Management Accounting Math

Problem: Philips Company manufactures and sells its own brand of cameras. It sells each camera for Tk.28. The company’s account shows the following data:-

Manufacturing cost:

Variable                                 Tk. 12 per unit

Fixed                                      Tk. 1,00,000 per year

Selling and Administrative cost:

Variable                                 Tk. 4 per unit

Fixed                                      Tk. 44,000 per year

Required:

1) Use the per unit contribution margin (CM) approach to determine the Break-even point in unit and in Taka.

2) Use the per unit contribution margin (CM) approach to determine the level of sales in units and in Taka required to obtain a Tk.84,000 profit.

3) Suppose that variable selling and administrative cost could be eliminated by having a salaries sales force. If the company could sale 20,000 units, how much could it pay in salaries for the sales people and still have a profit of Tk.84,000.

Solution:

Total VC = Tk.12+4=Tk.16

Total FC = Tk.1,44,000

Sell price = Tk. 28

Contribution margin = 28-16 = 12

Required 1:

BEP in unit = TFC/CM per unit

                    = 1,44,000/12=12,000 units

BEP in sale volume = Tk. 12,000*28 = Tk.3,36,000

Required 2:

Required sales (in unit)

= (F/C+Target profit) / Contribution Margin

= 1,44,000 + 84,000 / 12 = 19,000 units

Required in sales volume = Tk.19,000*28

                                          =Tk. 5,32,000 

Required 3:

New VC            = Tk.12/unit

Total sell price = 20,000*28 = Tk.5,60,000

New CM = 28-12 = 16

Target profit = Tk.84,000

Target sales = 20,000 units

Suppose salaries = ‘X’

So, FC = (1,44,000 + X)

Target sales    = (FC + Profit) / CM per unit

Or  20,000       = (1,44,000+X+84,000)/16

Or  20,000*16 = 2,28,000+X

Or       X          = 3,20,000 – 2,28,000

Or       X          = 92,000.

So, Salaries will stand = Tk. 92,000