A company manufactures a single product with a capacity of 120000 units per annum. The summarized...

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A company manufactures a single product with a capacity of 120000 units per annum. The summarized profitability statement for a year is as under: (Note: Direct Labour changes with production) Particulars Sales: 100 000 units @ Rs.15 per unit Less: Cost of Sales Direct materials Direct labor Production overheads-variable Production overheads-foced Administrative overheads-fixed Selling and distribution overheads -variable Selling and distribution overheads - fixed Total cost of sales Profit Amount Rs. 3,00,000 2,00,000 60,000 3,00,000 1,50,000 90,000 1,50,000 Amount Rs. 15,00,000 12, 50,000 250,000 You are required to evaluate the following options: a) What will be the amount of sales required to earn a target profit of 30% on sales, if the packing is improved at a cost of Re. 1 per unit? b) There is an offer from a large retailer for purchasing 30000 units per annum subject to providing a packing with a different brand name at a cost of Rs.2 per unit. However, in this case there will be no selling and distribution expenses. Also this will not in any way affect the company's existing business. What will be the break-even price for this additional offer? c) If an expenditure of Rs.3.00.000 is made on advertising, the sales would increase from the present level of 100000 units to 120000 units at a price of Rs.18 per unit. Will that expenditure be justified? 3 d) If the selling price is reduced by Rs.2 per unit, there will be 100% capacity utilization. Will the reduction in selling price be justified? A company manufactures a single product with a capacity of 120000 units per annum. The summarized profitability statement for a year is as under: (Note: Direct Labour changes with production) Particulars Sales: 100 000 units @ Rs.15 per unit Less: Cost of Sales Direct materials Direct labor Production overheads-variable Production overheads-foced Administrative overheads-fixed Selling and distribution overheads -variable Selling and distribution overheads - fixed Total cost of sales Profit Amount Rs. 3,00,000 2,00,000 60,000 3,00,000 1,50,000 90,000 1,50,000 Amount Rs. 15,00,000 12, 50,000 250,000 You are required to evaluate the following options: a) What will be the amount of sales required to earn a target profit of 30% on sales, if the packing is improved at a cost of Re. 1 per unit? b) There is an offer from a large retailer for purchasing 30000 units per annum subject to providing a packing with a different brand name at a cost of Rs.2 per unit. However, in this case there will be no selling and distribution expenses. Also this will not in any way affect the company's existing business. What will be the break-even price for this additional offer? c) If an expenditure of Rs.3.00.000 is made on advertising, the sales would increase from the present level of 100000 units to 120000 units at a price of Rs.18 per unit. Will that expenditure be justified? 3 d) If the selling price is reduced by Rs.2 per unit, there will be 100% capacity utilization. Will the reduction in selling price be justified?

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Solution a The amount of Sales required to earn a target profit of 30 on sales if packing is improved at a cost of Rs 1 per unit Target Profit 30 On Sales Amount of Sales required to earn a Target pro... View the full answer