Question

Operations of Jayathi Co Lts. In 2001 disclosed a margin of safety ratio of 20% and a contribution margin ratio of 60%. (a) Calculate the net income for 2001 assuming the fixed costs to be (i) Rs.60,000 and (ii) Rs.24,000 (b) Present income statement to prove your answer to question (a)

Answer 1

Answer:

Rs.24,000 (b) Present

60,000

Answer 2

Given:

• Operations of Jayathi Co Lts. In 2001 disclosed a margin of safety ratio of 20% and
• a contribution margin ratio of 60%

(a) Margin of safety is computed as,

MOS Ratio Current Sales level - Breaken point

Breakeven sales = Fixed Cost/Contribution

Margin Ratio

(1) Where fixed costs 60,000 and Contribution Margin Ratio = 60%

Breakeven sales 60,000/60% = 100,000

Current Sales * 20% = Current Sales - Breakeven sales

Current Sales = Breakeven Sales: (100-MoS) %

Current Sales = Breakeven Sales/80%

= 125,000

Net Income = (Current Sales * Contribution Margin Ratio) - Fixed Cost

= 125000*60% - 60,000

= 15,000

(ii) Fixed Cost = 24000

• Breakeven Sales = 24,000/60% =40,000
• Current Sales = 40,000/(100-20)% =50000
• Net Income = 50,000*60% - 24000 = 6,000.

(b) Income statement would be as follows,

Particulars. (i) (ii)

• Sales 125,000 50,000
• Less: Variable Cost

(Sales * (100-Contribute Margin Ratio %)

-50000. -20000

• Contribution Margin 75,000. 30000
• Fixed Cost -60,000. -24,000
• Net Income 15,000 6,000

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