Ganesh Bidi manufactures bidis in Andhra Pradesh, India. A bidi is a blended-tobacco product that is hand wrapped in a tendu (type of plant) leaf, then roasted in charcoal to remove moisture and provide flavor. In India, bidis often are referred to as the “poor person’s cigarette.” Ganesh sells his bidis directly to wholesalers for 3.00 Indian Rupees per pack of 20 (1 Indian Rupee = approximately $0.02). Each pack of bidis costs Ganesh 0.75 Indian Rupees in materials and 0.25 Indian Rupees in labor. Ganesh’s fixed costs amount to 1,075,000 Indian Rupees per month.

Required:

a. Assume Ganesh does not pay any taxes. How many packs of bidis must Ganesh sell to earn a profit of 750,000 Indian Rupees per month?

b. Assume Ganesh pays income taxes equal to 40% of profit. How many packs of bidis must Ganesh sell to earn a profit after taxes of 750,000 Indian Rupees per month?

c. In addition to income taxes equal to 40% of profit, assume Ganesh also pays a value added tax (VAT) of 20% per pack of bidis. The Indian government assesses the 20% value-added tax based on the selling price less the cost of the materials. (A value added tax is levied on the difference between the price of outputs and the value of materials input.) How many packs of bidis must Ganesh sell to earn a profit of 750,000 Indian Rupees per month?

d. In addition to income taxes equal to 40% of profit and a value-added tax of 20%, assume the Indian government requires Ganesh to pay an excise tax of 0.05 Indian Rupees per pack of bidis. (An excise tax is a manufacturing tax usually levied as a percentage of manufacturing cost. Sometimes, it is a fixed amount per unit of the product.) How many packs of bidis must Ganesh sell to earn a profit of 750,000 Indian Rupees per month?

e. Briefly discuss how you modified the standard CVP relation to include income, value added, and excise taxes. What does each tax vary with? Do you think sales taxes would affect the CVPmodel?