[A9Q3]

Q.3 Solvent Limited has two divisions each of which makes a different product. The budgeted data for
the next year is as under:

Product A Product B
Rupees
Sales 200,000,000 150,000,000
Direct material 45,000,000 30,000,000
Direct labour 60,000,000 45,000,000
Factory overheads 35,000,000 15,000,000
Price per unit 20 25

Details of factory overheads are as follows:

(i) Product A is stored in a rented warehouse whose rent is Rs. 0.25 million per month. Product B is
required to be stored under special conditions. It is stored in a third party warehouse and the
company has to pay rent on the basis of space utilized. The rent has been budgeted at Rs. 0.12
million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed.
(iii) Depreciation for assets pertaining to product A and B is Rs. 6.0 million and Rs. 2.0 million
respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units and the
total cost has been budgeted at Rs. 4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the
same, as has been budgeted above. (14)

NOTE (Lec # 100):

 Agr fixed cost multiple break-even ka question ha, fixed cost bannt kr di huwi ha lekin humne phir
bhi oss sari fixed cost ko “add” kar k combine break-even nikal’na ha.
Solution [Q-3 Aut-09]
Solvent Limited
A B
Sale units [Sales amount / sale price] (million) [a] 10.00 6.00

Sale units total [10 + 6] (million) [b] 16.00

A B
------- Rs. million -------
Sales 200.00 150.00
Material 45.00 30.00
Labor 60.00 45.00
Variable OH (W-1) 5.60 5.34
110.60 80.34
Contribution [c] 89.40 69.66

Contribution per unit (Rs.) [c/a] 8.94 11.61

W. average contribution per unit (Rs.) [8.94 x 10/16 + 11.61 x 6/16] 9.94

Combined B/E units (million) [Rs. 39.06m (W-1) ÷ Rs. 9.94] 3.930

Product-wise B/E
Units Price Revenue
(million) (Rs.) (Rs. million)

A [3.93 x 10/16] 2.456 20.00 49.120

B [3.93 x 6/16] 1.474 25.00 36.850
3.930 85.970

W-1 ----------- Rs. million ----------

A B Total
Total OH [35 + 15] 50.00
Variable OH:
Rent [120,000 x 12] - 1.44 1.44
Indirect labor [60 x 20% x 30%] [45 x 20% x 30%] 3.60 2.70 6.30
Elect. [4m / 16m x 80% x 10m] [4m / 16m x 80% x 6m] 2.00 1.20 3.20
5.60 5.34 10.94
Total fixed 39.06
[A18Q2]

Q.2 Basketball (Private) Limited (BPL) is in the process of planning for the next year. BPL is
currently operating at 70% of the production capacity. The management wants to achieve
an increase of Rs. 36 million in profit after tax of the latest year.

The summarized statement of profit or loss for the latest year is as follows:

Rs. in million
Sales 567
Cost of sales (60% variable) (400)
Gross profit 167
Operating expenses (40% variable) (47)
Profit before tax 120
Tax (25%) (30)
Profit after tax 90

Following are the major assumptions/projections for the next year’s budget:

(i) Selling price of all products would be increased by 8%. However, to avoid any adverse impact
of price increase, 10% discount would be offered to the large customers who purchase about
30% of the total sales. Additionally, distributor commission would be increased from 2% to
3% of net selling price.
(ii) Average variable costs other than distributor commission are projected to increase by 4%
while fixed costs other than depreciation are projected to increase by 5%.
(iii) Depreciation for the latest year was Rs. 90 million and would remain constant.

Required:
(a) Compute the amount of sales required to achieve the target profit. (09)
(b) Determine the production capacity that would be utilized to achieve the sales as computed in (a)
above. (02)
Q-32 Aut-18 [ALTERNATIVE SOLUTION]
(a)

Rs. million
Target sales [6.42 million (W-1) x Rs. 104.76 (W-2)] 672.56

W-1 Rs. million

Target PBT [(90 + 36) / 0.75] 168.00
Fixed cost (W-3) 193.11
361.11

Target sale units [Rs. 361.11m / Rs. 56.23 (W-2)] (million units) 6.42

W-2
Last year:
Units sold (assuming sale price at Rs. 100) [567m / 100] (million units) 5.67
Rs.
Sale price 100.00
Variable COS [Rs. 400 m x 60% / 5.67 m] (42.33)
Commission [Rs. 100 x 2%] (2.00)
Other variable operating cost [Rs. 47 m x 40% / 5.67 m - Rs. 2] (1.32)

Next year: Rs.

