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.


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

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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