Gourmet Food Products is a new entrant in the market for chocolates. It has introduced a new product—Sweetee. This is a small rectangular chocolate…

CA Intermediate · Cost and Management Accounting · RTP · May 2025
Gourmet Food Products is a new entrant in the market for chocolates. It has introduced a new product—Sweetee. This is a small rectangular chocolate bar. The bars are wrapped in aluminium foil and packed in attractive cartons containing 50 bars. A carton, is therefore, considered the basic sales unit. Although management had made detailed estimates of costs and volumes prior to undertaking this venture, new projections based on actual cost experience are now required. Income Statements for the last two quarters are each thought to be representative of the costs and productive efficiency we can expected in the next few quarter. There were virtually no inventories on hand at the end of each quarter. The income statements reveal the following:- First Quarter (₹) Second Quarter (₹) Sales : 50,000 × ₹ 24 12,00,000 — 70,000 × ₹ 24 — 16,80,000 Less: Cost of Goods Sold 7,00,000 8,80,000 Gross Margin 5,00,000 8,00,000 Less: Selling and Administration 6,50,000 6,90,000 Net Income / (Loss) before Taxes (1,50,000) 1,10,000 Less: Tax (60,000) 44,000 Net Income / (Loss) (90,000) 66,000 The firm's overall marginal and average income tax rate is 40%. This 40% figure has been used to estimate the tax liability arising from the chocolate operations. REQUIRED: (a) Management would like to know the breakeven point in terms of quarterly carton sales for the chocolates. (b) Management estimates that there is an investment of 30,00,000 in this product line. What quarterly carton sales and total revenue are required in each quarter to earn an after tax return of 20% per annum on investment? (c) The firm's marketing people predict that if the selling price is reduced by - 1.50 per carton (₹ 0.03 off per chocolate bar) and a - 1,50,000 advertising campaign among school children is mounted, sales will increase by 20% over the second quarter sales. Should the plan be implemented?

Suggested Answer and Working Notes:

(a) Estimation of the Fixed and Variable Costs. Variable Manufacturing Cost per carton: Change in Costs / Change in Activity = (₹ 8,80,000 -7,00,000) / (70,000 - 50,000) = 1,80,000 / 20,000 = 9 per carton Fixed Manufacturing Costs: Costs of Goods Sold = Fixed Manufacturing Cost + Variable Manufacturing Cost 7,00,000 = Fixed Manufacturing Cost + (50,000 Cartons × 9) Fixed Manufacturing Cost = 7,00,000 - 4,50,000 = 2,50,000 Variable Selling and Administration Cost per unit: = (₹ 6,90,000 -6,50,000) / (70,000 - 50,000) = 40,000 / 20,000 = 2 per unit Fixed Selling & Administration Costs: Total Selling & Admn. Costs = Fixed Selling & Admn. Cost + Variable Selling & Admn. Costs 6,50,000 = Fixed Selling & Admn. Costs + (50,000 Cartons × 2) Fixed Selling & Admn. Cost = 6,50,000 - 1,00,000 = 5,50,000 So the Total Variable Costs per unit are 11per unit (₹ 9 +2). Total Fixed Costs are - 8,00,000 per quarter (₹ 2,50,000 +5,50,000). Given Sale Price of 24per carton and Variable Costs of 11per carton, the Contribution per carton is 13 (₹ 24 - 11). Breakeven Point (in terms of carton units) = Fixed cost (per quarter) / Contribution per Carton = 8,00,000 /13 = 61,539 Cartons (b) To earn an After Tax Return of 20% on 30,00,000, the Desired Annual After Tax Net Income is 6,00,000 (₹ 30,00,000 × 20%). The Quarterly After Tax Net Income will be - 1,50,000. Given the Tax Rate of 40%, the Pre-tax Return will be - 2,50,000 (₹ 1,50,000 × 100/60). Quarterly Sales (units) = (Fixed Cost + Desired Return) / Contribution per unit = (₹ 8,00,000 +2,50,000) /13 = 10,50,000 /13 = 80,769 Cartons Quarterly Sales Revenue = 19,38,456 (80,769 Cartons × ₹ 24) (c) The proposal involves reducing Selling Price from 24 per carton to 22.50 per carton. Hence the Contribution per carton will be - 11.50 (₹ 22.50 - 11.00). The increase in Advertising Costs will push Fixed Costs up by - 1,50,000 to 9,50,000. A 20% increase over second quarter's Sales would increase Sales form 70,000 cartons to 84,000 cartons. The Expected Earnings Before Taxes will be - 16,000 [(84,000 Cartons × 11.50) - 9,50,000]. After deducting Tax at 40%, the Net Income will be - 9,600 (₹ 16,000 - 6,400). Earning has reduced from 66,000 to 9,600, accordingly this plan should not be implemented.

Topics: Marginal Costing

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