From the following information, find out the number of units that must be sold by the firm to earn profit of ₹ 80,000 per year. Sales price : ₹ 25 per unit Variable manufacturing costs – ₹ 12 per unit Variable selling costs – ₹ 3 per unit Fixed factory overheads – ₹ 5,00,000 Fixed selling costs – ₹ 3,00,000
Finding Units for Target Profit
To determine the number of units needed to achieve a specific profit target, we utilize the concept of contribution margin. The contribution margin represents the revenue remaining after covering variable costs, which contributes towards covering fixed costs and generating profit.
Contribution Margin Calculation
- Sales Price per Unit: ₹ 25
- Variable Costs per Unit: Variable manufacturing costs (₹ 12) + Variable selling costs (₹ 3) = ₹ 15
- Contribution Margin per Unit (CMU): Sales Price per Unit - Variable Costs per Unit
$\text{CMU} = ₹ 25 - ₹ 15 = ₹ 10$
Total Fixed Costs Calculation
- Fixed Factory Overheads: ₹ 5,00,000
- Fixed Selling Costs: ₹ 3,00,000
- Total Fixed Costs (TFC): Fixed Factory Overheads + Fixed Selling Costs
$\text{TFC} = ₹ 5,00,000 + ₹ 3,00,000 = ₹ 8,00,000$
Units Required for Target Profit
The formula to find the number of units required to achieve a target profit is:
$ \text{Units} = \frac{\text{Total Fixed Costs} + \text{Target Profit}}{\text{Contribution Margin per Unit}} $
- Target Profit: ₹ 80,000
- Calculation:
$ \text{Units} = \frac{₹ 8,00,000 + ₹ 80,000}{₹ 10} $
$ \text{Units} = \frac{₹ 8,80,000}{₹ 10} $
$ \text{Units} = 88,000 $
Therefore, the firm must sell 88,000 units to earn a profit of ₹ 80,000.
Important Questions from Marginal Costing
- Which one of the following is not correct ?
The Break Even point expressed in amount of sales in rupees of X Ltd having selling Price of ₹ 20 per unit, variable cost of ₹ 14 per unit and fixed cost of ₹ 7,92,000 is:
