Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
A Japanese Soft Drink Company is planning to establish a subsidiary company in India to produce Mineral Water
A Japanese Soft Drink Company is planning to establish a subsidiary company in India to produce Mineral Water. Based on the estimated annual sales of 40,000 bottles of the mineral water, cost studies produced the following estimates for the Indian subsidiary. % of Variable cost Material Rs. 1,20,000 100% Labour Rs. 1,50,000 80% Factory Overhead Rs. 92,000 60% Administration O/H Rs. 40,000 35% The Indian production will be sold by manufacturer's representatives who will receive a commission of 8% of the sale price. No portion of the Japanese office is to be allocated to the Indian Subsidiary. Required to a) Compute the sale price per bottle enable the management to realise an estimated 10% profit on sale proceeds in India. b) Calculate the BEP in rupees and also in number of bottles for the Indian subsidiary on the assumption that the sale price is Rs. 14/- per bottle. c) Prepare break even chart and comment on the profitability of the firm. d) Discuss the relevance of CVP analysis in this context.
Expert Solution
Note: It is assumed that the costs given in the question are Total Costs per annum and the % given represents the variable portion and remaining the fixed portion.
| Particulars | Total Annual Cost | Variable Cost % | Variable Cost | Fixed Cost |
| Materials | 120000 | 100 | 120000 | - |
| Labour | 150000 | 80 | 120000 | 30000 |
| Factory Overhead | 92000 | 60 | 55200 | 36800 |
| Admin Overhead | 40000 | 35 | 14000 | 26000 |
| TOTAL | 402000 | 309200 | 92800 |
a) Computation of Selling Price per unit of bottle to realise a profit of 10% on Sales
Let the Selling Price per unit be x.
Annual Sales = 40000x
Commission (8% on Sales) = 3200x
Target Profit (10% on Sales) = 4000x
Total Cost (from above table) = 402000
Sales = Cost + Profit
40000x = 402000+3200x+4000x
Solving, x = 12.256
Thus, Selling Price per unit of bottle to realise a profit of 10% on Sales = 12.256 per unit
b) Required Break-even point in Sales and Quantity:
Assumption, Sales Price per bottle = Rs. 14
BEP in Sales = Total Fixed Costs/Contribution Sales Ratio(PV Ratio)
BEP in Quantity = Total Fixed Costs/Contribution per unit
- Total Fixed Costs = 92800
- Contribution per unit = Selling Price per unit - Variable Cost per unit
Variable Cost per unit = 309200/40000 = 7.73
Sales Commission per unit = 14*8% = 1.12
Contribution = 14-7.73-1.12 = 5.15 per unit
- Contribution Sales Ratio = 5.15/14 = 36.79%
BEP (Sales) = 92800/36.79% = Rs. 252242
BEP (Quantity) = 92800/5.15 = 18019 units
d) Relevance of CVP Analysis:
- CVP analysis provides relationship between cost, volume and profit and hence becomes important for budgeting and planning.
- It helps management to identify most profitable combination of costs and volume.
- We can also identify how change in costs and volume effect changes in income.
- Hence it plays a major role in decision making.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
