Question

Problem 2: M.K. Ltd. manufactures and sells a single product X whose selling price is 40 per unit and the variable cost is 16 per unit. () If the Fixed Costs for this year are 4,80,000 and the annual sales are at 60% margin of safety, calculate the rate of net return on sales, assuming an income tax level of 40% () For the next year, it is proposed to add another product line Y whose selling price would be 50 per unit and the variable cost' 10 per unit. The total fixed costs are estimated at 6,66,600. The sales mix of X: Y would be 7:3. At what level of sales next year, would M.K. Ltd. break even? Give separately for both X and Y the break even sales in rupee and quantities

Answer 1

Answer-(i)-Contribution unit= Selling price- Variable cost

=40-16

=24

Break-even point= Fixed cost/ Contribution margin

=480,000/ 24

=20,000 units

Percentage Margin of Safety= Actual Sales- Break-even Sales

60%= Actual Sales-20,000 units

Actual Sales= 50,000 units

Sales value (50,000 units *40)	20,00,000
Less: Variable cost (50,000 units *16)	8,00,000
Contribution	12,00,000
Less: Fixed Cost	480,000
Profit	720,000
Less: Income Tax @40%	288,000
Net Return	432,000

Rate of Net Return on Sales= 432,000/ 20,00,000*100= 21.6%

(ii)-

	X	Y
Selling price per unit	40	50
Variable cost per unit	16	10
Contribution per unit	24	40
Individual Product' s Contribution Margin	24/40*100 =60%	40/50*100 =80%

60%*7/10+ 80%*3/10= 66%

Break-even Sales=6,66,600/ 66*100

=10,10,000

Break-even sales Mix=

X-70% of 10,10,000= 7,07,000

7,07,000/ $40= 17,675 units

Y-30% of 10,10,000= 3,03,000

3,03,000/ $50=6,060 units

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