Problem:
The Sunmoon Ltd is the distributor for a foreign product. The product sells in
the market for Tk.200.00 per unit with a variable selling expense of Tk.20.00
and a item based commission of Tk.40.00 per item. The Company’s cost of import
at its godown is Tk.90.00 Fixed selling and administrative expenses are
Tk.2,00,000.00 per year.
Required:
1)
What is Break-even point in unit and taka;
2)
What sales level in unit is required to earn an annual before tax profit of
Tk.1,50,000.00
3)
What sales level must be achieved to have the same level of after tax profit as
above, if tax rate is 40%.
4)
What sales level must be achieved to have the after tax target profit
Tk.3,00,000.00. If tax rate is 30%.
5)
What is the Margin of safety and after tax profit for sales level of 10,000
units, if tax rate is 40%.
Solution:
Calculation
of unit contribution:
Variable
cost of the product/unit:
Variable Selling expenses :
20.00
Commission :40.00
Cost of import :90.00
Variable cost per unit =
150.00 Taka
Selling
price per unit = Tk.200
So,
Unit Contribution = Selling price per unit – Variable Cost per unit =
200-150=Tk.50.00
Required 1:
BEP
in units = FC/Contribution per unit = 2,00,000/50
=4000 units
Therefore
BEP in sales = 4,000*200 = 8,00,000 Taka
Required 2:
Level
of Sales = (Fixed Cost + expected profit)/(Contribution Margin per unit) = (2,00,000+1,50,000)/50=7,000
units
Required 3:
Required
sales Level = Fixed Cost+(Profit after tax)/(1-tax rate)
Contribution Margin per unit
= 2,00,000
+ (1,50,000)/(1-0.40)
50
= 2,00,000
+ 2,50,000
50
= 9,000
units
Required 4:
Required
sales level= Fixed cost + Profit after tax/(1-tax rate)
Contribution Margin per unit
= 2,00,000
+ (3,00,000)/(1-0.30)
50
= 2,00,000 +
3,00,000/0.70
50
= 2,00,000
+ 4,28,571.42
50
= 6,28,571.42
50
= 12,571.43
units
= 12572 units
(approx.)
Required 5:
Margin
safety in units = Sales – BEP=10,000-4,000=6000
Marginal
safety in Tk. = 6000*Selling price per unit
= 6000*200
= 12,00,000 Taka
Profit
of marginal safety =6000*50 = 3,00,000
Less,
Tax (40% of 3,00,000)= 3,00,000*0.40= 1,20,000
Now, Profit after tax =1,80,000
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