2. The sales and profit during two years were as follows. Year Sales (Rs.) Profit (Rs.) 2001 1,50,000 20,000 2002 1,70,000 25,000 You are required calculate (a) P.V. ratio (b) Fixed cost (c) Break even sales (d) The sales required to earn a profit of Rs. 100,000 (e) The profit made when sales are Rs. 3, 50,000
Answers
Answer:
point
20. The characteristics of
Accounting are:
O
(a) A perspective employee is
interviewed
o
(b) According to accounting
tradition all the assets which are in
the possession of business are
called goods.
O
(C) Recording of Financial
Transactions only
0 (d) Recording in terms of money
Answer: Below is the explanation of each part :
Explanation:
(a) The P.V. ratio, or Profit-Volume ratio, is a useful tool for analyzing the profitability of a business. It is calculated as the ratio of the contribution margin (sales minus variable costs) to sales. The formula for P.V. ratio is:
P.V. ratio = (contribution / sales) x 100%
Using the given data, we can calculate the P.V. ratio for the two years as follows:
For 2001:
Contribution = Sales - Variable Costs = 1,50,000 - 1,30,000 = 20,000
P.V. ratio = (20,000 / 1,50,000) x 100% = 13.33%
For 2002:
Contribution = Sales - Variable Costs = 1,70,000 - 1,45,000 = 25,000
P.V. ratio = (25,000 / 1,70,000) x 100% = 14.71%
(b) The fixed cost is the amount of expense that does not vary with the level of production or sales. We can use the P.V. ratio to calculate the fixed cost as follows:
Fixed Cost = Total Cost - Variable Cost
Total Cost = Sales - Profit
Variable Cost = Sales x (1 - P.V. ratio)
For 2001:
Fixed Cost = 1,50,000 - 20,000 / (1 - 0.1333) = Rs. 1,46,667
For 2002:
Fixed Cost = 1,70,000 - 25,000 / (1 - 0.1471) = Rs. 1,51,316
(c) The break-even point is the level of sales at which the total cost is equal to total revenue, resulting in zero profit or loss. We can calculate the break-even sales using the formula:
Break-even sales = Fixed cost / P.V. ratio
For 2001:
Break-even sales = 1,46,667 / 0.1333 = Rs. 11,00,498
For 2002:
Break-even sales = 1,51,316 / 0.1471 = Rs. 10,27,174
(d) To calculate the sales required to earn a profit of Rs. 100,000, we can use the formula:
Profit = (Sales x P.V. ratio) - Fixed cost
Rearranging the formula, we get:
Sales = (Fixed cost + Profit) / P.V. ratio
For both years, the calculation would be:
Sales = (Fixed cost + 1,00,000) / P.V. ratio
(e) Finally, to determine the profit made when sales are Rs. 3,50,000, we can use the P.V. ratio and fixed cost to calculate the contribution margin, and then subtract the fixed cost to arrive at the profit.
For 2001:
Contribution margin = 3,50,000 x 0.1333 = Rs. 46,655
Profit = Contribution margin - Fixed cost = 46,655 - 1,46,667 = -1,00,012
For 2002:
Contribution margin = 3,50,000 x 0.1471 = Rs. 51,485
Profit = Contribution margin - Fixed cost = 51,485 - 1,51,316 = -99,831
These calculations show the importance of understanding the relationship between sales, costs, and profits in order to make informed decisions about a business's future direction.
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