Average sale price [108 x 70% + 108 x 0.9 x 30%] 104.76
Variable COS [Rs. 42.33 x 1.04] (44.02)
Commission [Rs. 104.76 x 3%] (3.14)
Other variable operating cost [Rs. 1.32 x 1.04] (1.37)
56.23

W-3
Next year fixed costs Rs. million
Fixed COS:
- depreciation 90.00
- other [(400 x 40% - 90) x 1.05] 73.50
Fixed operating expenses [47 x 60% x 1.05] 29.61
193.11

(b)
Total capacity [5.67 / 0.7] (million units) 8.10
Capacity utilization next year [6.42 / 8.10] 79.26%
[A13Q6(a)]
Q.6 (a) Maroof Engineering (ME) produces and markets a single product. In order to keep
pace with the changing technology, ME’s management has decided to install high-tech
machines in its production department which would result not only in improving the
productivity but would also reduce the number of workers from the present level of 500
to 400 workers. Following information is available from ME’s records for the year
ended 31 August 2013:

Sales per month Rs. 12,000,000

Wages paid to workers per month Rs. 2,000,000
Other benefits 35% of wages
Production per month 80,000 units
Profit/volume (P/V) ratio 30%

After the installation of high-tech machines, the company is expected to produce 89,600 units per
month. The management has also decided to pay 1.6% incentive wages to the workers for every 2%
increase in productivity.

Required:
Calculate the annual financial implication of the proposal. (11)
Short term decision making [Q-6(a) Aut-13]
Maroof Engineering

Note:
- It is assumed that total labor cost is variable and already covered in contribution margin of 30%

Rs. million
Existing situation
Sales [Rs. 12m x 12] 144.00
Variable cost:
- Wages (W-1) 32.40
- Other variable cost [Rs. 144m x 70% - Rs. 32.40m] 68.40
100.80

Total contribution 43.20

Proposed situation
Sales [Rs. 144m x 89.6/80] 161.28
Variable cost:
- Wages (W-2) 32.06
- Other variable cost [Rs. 68.40 x 89.6/80] 76.61
108.67

Total contribution 52.61

Annual implication [Rs. 52.61m - Rs. 43.20m] 9.41

W-1 Rs. million

Total wages:
- Basic wages [Rs. 4,000* x 500 x 12] 24.00
- Other benefits [Rs. 24m x 35%] 8.40
32.40
* Wage cost per worker [Rs. 2m / 500] = Rs. 4,000

W-2
Total wages:
- Basic wages [Rs. 4,000 x 400 x 12] 19.20
- Incentives [Rs. 19.20 m x 32%(W-2.1)] 6.14
- Other benefits [Rs. 19.20 m x 35%] 6.72
32.06

W-2.1 Incentives Units

Monthly production per worker:
- under proposed situation [89,600/400] 224
- under existing situation [80,000/500] 160
Increase in production 64
% Increase in productivity [64/160] 40%
% Incentive [40 x 1.6/2] 32%
[S22Q4]
Q.4 Rio Limited (RL) operates donut shops in different parts of Karachi and has average monthly
sales of Rs. 4.5 million per shop. RL earns contribution margin of 20%.

RL is now planning to open a shop in Lahore. In this respect, following two rental options
are under consideration:
(i) Annual rent of Rs. 2.52 million payable in advance.
(ii) Monthly rent of Rs. 0.1 million plus 2% commission on total sales, payable at the
end of each month.
Additional information:
(i) RL would introduce customized donuts, in addition to the regular range. The
price of customized donuts will be 15% higher than the regular ones.
(ii) Average monthly sales volume of this shop is expected to be 30% higher than
existing sales. 20% of the sales volume will consist of customized donuts.
(iii) Variable costs consist of 75% cost of making regular donuts which would increase
by 5% in case of customized donuts. The remaining variable costs represent
packaging cost
of all donuts which is expected to increase by 4%.
(iv) Fixed costs (other than rent) is estimated at Rs. 0.8 million per month.
(v) RL can borrow the required funds at 14% per annum.

