# Thread: "MGT502 GDB 2" July 2010

1. ## "MGT502 GDB 2" July 2010

MilkyWay, is a famous chocolate brand and the company always prefers to use pop stars as the "Brand Ambassador" to promote their product among the public. On the other hand Xyer Company was facing losses until they introduced a famous dermatologist in their TV commercial that influenced the decision of the consumers to buy their skin care products.

Q. Name the power base used by companies in the above mentioned situations.

3. Solution Question No. 1
Part-1
Delta Corporation
Income Statement (Under Absorption Costing System)
For the Quarter Ending -------------

(Rupees)
Sales (20,000 * 30) 600,000
Less: Cost of Goods Sold
Opening Stock 0
Add: Production Cost (15.50 * 24,000) 372,000
Less: Closing Stock (15.50 * 4,000) (62,000) 310,000
Gross Profit 290,000
Less: Operating Expenses
Selling & Administrative Expenses (Fixed) 60,000
Net Profit 230,000

Working:
Production Cost (Total) = 80,000+100,000+120,000+72,000 = 372,000
Per Unit Production Cost = 372,000/24,000 = 15.50

Part-2Delta Corporation
Income Statement (Under Direct Costing System)
For the Quarter Ending -------------

(Rupees)
Sales (20,000 * 30) 600,000
Less: Variable Cost of Goods Sold
Opening Stock 0
Add: Variable Production Cost (12.50 * 24,000) 300,000
Less: Closing Stock (12.50 * 4,000) (50,000) 250,000
Gross Profit 350,000
Less: Fixed Expenses
Selling & Administrative (Fixed) 60,000 132,000
Net Profit 218,000

Working:
Total Variable Cost = 80,000+100,000+120,000 = 300,000
Per Unit Cost (Variable) = 300,000/24,000 = 12.50
Solution Question No. 2

Net Profit Calculation (Contribution Margin Approach)

a) Existing Plan
(Rupees)
Sales (100 * 100) 10,000
Less: Variable Cost (70 * 100) (7,000)
Contribution Margin 3,000
Less: Fixed Cost (2,000)
Net Profit 1,000

b) New Plan (Increase Sales by 10 Units)
(Rupees)
Sales (90 * 110) 9,900
Less: Variable Cost (70 * 110) (7,700)
Contribution Margin 2,200
Less: Fixed Cost (2,350)
Net Profit / (Loss) (150)

Working:
10% of 100 Units = 100 * 10% = 10
Per Unit Existing Sales Price = 100
Per Unit Sales Price after 10% Decreased Sales Price = 100 – 10 = 90

In this case, the new plan will not be feasible for the company to adopt as if the company adopts the new plan, it will suffer the loss instead of making any profit.