to earn a profit of Rs. 5,000.

19. The sales and profit for 2016 and 2017 are as follows :

Year Sales Profit

2016 1,50,000 20,000
2017 1,70,000 25,000
Find out :
(a) P / V Ratio
(b) BEP
(c) Sales for a Profit of Rs. 40,000
(d) Profit for Sales of Rs. 2,50,000 and
(e) MOS at a Profit of Rs. 50,000

20. From the following data, which product would you recommend to be manufactured in a
factory time being the key factor ?

Particulars Product A (per unit) Product B (per unit)

Direct Material 24 14

Direct Labour at Re. 1 per hour 2 3

Variable Overheads at Rs. 2 per hour 4 6

Selling Price 100 110

Standard Time to Produce 2 Hours 3 Hours

21. Sales Rs. 2,00,000 ; Profit Rs. 20,000 ; Variable Costs 60 % ; you are required to
calculate :
(i) P/V Ratio
(ii) Fixed Cost
(iii) Sales volume to earn a profit of Rs. 50,000.

22. A company finds that while it costs Rs. 6.25 each to make component “X”, the same is
available in the market at Rs. 5.75 each, with assurance of continued supply. The
break down of costs is :
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Material Rs. 2.75 each

Labour Rs. 1.75 each
Other Variable Cost Re 0.50 each
Other Fixed Cost Rs. 1.25 each
Total Cost Rs. 6.25 each
(a) Should you make or buy ?
(b) What should be your decision if the supplier offers the component at Rs. 4.85
each ?

23. Following information relates to Coromandal Co., Ltd., which produces washing
machines.
Cost (per unit) Material Rs. 50, Labour Rs. 25, Direct Expenses Rs. 15, Fixed
Expenses Rs. 10, Profit Rs. 20, Selling Price Rs. 120.
The production capacity of the factory is 10,000 units. At present, a supplier has offered
to sell the same item for Rs. 95. Should the company produce the item or buy it from the
supplier ? Give reasons.

24. Given margin of safety Rs. 20,000 (which represents 20 % of sales) and p/v ratio =
50 %, find out the break even sales, fixed cost and profit ?

25. An analysis of Sultan Manufacturing Co., Ltd., led to the following information :

Variable Cost Fixed Cost

(% of Sales) (Rs)
Direct Materials 32.8 ----
Direct Labour 28.4 ----
Factory Overheads 12.6 1,89,900
Distribution Overheads 4.1 58,400
General Administration Overheads 1.1 66,700

Budgeted sales are Rs. 18,50,000. You are required to determine : (i) Break even
sales value (ii) Profit at the budgeted sales value (iii) Profit if actual sales (a) drop by
10 % (b) Increase by 5 % from budgeted sales.

26. Two businesses X Ltd., and Y Ltd., manufacture and sell the same type of product in
the same type of market. The budgeted profit and loss accounts for the coming year are :
X Ltd. Y Ltd.
Sales 30,000 30,000
Variable Cost 24,000 20,000
Fixed Cost 3,000 7,000
27,000 27,000
Estimated Profit 3,000 3,000
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Required :
(a) Calculate the BEP and MOS of each business.
(b) State which business is likely to earn greater profits in conditions of :
(i) Heavy demand of the product.
(ii) Low demand of the product.

27. Following information has been made available from the cost records of ABC Ltd.,
manufacturing spare parts.

Direct Materials
X = Rs. 8 per unit
Y = Rs. 6 per unit
Direct Wages
X = 24 hours @ Re. 0.25 per hour
Y = 16 hours @ Re. 0.25 per hour
Variable Overheads @ 150 % of direct wages.
Fixed Overheads (total) = Rs. 750.
Selling Price
X = Rs. 25 per unit
Y = Rs. 20 per unit

The directors want to be acquainted with the desirability of adopting any one of the
following alternative sales mixes in the budget for the next period.
(a) 250 units of X and 250 units of Y.
(b) 400 units of X only.
(c) 400 units of X and 100 units of Y.
(d) 150 units of X and 350 units of Y.

State which of the alternative sales mixes would you recommend to the management.

