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Question
Ruby Industries Ltd. furnish the following information for the year 2018.
| Sales | (Rs.) 2,00,000 |
| Variable Cost | (Rs.) 1,00,000 |
| Fixed Cost | (Rs.) 50,000 |
(1) Find: PN Ratio, BEP (Sales) and Margin of Safety.
(2) Calculate the effect of the following :
(a) 10% increase in Selling:Price,
(b) 5% Decrease in Variable Cost, and
( c) 10% Decrease in Fixed Cost.
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Solution
(1) Present Position :
Contribution (C) = Sales - Variable Cost
∴ Contribution (C) = Rs. 2,00,000 - Rs. 1,00,000
∴ Contribution (C) = 1,00,000
(a) P/V Ratio `="Contribution"/"Sales"xx100`
`=(1,00,000)/(2,00,000)xx100`
= 50%
(b) BEP (Sales) `="Fixed Cost"/"P/V Ratio"`
`=(50,000)/(50%)`
= Rs. 1,00,000
(c) Margin of Safety = Sales - BEP Sales
= Rs. 2,00,000 - Rs. 1,00,000
= Rs. 1,00,000
(2) (a) 10% Increase in Selling Price:
Present Sales = 2,00,000
Add: 10% Increase = 20,000
New Sales = 2,20,000
P/V Ratio = `"C"/"S"xx100`
`=(2,20,000 - 1,00,000)/(2,20,000)xx100`
`=(1,20,000)/(2,20,000)xx100`
= 54.45%
BEP (Sales) `="Fixed Cost"/"P/V Ratio"= (50,000)/(54.45%)`
= Rs. 91,676
Margin of Safety = Actual Sales - BEP Sales
= 2,20,000 - 91,676
= Rs. 1,28,324
(b) 5% Decrease in Variable Cost:
Present Variable Cost = 1,00,000
(-) 5% Decrease = 5,000
New Variable Cost = Rs. 95,000
P/V Ratio = `"C"/"S"xx 100`
`=(2,00,000-95,000)/(2,00,000)xx100`
`=(1,05,000)/(2,00,000)xx100`
= 52.5%
BEP (Sales) =` "Fixed Cost"/"P/V Ratio"`
`=(50,000)/(52.5%)`
= Rs. 95,238
Margin of Safety = Actual Sales - BEP Sales
= 2,00,000 - 95,238
= Rs. 1,04,762
(c) 10% Decrease in Fixed Cost:
Present Fixed Cost = 50,000
(-) 10% Decrease = 5,000
New Fixed Cost = 45,000
P/V Ratio = 50%
No change as Fixed Cost does not affect the P/V Ratio.
BEP (Sales) `="Fixed Cost"/"P/V Ratio"`
`= ("Rs."45,000)/(50%)`
= Rs. 90,000
Margin of Safety = Sales - BEP Sales
= Rs. 2,00,000 - Rs. 90,000
= Rs. 1,10,000
