From the following information find out :
(a) Contribution
(b) B.E.P. in units
(c) Margin of safety at present sale
(d) Profit for a sale of Rs. 20,000
(e) Sales required to earn a profit of Rs. 6,000.
Total fixed cost Rs. 4,500; Total variable costs Rs. 7,500; Total sales Rs. 15,000;
Number of units sold 5,000.
Answers
GIVEN:
Total fixed cost = Rs. 4,500
Total variable costs = Rs. 7,500
Total sales = Rs. 15,000
Number of units sold = 5,000
TO FIND :
(a)Contribution
(b) B.E.P. in units
(c) Margin of safety at present sale
(d) Profit for a sale of Rs. 20,000
(e) Sales required to earn a profit of Rs. 6,000
SOLUTION:
- Contribution, is an important aspect while operating a business. It clearly tells about the returns a company make with each unit sold.
- To find it following formula is use
(a) Contribution = Total sales - Vriable Cost
= 15,000 - 7,500
= Rs. 7,500
- B.E.P. or break even point in units is the point of no profit or loss.
- This can be formulated as:
(b) B.E.P. in units = Fixed cost / Contribution per unit
We have contribution as Rs. 7,500 but to calculate Contribution per unit, we need to divide contribution by number of units sold
Contribution per unit = 7,500/5,000
= 1.5
B.E.P. in units = 4,500/ 1.5
= 3,000
- Margin of safety as the name suggests work as a safety where a company can incur certain losses without having major impacts.
- This can be formulated as:
(c) Margin of safety = Total sales - Break even point
= 15,000 - 3,000
= 12,000
- Profit for a sale of Rs. 20,000
(d) Sales for desired for profit = Fixed Cost+Desired Profit
/ Profit volume ratio
Profit volume ratio = Contribution/ sales × 100
= 7,500/15,000×100
= 50%
Sales for desired for profit = 4,500 + Profit/ 50%
20,000 = 4,500 + Profit/ 50%
Profit = 20,000 - 4,500 × 50%
= 15,500 × 50%
= Rs. 7,750
- Sales required to earn a profit of Rs. 6,000
(e) Sales for desired for profit = Fixed Cost+Desired Profit/ Profit volume ratio
Sales for desired for profit = 4,500 + 6,000/ 50%
= 10,500/ 50%
= Rs. 21,000