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Question
The Directors of Steel Manufacturing Co. gives the following information.
| Sales - (1,00,000 units) | (Rs.) 1,00,000 |
| Variable Costs | (Rs.) 40,000 |
| Fixed Costs | (Rs.) 50,000 |
(i) Find out PN Ratio, Break Even Point & Margin of Safety.
(ii) In case of 20% increase In Physical Sales Volume, calculate P/V Ratio, Break Even Point & Margin of Safety.
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Solution
(i) Contribution = S - VC
∴ Contribution = Rs. 1,00,000 (-) Rs. 40,000
Contribution = Rs. 60,000
P/V Ratio = `"C"/"S"xx100`
`= ("Rs." 60,000)/("Rs." 1,00,000)xx100` = 60%
BEP =`"Fixed Cost"/"P/V Ratio"`
`=("Rs."50,000)/(60%)`
= Rs. 83,333.33
Margin of Safety (MOS) - Actual Sales (-) BEP Sales
= Rs. 1,00,000 (-) Rs. 83,333
= Rs. 16,667
(ii) 20% Increase in Physical Sales Volume :
Present Sales Volume 1,00,000 Units
Add : 20% Increase 20,000 Units
1,20,000 Units
Existing Sales = 1/- per unit (Rs. 1,00,000 + 1,00,000 Units)
∴ New Revised Sales 1,20,000 Units x Rs. 1 = Rs.1,20,000
Now, Contribution = S - VC
∴ Revised Contribution = Rs. 1,20,000 (-) Rs. 40,000
∴ Revised Contribution = Rs. 80,000
Revised P/V Ratio `="C"/"S"xx100`
`=(80,000)/(1,20,000)xx100`
= 66.67%
Revised BEP = `"FC"/"P/V Ratio"`
`=("Rs."50,000)/(66.67%)`
= Rs. 74,996.25
Revised Margin of Safety = Actual Sales (- ) BEP Sales
= Rs. 1,20,000 (-) Rs. 74,996.25
= Rs. 45,003.75
