Problem-one:
The contribution income summary is extracted
from a business entity as follows:
Revenues (tk. 200 × 50)
10,000
Less: Variable costs (tk. 120× 50)
6,000
Contribution margin
4,000
Less: Fixed costs
2,400
Operating income
1,600
What number of units to be sold to earn a net
income of tk. 1,600, assuming operating income
is taxed at a rate of 50%? Also verify your
answer.
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Problem-two:
From the following information
a) compute the cost of prediction error if unsold
units can be returned to supplier and
b) b) compute the cost of prediction error if unsold
units can’t be returned to supplier:
Original sales prediction:
2,000 units at a selling price of tk. 1.80
Unforeseen competition reduced sales to 1,200
units
Fixed costs
tk. 400
Cost per unit
tk. 1.00
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Problem-three:
A company fixes up the selling price of a new
product tk. 20. The company estimates to produce
2,500 units. It has the following two alternatives:
Production method A:
Unit variable cost tk. 8, total fixed cost tk. 16,000,
break-even quantity 1,333 units
Production method B:
Unit variable cost tk. 10, total fixed cost tk. 12,000,
break-even quantity 1,200 units
Compute a sensitivity table showing the sensitivity
of profit at the following levels:
1,000 units, 1,500 units, 2,000 units, 2,500 units,
3,000 units and 4,000 units, Also give your opinion.
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Problem-four:
The Waxton Company has recently gone through a strategic
planning session for all of its sales personnel. Based on past
experience and future goals for the upcoming year, the
following information is available:
Mean sales for the last 5 years
units
Standard deviation of sales volume
Last year’s sales
Goal for the next year
Other information is as follows:
Selling price per unit
Variable cost per unit
Total fixed costs
1, 00,000
8,000 units
1, 06,000 units
1, 11,300 units (5% increase)
tk. 10
tk. 4.80
tk. 4, 50,000
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Requirements:
a) What is the probability of at least breaking even?
b) What is the probability of achieving next year’s sales goal?
c) What additional information do you want to be more confident
about your probability assessments in the previous two parts?
d) How are your answer to parts a and b affected by a shift of the
mean from 1, 00,000 to 1, 06,000?
e) Independent from your response to part 4, how are your
answers to parts a and b affected by a reduction of the
standard deviation to 6,000 units?
f) What is the probability of achieving a target profit of tk. 1,
74,000?
[Adapted from: Maurice L. Hirsch, Jr. (1998), Advanced Management Accounting,
Boston: PWS-KENT Publishing Company. ]
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Problem-five:
ABC Ltd. plans to sell a special leather bag at a
three-day trade fare. ABC can purchase these
leather bags from an importer at tk. 100 with the
privilege of returning all unsold units and
receiving the full amount per unit. The units will
be sold at tk. 180 each. The trade fare has
offered the following alternatives for stall rental:
 Alternative 1: Tk. 2,000 fixed fee.
 Alternative 2: Tk. 1,400 fixed fee plus 5% of the
revenues from the sale of leather bag.
 Alternative 3: 25% of the revenues from the sale
of leather bag but no fixed fee.
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ABC Ltd. estimates 0.60 probability that
sales will be 60 units and .40 probability
that sales will be 80 units. Which stall
rental alternative should ABC choose? If
ABC is sure that 40 units would be sold,
which one should ABC choose? If ABC is
sure that 60 units would be sold, which
one should it choose?
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Problems for practice:
1.Unit selling price of a particular product is tk. 200,
variable cost per unit is tk. 125 and total fixed cost
for the current period is tk. 3,000. What number of
units to be sold to earn a net income of tk. 4,000,
assuming that operating income is taxed at a rate of
30%?
2. Shoilee enterprise has fixed cost of tk. 1, 20,000
and a variable cost ratio is 70%. The firm earns net
income of tk. 80,000. The income tax rate is 25%.
Requirements:
a) Compute the operating income.
b) Compute the contribution margin
c) Total revenues and
d) Break-even revenues
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3. Dexter Company has the following information for its strategic
planning session:
Mean sales for the last five years
80,000 units
Standard deviation of sales volume
10,000 units
Last year’s goal
85, 000 units
Goal for the next year
93,500 units
Price per unit
tk. 7.00
Variable costs per unit
tk. 4.20
Fixed costs
tk. 1, 80,000
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Requirements:
a) What is the probability of at least breaking even?
b) What is the probability of achieving next year’s sales
goal?
c) What additional information do you want to be more
confident about your probability assessments in the
previous two parts?
d) How are your answer to parts a and b affected by a shift
of the mean from 80,000 to 90,000 units?
e) Independent from your response to part d, how are your
answers to parts a and b affected by a reduction of the
standard deviation to 8,000 units?
f) What is the probability of achieving a profit of tk. 50,000?
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4. The Exclusive Company introduced a new
product last year for which it is trying to find an
optimal selling price. A feasibility study was
conducted which suggests that the company can
increase sales by 5,000 units for each tk. 3
reduction in the selling price. The company's
present selling price is tk. 80 per unit and
variable costs are tk. 40 per unit. Fixed
expenses are tk. 5, 50,000 per year. The current
sales volume is 15,000 units at the selling price
of tk. 80 per unit.
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Requirements:
a) What is the yearly operating income or loss at the
present level of sales?
b) Compute the break-even quantity and the break-even
sales in tk.
c) Assuming that the feasibility study is correct, what is the
maximum profit that the company can earn yearly? At
how many units would the company generate this profit?
At what selling price per unit?
d) What would be the break-even point in units and in tk.
using the selling price you calculated in (c) above.
e) Comment on the results.
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