Topic Profit Planning

Question Q.1.Last year a company earned 20% pre tax profit on a sales turnover of Rs.100 lakhs.To improve its profitability and competitiveness,the management has decided to reduce selling price by 10% and increase output by 20%.Cuts are proposed to be effected on variable and fixed costs at 5% and 20% respectively. What effect will these steps have on the companys profit this year ?The company was having a fixed cost of Rs.25 Lakhs per annum last year. Make Q.2.Ridewell Cycles Ltd purchases 20,000 bells p.a from an outside supplier @Rs.5 Or each.The management feels that these can be manufactured and not to be Buy purchased.A machine costing Rs.50,000 will be required to manufacture the item within the factory.The machine has an annual capacity of 30,000 units and life of 5 years. The following additional informations are available: Material Cost per bell will be ------Rs.2.00 Labour Cost per bell------------------Rs.1.00 Variable O/H ---------------------------100% of Labour Cost You are required to advise whether : i)the company should continue to purchase the bells from the outside supplier or should make them in the factory ; and ii)the company should accept an order to supply 5,000 bells to the market at a S.P of Rs.4.50 per unit ? Key Q.3.Sum Toys Pvt Ltd. Manufactures and sales childrens toys of high quality over an Factor extensive market, utilizing the services of skilled artisans who are paid at an average Analysis rate of Rs.15/hour.The total number of skilled labour hours available in a year is only 14,000. The details of planned production for 2011-12,estimated cost and unit selling prices are below:Toy Production Cost of Production per unit Selling Price Planned -----------------------------------------[per unit] [Units] Direct Direct Fixed Materials Labour Overheads ---------------------------------------------------------------------------------------------------A 3,000 20 10 15 70 B 4,000 24 12 18 92 C 4,000 32 12 18 95 D 3,000 40 16 24 110 E 2,400 60 20 30 180 --------------------------------------------------------------------------------------------------Variable overhead cost amount to 50% of the direct labour cost.The company has estimated the following maximum and minimum demand for each product:Particulars A B C D E -------------------------------------------------------------------------------------------------------Maximum 5,000 6,000 6,000 4,000 4,000 Minimum 1,000 1,000 1,000 500 500 a)What is the estimated profit for 2011-12 as per the companys production plan ? b)Do you agree with the said plan ?If not,what would be the plan for maximum profit ? c)What is the estimated profit as per the pan suggested by you in (b) ?

Reference/Ans Q.3 Page No.681 of Ravi Ans:-26.5% Increase in profits.

Q.12 Page No.693 Ans: i)Make in th e factory.Annual Saving Rs.10,000 ii)Should accept.

Q.7 of Page 685 of Ravi Ans:a.Net Profit5,06,000 b.Net Profit5,34,895

Topic Selection of Profitable Sales Mix

Question Q.4.A firm can produce three [3] different products from the same raw material using the same production facilities.The requisite labour is available in plenty@Rs.8 per hour for all products.The supply of raw material,which is imported @Rs,.8 per kg is limited to 10,400 kg for the budget period.The variable overheads are Rs.5.60 per hour.The fixed overheads are Rs.50,000.The selling commission is 10% on sales. a)From the following information,you are required to suggest the most suitable sales mix,which will maximize the firms profit.Also determine the profit that will be earned at that level: Product Market S.P Labour Hours Raw Materials Demand [Per unit] Required Required [Units] [per unit] [per unit] X 8,000 30 1 0.7 Y 6,000 40 2 0.4 Z 5,000 50 1.5 1.5 b)Assume,in above situation,if additional 4,500 kgs of raw material is made available ,should the firm go in for further production,if it will result in additional fixed overheads of Rs.20,000 and 25 % increase in the rates per hour for labour and variable overheads. Q.5.A company sold in two successive periods 7,000 units and 9,000 units and has incurred a loss of Rs.10,000 and earned Rs.10,000 profit respectively.The Selling Price per unit can be assumed at Rs.100. You are required to calculate: a)The amount of Fixed cost b)The number of units to break even c)The no of units to earn a profit of Rs.40,000.

Reference/ Ans Page 686 Q.8 of Ravi Ans:Existing ProfitRs.66,160 Revised ProfitRs.68,660

Misc.

Q.17.18 of page 17.56 of Arora Ans: a)80,000 b)8,000 units c)12,000 units.

Misc.

Q.6 a).A company earned a profit of Rs.30,000 during the year 2011.If the marginal cost and and selling price of the product are Rs.8 and 10 respectively ,find out the amount of margin of safety. b)The ratio of variable cost to sales is 70%.The break even point occurs at 60% of the capacity sales. Find the capacity sales when fixed costs are Rs.90,000.also compute profit at 75% of the capacity sales .

Q.17.22 of page 17.59 of Arora Ans: a)1,50,000 b)BEP-3,00,000 100% Capacity Sales-5,00,000 Sales @75% Capcity-3,75,000 Profit at 75% =22,500.