Question

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

Answer 1

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