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MGT402 Cost & Management Accounting GDB Solution Fall 2013

Scenario:

Modern Industries (PVT) Ltd. manufactures basketballs and sells them across the country. The company’s management is desirous to boost-up the yearly profits and considering a change in the sales price of its products in this regard. The company’s management accountant has developed following information using the recent year’s published accounts:

  TOTAL      UNITS
Sales (200 units) Rs. 30,000 Rs.150.00
Variable cost 17,500 087.50
Contributionmargin 12,500                           62.500

 

Fixed cost                                    5,000  
Profit before tax                          7,500  

 

The management accountant believes that a 10% reduction in selling price would increase the sales volume by 30%.

Required: Analyze the above information carefully and answer the following assuming no change in the fixed cost:
i)     Change in the net sales;

ii)      Change in the contribution margin in total & per unit;

iii)    Change in per unit net profit assuming 40% tax rate;

iv)     Would you recommend the proposed sale price and why?

Solution:

Sales increased by 30% (200 x 30% + 200) =260 units

10% decrease in price (150 -15)                  = Rs. 135 per unit

 

Total                              Unit

Sales (260 units)                                         35,100                            Rs. 135

Variable Cost                                             (17,500)                                67.31

Contribution Margin                                 17,600                                  67.7

Fixed Cost                                                   (5,000)

Profit before Tax                                       12,600                                  48.46   

40% tax                                                       5,040

Profit after Tax                                          7,560                                     29.1

 

Change in Net Sales (30,000 – 35,100) Increased by Rs. 5,100

Change in C.M in total (17,600 – 12,500) Increased by Rs. 5,100

C.M Change in per unit (67.7 – 62.5) Increased by 5.2

Change in per Unit net profit after 40% tax (37.5 – 29.1) decreased by 8.4 because of comparing per unit profit before and after tax (37.5 before per unit profit)

I would strongly recommend this sale price, although the price is decrease by 10% but volume increases with the positive effect on profit, even in this strategy net profit is more than the profit before tax shown in the question.

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