Answer to Question #274672 in Economics of Enterprise for Dennis

Question

2. Kapoor Denims Inc. manufactures denim fabric. 20 metres

of the fabric is sold at Rs 8000. Fixed costs is Rs 20 lacs per

production period and the profit contribution is 40 percent of

price. (20 marks)

a.

Determine the BEP.

b.

Determine the Profit/loss at output of 8,000, 10,000

and 15,000 units.

C.

For the next production period, fixed costs will

increase to 30 lacs due to a major capital investment

programme, but the new and more efficient machinery will

result in a lower variable production cost so that variable cost

per metre will be reduced by 40 percent. If price is

unchanged, re-compute the profit /loss at output rate of 8,000,

10,000 and 15,000 units

Answer 1

(a)

$BEP=\frac{Fixed Cost}{Contribution Margin}$

$=\frac{20}{0.40\times 8000}=0.00625$

(b)

Profit = Total Revenue- Total Cost

8,000:

$\frac{8000}{20}=400$

$=(400\times8000)-2000000$

$=1200000$

10,000:

$\frac{10000}{20}=500$

$=(500\times8000)-2000000$

$=2000000$

15,000:

$\frac{15000}{20}=750$

$=(750\times8000)-2000000$

$=4000000$

(c)

8,000:

$=(400\times8000)-3000000$

$=200000$

10,000:

$=(500\times8000)-3000000$

$=1000000$

15,000:

$=(750\times8000)-3000000$

$=3000000$