28. Ramakanth Ltd., manufactures a product, whose cost structure is as follows :

Material Rs. 34
Labour Rs. 13
Services (Rs. 2 fixed) Rs. 6
Factory overhead (fixed) Rs. 7
Office overhead (fixed) Rs. 2
Rs. 62
Add : Profit Rs. 6
Selling Price Rs. 68

Vijay Ltd., a subsidiary of a Hong Kong based company has approached Ramakanth
Ltd., to buy 10,000 units of the product at Rs. 55 per unit for sale in Hong Kong. The
management of Ramakanth Ltd., wants to reject the offer as it is below cost price.
There is spare capacity to manufacture the 10,000 units. What is your advise ?
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29. Manik Ltd., produces a product that can be further broken down into 3 parts namely A,
B and C. Every month, it produces 50,000 units of A ; 20,000 units of B and
30,000 units of C at a cost of Rs. 15,00,000. These costs are apportioned to the three
products in the ratio of number of units produced i.e., 5 : 2 : 3.

Each of the three parts can be further processed, the details of which are as under :
A B C
Selling price per unit at Split 15.00 8.00 10.00
Further processing cost per unit 5.00 3.00 4.00
Selling price per unit after further
-processing 23.00 15.00 13.00

Should Manik Ltd process the 3 Products further ?

30. Pravek Ltd., manufactures 3 products X, Y and Z. Following are the budgets prepared
for the 3 products for the year 2019

Particulars X (Rs) Y (Rs) Z (Rs) Total (Rs)

Sales 90,000 4,50,000 60,000 6,00,000
Production Cost
Variable 48,000 2,88,000 24,000 3,60,000
Fixed 6,000 96,000 18,000 1,20,000
54,000 3,84,000 42,000 4,80,000
Selling and
Administration
Variable 16,200 16,200 15,600 48,000
Fixed 4,200 3,600 4,200 12,000
Total Cost 74,400 4,03,800 61,800 5,40,000
Profit 15,600 46,200 (1,800) 60,000

The Board is of the view tht product Z should be dropped, as it is making losses. State
your views with reasons.

31. ABC Ltd., produces 3 products -- X, Y and Z, the details of which are given below :

X (Rs) Y (Rs) Z (Rs)

Selling price per unit 630.00 780.00 1,100.00
Cost per unit
Direct Material 330.00 240.00 330.00
Direct Labour 120.00 240.00 300.00
Overheads 120.00 210.00 300.00
570.00 690.00 930.00
Profit per unit 60.00 90.00 170.00
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The factory has only 100 workers who work for 8 hours a day after accounting for idle
time. Rs. 480 per day is paid to each one of them. The management wants to
maximize profit by discontinuing product X and focusing on only Y and Z. The
maximum number of units that can be sold of each product are as under :

X = 200 units, Y = 300 units and Z = 100 units. Assume that 50 % of overheads are
variable. There will be no change in fixed overheads irrespective of the product mix.

What is your advise to the management ?

32. A manufacturing firm produces 40,000 units by operating 60 % of the capacity and
sells at a price of Rs. 30 per unit. The budgeted figures for the year 2018 are as
follows :
Raw Material @ Rs. 4.25 = Rs. 1,70,000
Direct Labour @ Rs. 5.75 = Rs. 2,30,000
Fixed Factory Overheads = Rs. 2,50,000
Variable Factory Overheads @ Rs. 7.75 = Rs. 3,10,000
Selling and Administrative Overheads = Rs. 1,45,000
Variable Selling Costs 2.75 % of selling price.
The firm receives a special order for 20,000 units for other country. The firm desires to
earn a profit of Re. 1 per unit and so selling expenses are to be incurred for the special
order.

33. Moin Ltd., is at present operating at 80 % capacity level, the production being 30,000
units annually. The company operates a flexible budgetary control system. The following
relevant cost data are obtained from the company’s budget at different capacity utilization
levels :

Particulars Capacity utilization levels

80 % 100 %
Sales 40,00,000 50,00,000
Variable Overheads 4,50,000 5,00,000
Semi-Variable Overheads 2,10,000 2,22,000
Fixed Overheads 8,00,000 9,40,000
Output (in units) 30,000 37,500

Material and Labour cost per unit are constant under present conditions. The
management expects a profit margin of 10 % on sales.

