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Thread: MGt402 assignment no 2 solution fall 2010 date 12/01/2011

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    MGt402 assignment no 2 solution fall 2010 date 12/01/2011

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    Assignment no.2
    Mgt-402
    Cost and management

    PROBLEM:
    Mirza & Co manufactures and sells 3,500 units of product “A” at a selling price of Rs.
    30 per unit. Fixed Cost Rs. 45,000 and variable cost Rs 10 per unit incurred to
    manufacture the product A.
    Management of Mirza & Co. is anxious to improve the company’s profit performance
    and has asked for analysis of a number of items.
    Required:

     Scenario 1: Calculate contribution margin and net profit with the help of given data

    Solution.

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    Sales (3500*30) RS.105, 000

    Less. Variable cost (3500*10) RS.35000

    Contribution margin 70,000

    Less. Fixed cost 45,000

    Profit 25,000



    Scenario 2:
    Refer to original data; the management feels that due to increase of
    advertising budget by Rs. 30,000 (this cost is considered as fixed cost) would increase
    sales volume of product “A” by 20%. Should the advertisement budget be increased and show complete calculation of contribution margin and net profit with these changes?
    Also compare the findings of scenario 2 with scenario 1 and suggest which scenario is more profitable.

    Increasae in advertising budget by 30,000
    Fixed cost will increase from 45000 to 45000+30,000=75,000 RS.
    Sales volume increased by 20%=3500+3500*20%=4200 units
    Scenario 1 scenario 2.
    Sales 3500*30=105,000 4200*30=126,000
    Veriable cost 3500*10=35000 4200*10=42000
    Contribution margin 70,000 84000
    Fixed cost 45000 75000
    Profit 25000 9,000

    Analysis.
    According to this analysis, the changes should not be made because net profit is low, so scenario 1 is more profitable.


     Scenario 3:
    Refer to original data the management decided to improve the quality of its product “A” by increasing the variable cost by 40%. Due to improvement in quality of product the sales volume also increased by 20%. What effects should be seen on its Contribution margin and net profit with new these changes.
    Also compare the findings of scenario 3 with scenario 1 and suggest which scenario
    will more profitable.

    In this scenario variable cost will increase by 40%
    So variable cost will be =10+10*40%=14 RS.
    Sales volume increased by 20%=3500+3500*20%=4200 units

    Scenario 1 scenario 3.
    Sales 3500*30=105,000 4200*30=126,000
    Veriable cost 3500*10=35000 4200*14=58,800
    Contribution margin 70,000 67200
    Fixed cost 45000 45000
    Profit 25000 22,200

    Analysis.
    According to this analysis, the changes should not be made because net profit is low, so scenario 1 is more profitable

     Scenario 4:
    Refer to original data; management has a plan to increase the sale price of the product “A” by 25%. Due to this, they expect that their sales volume decreased by 30%. Analyze the all changes by preparing income statement.
    Also compare the findings of scenario 4 with scenario 1 and suggest which scenario is more profitable.

    Increase in sale price by 25% then sale price will be=30+30*25%=38RS
    Sales volume decrease by 30% then sales will be=3500-3500*30%=2450


    Scenario 1 scenario 4.
    Sales 3500*30=105,000 2450*38=93100
    Veriable cost 3500*10=35000 2450*10=24500
    Contribution margin 70,000 68600
    Fixed cost 45000 45000
    Profit 25000 23600

    Analysis.
    According to this analysis, the changes should not be made because net profit is low, so scenario 1 is more profitable



    Analyze the all changes by preparing income statement


    Scenario 1 scenario 2 scenario 3 scenario.4
    Sales 105,000 126000 126000 93100
    Veriable cost 35000 42000 58800 24500
    Contribution margin 70,000 84000 67200 68600
    Fixed cost 45000 75000 45000 45000
    Profit 25000 9000 22200 23600
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