V. Ltd. manufactures and markets a single product. The following information is available:
Rs. per unit Materials 8.00 Conversion costs (variable) 6.00 Dealer’s margin 2.00 Selling price 20.00 Fixed cost Rs.2,50,000 Present sales, 90,000 units Capacity utilization: 60 per cent. There is acute competition. Extra efforts are necessary to sell. Suggestions have been made for increasing sales:
(i) By reducing sales price by 5%
(ii) By increasing dealers margin by 25% over the existing rate.
Calculated the units of sales under both options?
a) Option 1 : 116129 units, Option 2 : 102857 units
b) Option 1 : 102857 units, Option 2 : 116129 units
c) Option 1 : 116139 units, Option 2 : 102867 units
d) Option 1 : 106129 units, Option 2 : 112857 units
Answers
Answer:
Option 1 : 116129 units, Option 2 : 102857 units
Explanation:
b) Calculation of present profit `
Selling price per unit A 20.00
Material cost per unit 8.00
Conversion cost per unit 6.00
Dealer‘s margin per unit 2.00
Variable cost per unit B 16.00
Contribution per unit A – B 4.00
Total contribution (` 4 x 90,000 units) 3,60,000
Less : fixed cost 2,50,000
Profit 110,000
The present profit can be maintained by keeping total contribution at present level of ` 3,60,000
(i) Reducing sales price by 5%
Reducing sales price by 5% New selling price per unit = 20 – 1 = ` 19.00
New dealer‘s margin per unit = 19 x 10/100 = ` 1.90
New variable cost per unit = 8 + 6 +1.90 = ` 15.90
New contribution per unit = 19.00 – 15.90 = ` 3.10
Desired sales (units) to maintain the present level of profit : = Desired contribution/ New contribution per unit = 3,60,000/3.10 = 116129
(ii) Increasing dealer‘s margin by 25%
New dealer‘s margin per unit = 2 + 25% of 2 = ` 2.50
New variable cost per unit = 8 + 6 + 2.50 = ` 16.50
New contribution per unit = 20.00 – 16.50 = ` 3.50
Desired sales (units) required to maintain the present level of profit = Desired contribution/ New contribution per unit = 3,60,000/ 3.50=102875