Question

Bharat Seat Ltd. manufactures and sells one product an infant car seat called Baby comfort at a price of Rs. 500. Variable costs equal Rs. 200 per car seat. Fixed costs are Rs. 49,50,000. Bharat Seats Ltd. Manufactures Baby comfort upon the receipt of orders from its customers. In Year 1, It sold 30,000 units of Baby comfort. One of Bharat Seats Ltd. Customers, Hyundai Motor Co. has asked if in year 2 Bharat Seats will manufacture a different style of car seat called Baby luxury. Hyundai will pay Rs 250 each unit of Babyluxury. The variable cost for Baby luxury are estimated at Rs. 150 per seat. Bharat Seats has enough capacity to manufacture all the units of Babycomfort it can sell as well as the units of Babyluxury that Hyundai wants and will thus incur no additional fixed costs. Bharat Seats estimates that in the year 2 it will sell 30,000 units of Baby comfort (assuming the same price and variable costs in year 1 and 20000 units of Baby luxury.

Siddharth, the president of Bharat Seats, checked the effect of accepting Hyundai’s offer on the breakeven revenues for the year 2. Using the planned sales mix for the year 2, he was surprised to find that the revenues required to break even appeared to increase. He was not sure that his numbers were correct, but if they were, Siddharth felt inclined to reject Hyundai’s offer. He asks for your advice. Required:

1. Calculate the breakeven point in units and in revenues for the year 1.

2. Calculate the breakeven point in units and in revenues for the year 2 at the planned sales mix

3. Explain why the breakeven point in revenues calculated the requirements 1 and 2 are different.

4. Should Siddharth accept Hyundai’s offer? Provide supporting computations.

Answer 1

Based on the given data, pls find below workings:

Answers for Question (1) and (2) are highlighted in yellow below;

Answer for (3): The breakeven points are different due to the reason that the Fixed costs are partially covered thru the gross profit from sale of additional product to Hyundai;

Answer (4): Siddharth should accept this offer from Hyundai as this order can be manufactured with out any additional costs and even capacity for manufacturing is there and mainly the contribution (Gross Profit) from Baby Luxury seats adding to the overall profit of the business.