Required:
Compute net profit per month and margin of safety percentage under both options and
recommend the most suitable option to RL. (10)
Q-4 Spr-22 SOLUTION

Option 1 - Annual rent -------- Rs. 000 --------

Sales:
- Regular donuts [Rs. 4.5m x 1.3 x 80%] 4,680
- Customized donuts [Rs. 4.5m x 1.3 x 20% x 1.15] 1,346
6,026
Less: Variable costs:
- Cost of making (W-1.1) 3,545
- Cost of packing (W-1.2) 1,217
(4,762)
Contribution 1,264
Less: Fixed cost:
- Rent [Rs. 2.52m x 1/12] 210
- Interest on advance rent [Rs. 2.52m x 14% x 1/12] 29
- Other fixed costs 800
(1,039)
Profit 225

C/S ratio [Rs. 1.264m/Rs. 6.026m] 20.97%

B/E sales (Rs. 000) [Rs. 1.039m ÷ 20.97%] 4,955

Margin of safety [(Rs. 6.026m - Rs. 4.955m)/Rs. 6.026m] 17.77%

Option 2 - Monthly rent -------- Rs. 000 --------

Sales:
- Regular donuts [Rs. 4.5m x 1.3 x 80%] 4,680
- Customized donuts [Rs. 4.5m x 1.3 x 20% x 1.15] 1,346
6,026
Less: Variable costs:
- Cost of making (W-1.1) 3,545
- Cost of packing (W-1.2) 1,217
- Commission [6,026 x 2%] 121
(4,883)
Contribution 1,143
Less: Fixed cost:
- Rent 100
- Other fixed costs 800
(900)
Profit 243

C/S ratio [Rs. 1.143m/Rs. 6.026m] 18.97%

B/E sales (Rs. 000) [Rs. 0.9m ÷ 20.97%] 4,742

Margin of safety [(Rs. 6.026m - Rs. 4.742m)/Rs. 6.026m] 21.30%

Conclusion
Option 2 is more appropriate as profit and margin of safety both are higher than Option 1.

W-1 Variable costs Rs. 000

W-1.1 Cost of making
Existing cost of making [Rs. 4.5m x 0.8 x 75%] 2,700

Expected cost of making:

- Regular donuts [Rs. 2.7m x 1.3 x 80%] 2,808
- Customized donuts [Rs. 2.7m x 1.3 x 20% x 1.05] 737
3,545

W-1.2 Cost of packing

Existing cost of packing [Rs. 4.5m x 0.8 x 25%] 900

Expected cost of packing [Rs. 0.9m x 1.3 x 1.04] 1,217

 [A21Q5]
Q.5 Red Limited (RL) manufactures and sells plastic chairs. The relevant details at different demand
levels are as follows:

Demand in units 16,000 14,000 11,800 9,300

--------------------- Rupees --------------------
Sale price (net of 3% distributor
commission) per unit 2,850 2,945 3,040 3,135
Material 20,520,000 18,900,000 15,930,000 12,555,000
Conversion cost 11,403,600 10,750,000 9,374,000 8,299,000
Operating expenses 3,500,000 3,500,000 3,500,000 3,500,000

The management is considering manufacturing either 14,000 chairs or 16,000 chairs. In the above
table, fixed conversion cost increases by 10% if number of chairs manufactured exceeds 13,000.
Further, material cost and variable conversion costs reduce by 5% and 3% respectively, if number of
chairs manufactured exceeds 15,000.

In order to achieve the desired level of sales, RL is also considering to offer 5% sale discount on bulk
order of 25 chairs and 10% sale discount on bulk order of 50 chairs. The sales mix after introduction
of discount is estimated to be in the ratio of [Link] for normal sale, 5% sale discount and 10% sale
discount respectively. It is estimated that introduction of discount would result in increase in
distributor commission by 1% on bulk sale of 25 chairs and 2% on bulk sale of 50 chairs.

Required:
(a) Determine the breakeven revenue and margin of safety units at the demand level of
14,000 and 16,000 chairs. (14)
(b) Briefly discuss any conclusion which may be drawn from your calculation in (a) above.
(02)
Q-5 Aut-21
(a)
At 14,000 chairs demand level
Rs.
Total fixed costs:
- Conversion cost [4,300,000(W-1) x 1.1] 4,730,000
- Operating expenses 3,500,000
8,230,000

Contribution per unit:

Sale price (W-2) 2,960
Commission (W-2) (103)
Material [18.9m ÷ 14,000] (1,350)
Variable conversion (W-1) (430)
1,077

Units
B/E sale [8,230,000 ÷ 1,077] 7,642
Margin of safety [14,000 - 7,642] 6,358

Rs.
B/E sale [Gross] (7,642 x Rs. 2,960] 22,619,127
B/E sale [Net of commission] (7,642 x (Rs. 2,960 - Rs. 103)] 21,832,043

