PQ Ltd. sells bottles and currently is trying to find out the profitability of opening another store which will have the following expenses and…

CA Intermediate · Cost and Management Accounting · MTP · May 2024
PQ Ltd. sells bottles and currently is trying to find out the profitability of opening another store which will have the following expenses and revenues: Amount per piece (₹) Selling Price 600 Variable costs: Material cost 410 Salesmen's commission 60 Total variable cost 470 Annual fixed expenses are: (₹) Rent 6,00,000 Office and administrative expenses 20,00,000 Advertising 8,00,000 Other fixed expenses 2,00,000 Calculate the annual break-even point in units and in value. Also determine the profit or loss if 35,000 units of bottles are sold.

Suggested Answer and Working Notes:

Total Fixed Cost = 6,00,000 +20,00,000 +8,00,000 +2,00,000 = 36,00,000 Contribution per unit = Selling Price - Total variable cost = 600 -470 = 130 P/V Ratio = (Contribution per unit / Selling Price) × 100 = (₹ 130 /600) × 100 = 21.67% Break-even Point (in units) = Total Fixed Cost / Contribution per unit = 36,00,000 /130 = 27,692.31 or 27,693 units Break-even Sales (in value) = Total Fixed Cost / P/V Ratio = 36,00,000 / 21.67% = 1,66,12,829 Calculation of Profit/ (loss) if 35,000 units are sold: Total Contribution = 35,000 units × ₹ 130 = 45,50,000 Less: Fixed Cost = 36,00,000 Profit = 9,50,000

Topics: Marginal Costing

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