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. 0 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% (ii) 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

i.
Break-even point	Fixed costs/Contribution margin per unit
Break-even point	480000/(40-16)
Break-even point	20000
Margin of safety is percentage of sales above break-even point
Break-even point is 40% as margin of safety is 60%.
Total units sold	(20000*100%)/40%
Total units sold	50,000
Sales revenue	$2,000,000	50000*40
Less: Variable costs	$800,000	50000*16
Contribution margin	$1,200,000
Less: Fixed costs	$480,000
Operating income	$720,000
Less: Taxes @ 40%	$288,000
Net income	$432,000
Net return on sales	432000/2000000
Net return on sales	21.60%
ii.
Contribution margin X	24.00
Contribution margin Y	40.00
Proportinate contribution margin	28.80	(24*70%)+(40*30%)
Break-even sale in unit	666600/28.80
Break-even sale in unit	23,146
Break-even sale X (units)	16,202	23146*70%
Break-even sale Y (units)	6,944	23146*30%
Break-even sale X (Rupee)	648,083	16202*40
Break-even sale Y (Rupee)	347,188	6944*50