You are required to compute the differential cost of producing the additional 7,500 units
by increasing the capacity utilization level to 100 percent and the minimum price per unit
at 10 % profit on cost.
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34. There are two similar plants under the same management. The management desires to
merge these two plants. The following particulars are available :

Plant I Plant II
Capacity Operation 100 % 60 %
Sales Rs. 300 lakhs Rs. 120 lakhs
Variable Costs Rs. 220 lakhs Rs. 90 lakhs
Fixed Costs Rs. 40 lakhs Rs. 20 lakhs

You are required to calculate :

(a) What would be the capacity of the merged plant to be operated for break even.
(b) What is the profitability on working at 75 % of the merged capacity.

35. A company produces variety of products and components. Following components with
relevant manufacturing costs are under consideration for purchase outside.

Component Direct Direct Labour Variable Fixed Costs Bought out

Name Material (Rs) Overheads (Rs) price
(Rs) (Rs) (Rs)
XY 600 200 100 300 800

PR 200 800 200 1,000 2,300

MN 100 300 200 500 1,200

Select the components which should be bought from outside, indicating reason for
choice.

36. A part used in the assembly of a final product is manufactured by Vijay & Co., in two
operations. Originally 1,50,000 parts are manufactured each year with total
manufacturing costs as follows :

Operation I Rs. Operation II Rs.

Direct Materials 84,000 Total of Operation I b/d 2,16,000

Direct Labour 78,000 Direct Labour 23,000

Variable costs of supplies and Variable costs of supplies

Indirect material 18,000 and Indirect material 11,000

Allocated costs of plant Allocated costs of plant

Occupancy 36,000 occupancy 27,000

2,16,000 2,77,000
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Operation I can be eliminated if these parts are purchased from outside supplier at a
price of Rs. 1.10 per unit. The space used for operation I can be rented for Rs.
6,000a year. The parts purchased from outside supplier will still have to be
put throughoperation II.

Should the parts be manufactured or should they be purchased ? Give computations

to support your conclusion.

37. Mamta Ltd., manufactures 3 products, namely Heavy, Medium and Light, the
details of which are given below :

Heavy Medium Light

Selling Price per unit 80 50 40

Direct Material per unit 30 25 20

Other Variable Cost per unit 14 11 8

Fixed Overheads per unit 10 8 7

54 44 35

Material consumed per unit 10 kg 6 kg 4 kg

The company is thinking of discontinuing one product and focus on the other two :

(i) If there are no limitations on either material, labour or sales, which

productsshould be discontinued ?
(ii) Assuming that material is in short supply, which product should be
discontinued ? Fixed overheads will remains constant irrespective of product
mix.

38. Sanjay Ltd., manufactures a product whose cost details are given below :
Rs.
Material 35.00
Labour 12.50
Factory Overhead (50 % fixed) 62.50
Sales Overhead (25 % variable) 8.00
Total cost of 60,000 units produced 118.00

The company sells 60,000 units of the product at Rs. 143 per unit in the domestic
market. It receives an order to supply 20,000 units of the product at Rs. 98 per unit,
which will be sold in the foreign market. There is sufficient spare capacity available with
the company. Should the company accept or reject the offer ?
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39. Deepak Ltd., makes an average profit of Rs. 30 per unit by selling a product at Rs. 450
per unit whose cost break up is as under :
Material Rs. 105
Wages 40
Factory Overhead 180 (at 60 % capacity, 50 % fixed)
Sales Overhead 40 (25 % variable)

The company currently produces 6,000 units. For the coming year, it receives an order
from a large retain chain for supply of 2,000 units. It anticipates that material and
wages will increase by 6 % and 8 % respectively while fixed overheads will go up by
10 %. The company wants to earn a profit of Rs. 6 lakhs in the coming year but it
cannot increase its selling price in the normal market. What price can it accept the order
for 2,000 units.

40. Pankaj Industries produces 3 types of Detergents, Light, Strong and White, the details
of which are as under :
Light Strong White
Material 300 480 180
Labour 220 300 80
Variable Overhead 240 360 160
Fixed Overhead 240 360 240
Selling Price 1,360 1,800 760
Number of Units 1,000 1,500 2,000

The Management wishes to focus only on 2 products. The Sales Manager states that if
a product is discontinued, the other two products can be increased by 50 %. What is
your advise to the management ?