W-1 Fixed conversion cost

For high low method, we will use 9,300 and 11,800 demand levels as total fixed costs and variable
cost per unit remain within this slab.
Units Rs.
9,300 8,299,000
11,800 9,374,000
2,500 1,075,000

Variable conversion cost per unit [1,075,000 ÷ 2,500] = 430

Total fixed conversion cost [9,374,000 - 11,800 x 430] = 4,300,000

W-2 Sale price and commission

Normal 5% discount 10% discount
----------------------- Rs. -----------------------
Sale price 3,036 2,884 2,732
[2,945 ÷ 0.97] [3,036 x 0.95] [3,036 x 0.9]
Commission [3%, 4%, 5%] 91 115 137

Rs.
Average sale price [3,036 x 60% + 2,884 x 30% + 2,732 x 10%] 2,960

Average commission [91 x 60% + 115 x 30% + 137 x 10%] 103

At 16,000 chairs demand level
Rs.
Total fixed costs:
- Conversion cost 4,730,000
- Operating expenses 3,500,000
8,230,000

Contribution per unit:

Sale price (W-3) 2,865
Commission (W-3) (100)
Material [1,350 x 0.95] (1,283)
Variable conversion [430(W-1) x 0.97] (417)
1,065

Units
B/E sale [8,230,000 ÷ 1,065] 7,725
Margin of safety [16,000 - 7,725] 8,275

Rs.
B/E sale [Gross] (7,725 x Rs. 2,865] 22,131,547
B/E sale [Net of commission] (7,725 x (Rs. 2,865 - Rs. 100)] 21,359,067

W-3 Sale price and commission

Normal 5% discount 10% discount
----------------------- Rs. -----------------------
Sale price 2,938 2,791 2,644
[2,850 ÷ 0.97] [2,938 x 0.95] [2,938 x 0.9]
Commission [3%, 4%, 5%] 88 112 132

Rs.
Average sale price [2,938 x 60% + 2,791 x 30% + 2,644 x 10%] 2,865

Average commission [88 x 60% + 112 x 30% + 132 x 10%] 100

(b)
Conclusion:
Since the margin of safety at production level of 16,000 is higher and breakeven point could be
reached at 48% (7,728/16,000) of the targeted sales, it is better to set production level at 16,000.
[S21Q7]
Q.7 Fine Limited (FL) is involved in manufacturing and distribution of various consumer products.
Following information pertains to one of its products, FGH for the year ended
31 December 2020:

Rs. in '000
Sales (500,000 units) 56,000
Material (Rs. 30 per kg) (22,500)
Skilled labour ( Rs. 125 per hour) (10,000)
Semi-skilled labour (Rs. 100 per hour) (5,000)
Production overheads (50% variable) (4,500)
Gross profit 14,000

The management of FL has decided to take following measures with respect to production of FGH
for the next year:

(i) Increase production volume by 10% to take advantage of increase in demand. Currently the
plant for FGH is operating at 80% of its capacity.
(ii) Purchase 60% of the material from FL’s associated company that has offered a bulk discount
of 5%. Additional wastage from this material is expected to be 1%.
(iii) Replace 40% of the skilled labour with semi-skilled labour. It is estimated that semi-skilled
labour will take 30% more time to do the work of skilled labour.

Impact of inflation on all costs would be 10%.

FL’s management also wants to maintain the same gross profit margin in 2021 as the previous year.

Required:
Compute the selling price per unit of FGH for the next year. (12)
Q-7 Spr-21 SOLUTION
FGH

Budgeted cost of sales: Rs. 000

Material:
- Existing supplier [22.5m x 40% x 1.1 x 1.1] 10,890
- New supplier [22.5m x 60% x 1.1 x 1.1 x 0.95 ÷ 0.99] 15,675
Skilled labor [10m x 1.1 x 1.1 x 60%] 7,260
Semi skilled labor:
- Existing workers [5,000 x 1.1 x 1.1] 6,050
- Replacement of skilled labor [45,760(W-1) x 100 x 1.1] 5,034
Variable FOH [4,500 x 50% x 1.1 x 1.1] 2,723
Fixed FOH [4,500 x 50% x 1.1] 2,475
50,106

Sales [50,106 ÷ 75%] 66,808

Target sale price [Rs. (000) 66,808 ÷ 550,000 units] 121.47

W-1 Semi skilled labor hours Hours

Total hours which would be used by skilled labor [10m/125 x 1.1 x 40%] 35,200

Hours required by semi skilled labor for same work [35,200 x 1.3] 45,760