Question

1.ABC industries produces 1 table and sells it at shs 100. The marginal cost of production is shs. 60 and the fixed cost is shs. 4,000 per annum.

Calculate :

a) P/V ratio                                                   ( 1 marks)

b) break-even sales                                    ( 2 marks)

c) the sales to earn a profit of shs. 5,000 ( 3 marks)

d) profit at sales of shs 30,000                   ( 3 marks)

Answer 1

Solution:

a.). P/V ratio = $\frac{Contribution}{Sales} \times 100$

Contribution = Sales – Variable costs = 100 – 60 = 40

P/V ratio = $\frac{40}{100} \times 100 = 40\%$

 

P/V ratio = $= 40\%$

b.). Break-even sales = $\frac{Fixed \; costs \times Sales }{Contribution}$

= $\frac{4,000 \times 100 }{40} = 10,000$

Break-even sales = shs. 10,000

 

c.). The sales to earn a profit of shs. 5,000:

Desired sales = $\frac{Fixed \; costs + Profit }{P/V ratio}$

= $\frac{4,000 + 5,000 }{0.4} = \frac{9,000}{0.4} = 22,500$

The sales to earn a profit of shs. 5,000 = shs.22,500

 

d.). Profit at sales of shs.30,000:

Sales = Fixed Costs + Profit/P/V ratio

30,000 = 4,000 + $\frac{P }{0.4}$

30,000 $\times$ 0.4 = 4,000 + P

12,000 = 4,000 + P

P = 12,000 – 4,000 = 8,000

Profit at sales of shs.30,000 = shs.8,000