Two manufacturing companies which have the following operating details decide to
ID: 2443479 • Letter: T
Question
Two manufacturing companies which have the following operating details decide to merge:
Particulars
Company No. 1
Company No. 2
Capacity utilization %
Sales (Rs. Lakhs)
Variable Cost (Rs. Laksh)
Fixed Cost (Rs. Laksh)
90
540
396
80
60
300
225
50
Assuming that the proposal is implemented calculate :
(i) Break-even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales turn over of the merged plant to earn a profit of Rs. 75 lakhs.
(iv) When the merged plant is working at a capacity to earn a profit of Rs. 75 lakhs what percentage increase in selling price is required to sustain an increase of 5% in fixed overheads.
Particulars
Company No. 1
Company No. 2
Capacity utilization %
Sales (Rs. Lakhs)
Variable Cost (Rs. Laksh)
Fixed Cost (Rs. Laksh)
90
540
396
80
60
300
225
50
Explanation / Answer
(i) Break-even sales of the merged plant and the capacity utilization at that stage.
Company A Capacity ( 100%) 540 x 100 / 90 = Rs. 600 lakhs
Company B Capacity ( 100%) 300 x 100 / 60 = Rs. 500 lakhs
Total 840 Rs. 1100 lakhs
Total Sales of the merged plant 840 lakhs
Less : Variable costs (396+225) 621 lakhs
Contribution of the merged plant 219 lakhs
CM Ratio 219 x 100 / 840 26.07%
Break even Sales = Fixed costs / CM Ratio
= 130 lakhs / 26.07% = 498.66 lakhs
Capacity utilization = 498.66 / 1100 = 45.33%
(ii) Profitability of the merged plant at 80% capacity utilization.
80% Capacity utilization 1100 lakhs x 80% = 880.00 lakhs
Less : Variable costs 880 x (100% - 26.07%) = 650.58 lakhs
Contribution 229.42 lakhs
Less : Fixed costs 130.00 lakhs
Profit 99.42 lakhs
(iii) Sales turn over of the merged plant to earn a profit of Rs. 75 lakhs.
Required Sales = Fixed costs + Trget profit / CM Ratio
= (130 lakhs + 75 lakhs) / 26.07%
= 786.34 Lakhs
(iv) When the merged plant is working at a capacity to earn a profit of Rs. 75 lakhs what percentage increase in selling price is required to sustain an increase of 5% in fixed overheads.
Revised Fixed costs + Target profit
= [(130 lakhs x 1.05) + 75 lakhs]
= 211.50 Lakhs
Required Sales = 211.50 lakhs + (786.34 x 73.93%)
= 792.84 lakhs
% increase in Selling price = (792.84 - 786.34) x 100 / 786.34
= 6.50 x 100 / 786.34
= 0.827%
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