a company manufactures a single product with a capacity of 1 50 000 units per annum 626360

A company manufactures a single product with a capacity of 1 50 000 units per annum. The summarized profitability statement for a year is as under:


Amount Rs.

Amount Rs.

Sales: 1 00 000 units @ Rs.15 per unit


15, 00,000

Less: Cost of Sales

  • Direct materials
  • Direct labor
  • Production overheads-variable
  • Production overheads-fixed
  • Administrative overheads-fixed
  • Selling and distribution overheads &variable
  • Selling and distribution overheads-fixed


3, 00,00

2, 00,000




1, 50,000







Total cost of sales


12, 50,000



2, 50,000

You are required to evaluate the following options:

1) What will be the amount of sales required to earn a target profit of 25% on sales, if the packing is improved at a cost of Re.1 per unit?

2) There is an offer from a large retailer for purchasing 30 000 units per annum subject to providing a packing with a different brand name at a cost of Rs.2 per unit. However, in this case there will be no selling and distribution expenses. Also this will not in any way affect the company&s existing business.

What will be the break even price for this additional offer?

3) If an expenditure of Rs.3, 00,000 is made on advertising, the sales would increase from the present level of 1 00 000 units to 1 20 000 units at a price of Rs.18 per unit. Will that expenditure be justified?

4) If the selling price is reduced by Rs.2 per unit, there will be 100% capacity utilization. Will the reduction in selling price be justified?