Question

In: Accounting

Y enterprises sells is product at Rs. 20 per unit. Variable costs are Pa 15 per...

Y enterprises sells is product at Rs. 20 per unit. Variable costs are Pa 15 per st (2/3
manufacturing and 1/3non manufacturing). Fxed costs are incurred uniformly throughout the year and amount to Rs.750,000 (2/3 mamufacturing and 1/3 non-mammfactaring
Required:
a) The number of units that must be sold to carn an after-tax income of Ra. 100,000
assume income tax rate of 20%). Prove your answer by prepaning imcome
statement to that effect
b) Illustrate the role of changes in fiscal policies (changes in tax ates) and labor
unions (changes in structure of salaries and wages) in altering the break-even
point calculated in (a). Your answver must be supported by calculations based an
arbitrarily assumed values

Solutions

Expert Solution

1.

After Tax Profit 100,000
Before tax profit (100,000*100/80) 125,000
Add: Fixed costs 750,000
Reuqired Contribution 875,000

Contirbtuion per unit => 20 - 15 = 5 Rs per unit.

So, Units required to be produced => 875,000/5 = 175,000 units.

Income Statement:

Income Statement
Sales (175000) 3500,000
Less: Variable Costs
Manufacturing Costs (15*2/3*175000) 1750,000
Non-manufacturing 875,000
Contirbution 875,000
Less: Fixed Costs
Manufacturing (750,000*2/3) 500,000
Non-manufacturing 250,000
Income before taxes 125,000
Less: Taxes @ 20% 25000
Income after twax 100,000

B.

  • If Tax rates goes up by 5% ie 25% and down by 5% ie 15%
    Required Income 100,000 100,000
    Income after tax 100,000/.75 = 133,333 100,000/0.85 = 117,647
    Fixed Cost 750,000 750,000
    Contribution 883,333 867,647
    Contribution per unit 5 5
    Units to the sold 176,667 173,529
  • If manufacturing costs both variable and fixed go up by 10% and fall by 10%:
    Profit before taxes 125,000 125,000
    Fixed costs (750,000+/-500,000*10%) 800,000 700,000
    Contribution 925,000 825,000
    Contirbtuion per unit (20-(15+1)=4 20-(15-1)= 6
    Units to be sold 925000/4 = 231250 137,500

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