Question

A supermarket has sales of Rs. 40 lakhs in an accounting period with Rs. 12 lakhs of fixed cost and a Contribution margin ratio of 40%. With this level being the base level, answer the following questions:

a) What is the Break even point in Rupees of sales?

b) What is the margin of safety in rupees?

c) If the management desired a total post tax profit of Rs. 9,80,000, what would be the desired sales for the target profit (assume tax rate to be 30%)?

d) From base level, if the variable cost ratio increases to 70% and fixed cost reduces by Rs. 2 lakhs, find out the new BEP in rupees.

e) From base level, if the management decided to increase selling price of its products in such a manner so as to increase sales revenue by 5% (thus changing the VC ratio) and fixed cost increases by Rs. 1 lakh, find out the new BEP in rupees.

f) From the base level, if an additional advertising campaign which involved the spending of Rs. 4 lakhs of cost was to be sanctioned, what would be the minimum additional sales to justify this cost without changing existing profits?

Answer 1

a.) Break Even Point in rupee sales :

Break Even Point (Rupees) = Fixed Costs / Contribution Margin Ratio

= 1200000/40% = 1200000/40*100 = Rs. 30,00,000

b.) Margin of Safety:

Margin of Safety = Actual sales - BEP Sales

= 4000000 - 3000000 = Rs. 1,000,000

c.) Desired Sales for Target Profit:

Post Tax Desired Profit = Rs. 980,000

Tax Rate = 30%

So, Pre Tax Desired Profit = 980000/70% = 980000/70*100 = Rs. 1,400,000

Sales to earn a pre tax profit of Rs. 1,400,000 = Fixed Cost + Desired Profit / Contribution Margin Ratio

= 1200000 + 1400000 / 40% = 2,600,000/40*100 = Rs. 6,500,000

Sales	6,500,000
(-) Variable Costs [60%]	3,900,000
= Contribution Margin Ratio [40%]	2,600,000
(-) Fixed Costs	1,200,000
= Net Profit	1,400,000
(-) Tax @ 30%	420,000
= Profit after Tax	980,000

Hence Desired Sales for Target Profit = Rs. 6,500,000

d.) New BEP in Rupees:

Variable Cost Ratio = 70%, Hence Contribution Margin Ratio = 30%

New Fixed Cost = 1200000 - 200000 = 1000000

Hence, New BEP (in rupees) = New Fixed Cost/New Contribution Margin Ratio

= 1000000 / 30% = 1000000/30*100 = Rs. 3,333,333.33

e.) New BEP in Rupees:-

Sales (4000000+5%)	4,200,000
Less : Variable Costs (4000000*60/100)	2,400,000
= Contribution Margin	1,800,000
Contribution Margin Ratio [1800000*100/4200000]	42.86%

New Fixed Costs = 1200000 + 100000 = 1,300,000

BEP = 1300000/42.86% = 1300000/42.86*100 = Rs. 3,033,131

f.) Additional Sales:

Existing Net Profit

Sales	4,000,000
Less: Variable Costs	2,400,000
= Contribution Margin	1,600,000
Less: Fixed Costs	1,200,000
= Net Profit	400,000

Calculating Sales to achieve current profit of 400,000:

Particulars	Amount (Rs.)
Sales	x
Less: Variable Costs	0.60x
Contribution Margin	0.40x
Less: Fixed Costs [ 1200000+400000 ]	1,600,000
Existing Net Profit	400,000

Hence, 0.40x - 1600000 = 400000

0.40x = 2000000

x = 2000000/0.4 = 5000000

Additional Sales = 5,000,000 - 4,000,000 = Rs. 1,000,000

The minimum additional sales to justify this cost without changing existing profits would be Rs. 1,000,000.