MGT402 Ass Idea Sol

PROBLEM:

Mirza & Co manufactures and sells 3,500 units of product “A” at a selling price of Rs.

30 per unit. Fixed Cost Rs. 45,000 and variable cost Rs 10 per unit incurred to

manufacture the product A.

Management of Mirza & Co. is anxious to improve the company’s profit performance

and has asked for analysis of a number of items.

Required:

v Scenario 1: Calculate contribution margin and net profit with the help of given data

Solution.

Sales                            (3500*30)                                RS.105, 000

Less. Variable cost       (3500*10)                                RS.35000

Contribution margin                                                   70,000

Less. Fixed cost                                                           45,000

Profit                                                                           25,000

Scenario 2:

 Refer to original data; the management feels that due to increase of

advertising budget by Rs. 30,000 (this cost is considered as fixed cost) would increase

sales volume of product “A” by 20%. Should the advertisement budget be increased and  show complete calculation of contribution margin and net profit with these changes?

Also compare the findings of scenario 2 with scenario 1 and suggest which scenario is more profitable.

Increasae in advertising budget by 30,000

Fixed cost will increase from 45000 to 45000+30,000=75,000 RS.

Sales volume increased by 20%=3500+3500*20%=4200 units

                                                Scenario 1                                           scenario 2.

Sales                                        3500*30=105,000                               4200*30=126,000

Veriable cost                            3500*10=35000                                  4200*10=42000

Contribution margin                           70,000                                                 84000

Fixed cost                                            45000                                                  75000

Profit                                                   25000                                                  9,000

Analysis.

According to this analysis, the changes should not be made because net profit is low, so scenario 1 is more profitable.

v Scenario 3:

Refer to original data the management decided to improve the quality of its  product “A” by increasing the variable cost by 40%. Due to improvement in quality of product the sales volume also increased by 20%. What effects should be seen on its Contribution margin and net profit with new these changes.

Also compare the findings of scenario 3 with scenario 1 and suggest which scenario

will more profitable.

In this scenario variable cost will increase by 40%

So variable cost will be =10+10*40%=14 RS.

Sales volume increased by 20%=3500+3500*20%=4200 units

                                                Scenario 1                                           scenario 3.

Sales                                        3500*30=105,000                               4200*30=126,000

Veriable cost                            3500*10=35000                                  4200*14=58,800

Contribution margin                           70,000                                                 67200

Fixed cost                                            45000                                                  45000

Profit                                                   25000                                                  22,200

Analysis.

According to this analysis, the changes should not be made because net profit is low, so scenario 1 is more profitable

v Scenario 4:

Refer to original data; management has a plan to increase the sale price of the product “A” by 25%. Due to this, they expect that their sales volume decreased by 30%. Analyze the all changes by preparing income statement.

Also compare the findings of scenario 4 with scenario 1 and suggest which scenario is more profitable.

Increase in sale price by 25% then sale price will be=30+30*25%=38RS

Sales volume decrease by 30% then sales will be=3500-3500*30%=2450

                                                Scenario 1                                           scenario 4.

Sales                                        3500*30=105,000                               2450*38=93100

Veriable cost                            3500*10=35000                                  2450*10=24500

Contribution margin                           70,000                                                 68600

Fixed cost                                            45000                                                  45000

Profit                                                   25000                                                  23600

Analysis.

According to this analysis, the changes should not be made because net profit is low, so scenario 1 is more profitable

Analyze the all changes by preparing income statement

                                    Scenario 1      scenario 2       scenario 3                   scenario.4

Sales                            105,000           126000            126000                        93100

Veriable cost                35000              42000              58800                          24500

Contribution margin   70,000             84000              67200                          68600

Fixed cost                    45000              75000              45000                          45000

Profit                           25000              9000                22200                          23600

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