Calculating Desired Sales Volume for Target Profit

To determine the desired sales volume in units to achieve a specific target profit, we need to use concepts from Cost-Volume-Profit (CVP) analysis. The key components required are the total fixed costs, the target profit, and the contribution margin per unit.

Understanding the Given Data

The question provides the following financial information for the company:

We are asked to find the sales volume in units needed to earn a target profit of Rs. 60,000.

Step-by-Step Calculation

1. Calculate Total Variable Cost per Unit

The variable cost per unit includes all costs that change with the level of production or sales. In this case, it's the sum of variable manufacturing cost and variable selling cost.

\( \text{Variable Cost per Unit} = \text{Variable Manufacturing Cost per Unit} + \text{Variable Selling Cost per Unit} \)

\( \text{Variable Cost per Unit} = \text{Rs. } 11 + \text{Rs. } 3 = \text{Rs. } 14 \)

2. Calculate Contribution Margin per Unit

The contribution margin per unit is the amount each unit sold contributes towards covering fixed costs and generating profit. It is calculated as the sale price per unit minus the variable cost per unit.

\( \text{Contribution Margin per Unit} = \text{Sale Price per Unit} - \text{Variable Cost per Unit} \)

\( \text{Contribution Margin per Unit} = \text{Rs. } 20 - \text{Rs. } 14 = \text{Rs. } 6 \)

3. Calculate Total Fixed Costs

Total fixed costs are the sum of all fixed expenses incurred by the company, regardless of the production or sales volume within a relevant range. Here, it includes fixed factory overheads and fixed selling costs.

\( \text{Total Fixed Costs} = \text{Fixed Factory Overheads} + \text{Fixed Selling Costs} \)

\( \text{Total Fixed Costs} = \text{Rs. } 5,40,000 + \text{Rs. } 2,52,000 = \text{Rs. } 7,92,000 \)

4. Calculate Desired Sales Volume in Units

The formula to calculate the desired sales volume in units to achieve a target profit is:

\( \text{Desired Sales Volume (Units)} = \frac{\text{Total Fixed Costs} + \text{Target Profit}}{\text{Contribution Margin per Unit}} \)

Using the values we calculated and the given target profit:

\( \text{Desired Sales Volume (Units)} = \frac{\text{Rs. } 7,92,000 + \text{Rs. } 60,000}{\text{Rs. } 6} \)

\( \text{Desired Sales Volume (Units)} = \frac{\text{Rs. } 8,52,000}{\text{Rs. } 6} \)

\( \text{Desired Sales Volume (Units)} = 1,42,000 \text{ units} \)

Therefore, the company needs to sell 1,42,000 units to earn a profit of Rs. 60,000.

Conclusion

Based on the calculations, the desired sales volume in units to achieve a profit of Rs. 60,000 is 1,42,000 units.

Revision Table: Key CVP Concepts

Additional Information on CVP Analysis

Cost-Volume-Profit (CVP) analysis is a vital tool for management planning and decision-making. It examines the relationship between changes in costs (both fixed and variable), volume (sales activity), and profit.

• Assumptions of CVP: CVP analysis relies on several assumptions, such as costs can be accurately separated into fixed and variable components, cost and revenue relationships are linear within the relevant range, sales mix is constant (for multiple products), inventory levels do not change significantly, and the efficiency of operations is constant.
• Break-Even Point: A key output of CVP analysis is the break-even point, which is the level of sales where total revenue equals total costs (both fixed and variable), resulting in zero profit. It can be calculated in units or sales value.
• Margin of Safety: This is the excess of actual or planned sales over the break-even sales. It indicates how much sales can drop before the company incurs a loss. A higher margin of safety suggests lower risk.
• Operating Leverage: CVP analysis helps understand operating leverage, which is the extent to which an organization's costs are fixed rather than variable. A higher degree of operating leverage means a larger change in profit for a given percentage change in sales.

By understanding these relationships, managers can make informed decisions about pricing, cost control, product mix, and sales strategies to achieve desired profit levels.