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

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

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.

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  Reply With Quote