MGT402 Cost & Management Accounting Assignment 2 Solution Spring 2014

Rehman Sugar Mills is well known for its refined sugar. In the year of 2013, it sold 35,000 bags containing 1.75 million kilograms of refined sugar at Rs. 2,250 each bag.
The variable production and operating costs for the year were;
a) Purchase cost of sugarcane is Rs.15 per kg;
b) Crushing process requires Rs.7 per kg;
c) Boiling the pulp needs Rs. 3 per kg;
d) Sugar refinement costs Rs. 2 per kg; &
e) Other variable operating expenses Rs. 9 per kg
Rent of the factory’s outlet for the year was Rs. 1.5 million per month. Depreciation of the company’s plant and other assets was Rs. 36.80 million per year. Misc. fixed operating expenses were Rs.16 million for the year.
For year 2014, it is expected that the sale price will remain the same. But, the demand will be increased by 10%. Accordingly, the variable costs will also be increased by 15%.
Required:
1. Break even point in units and value both for the current and next year. (3 Marks)
2. Income statements of both the years. (4.5 Marks)
3. If the mills need to earn net profit of Rs. 350,000 in the year of 2014, how many bags it needs to sell. (2.5 marks)

Solution:

Solution:1

Contribution Margin (Per Unit) = 45 – 36 = Rs.9

Breakeven point in units = Fixed cost / contribution margin in units

Breakeven point in units = 70,800,000 / 9 = 7,866,666.67

Breakeven point in units = 7,866,666.67

Part(b)

Contribution Margin (Value) = 45 – 36 = Rs.9

Breakeven point (Value) = Fixed cost ÷ C/S

Breakeven point (Value) = 70,800,000÷ 70,800,000/7,8750,000

Breakeven point (Value) =70,800,000 /0.8990476104

=7,8750,000

Solution: 2 Details Working Quantity (Kg) UnitRate Total (Rs)
Sale (W1) 1,750,000 45 7,8750,000
Less:Variable Cost of Sale(15+7+3+2+9) 1,750,000 36 63,000,000
Contribution Margin (CM) 1,750,000 9 15,750,000
Fixed Cost ((18,000,000+36,800,000+16,000,000)-W2     70,800,000
Profit /(Loss)     (55,050,000)

 

 

Total Sale Value (35,000 Bags x Rs.2,250/- Per Bag) =  78,750,000

Sale rate per kg = Total sale value / Total Kgs

Sale rate per kg = 78,750,000 / 1,750,000 = Rs.45 per kg

Working: 2

Fixed Cost:

Rent of factory outlets (1,500,000 x 12)     = 18,000,000

Depreciation of plant and other assets      = 36,800,000

Other operating fixed expenses           =  16,000,000

                                    TOTAL            =  70,800,000

Solution: 2Income Statement 2014 Quantity (Kg) UnitRate Total (Rs)
Sale (W3) 1,750,000 49.5 86,625,000
Less:Variable Cost of Sale 1,750,000 41.4 72,450,000
Contribution Margin (CM) 1,750,000 8.1 14,175,000
Fixed Cost ((18,000,000+36,800,000+16,000,000)-W2     70,800,000
Profit /(Loss)     (65,625,000)

 

Working: 3

Total Sale Value (35,000 X 1.10 = 38,500  Bags x Rs.2,250/- Per Bag) =  86,625,000

Sale rate per kg = Total sale value / Total Kgs

Sale rate per kg = 86,625,000/ 1,750,000 = Rs.49.5 per kg

Working  4:

Variable .C.O.S = 63,000,000 x1.15=72,450,000

Target Contribution = Fixed Cost + Target Profit

Target Contribution Margin= Fixed Cost + Target Profit

Target Profit = Fixed Cost + Target Profit / CM per unit

= 70,800,000 + 350,000/8.1

=71150,000/8.1

=8784 bags

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