Question 4 OR (b)

P/V ratio, break-even sales and sales for a target income from a cost equation

12 marks

Time to write: About 24 minutes
Topic: Cost-volume-profit analysis

Question

Question 4 OR (b) · 12 marks

The following equation describes the Cost-Volume-Profit relationship of Tara Ltd.:

Y = Rs.2,10,000 + 0.6X, where X stands for sales revenue, and Y for the total cost (FC + VC) at the level of sales revenue / Volume that X represents.

Required:

Identify the P/V Ratio.
To break- even, what sales volume must the Company obtain?
Analyze the Sales volume required to produce an income Rs.1,40,000.

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

24 minfor 12 marks

Read from the question

Identify…What…?Analyze…3 asks, each with its own marks below. Answer all 3.

Write it in this order

Read the data; note exactly what is asked 2 min
1 P/V ratio 3 marks 5 min
2 Break-even sales with check 4 marks 7 min
3 Sales for the target income with check 5 marks 8 min
Check: arithmetic, units (₹, %), final answer underlined 2 min

123

Try it first. About 24 minutes for 12 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

In Y = ₹2,10,000 + 0.6X, ₹2,10,000 is the fixed cost and 0.6X the variable cost, so variable cost is 60% of sales.

(i) P/V ratio

P/V ratio = (Sales − Variable cost) ÷ Sales = (X − 0.6X) ÷ X = 0.4, that is, 40%.

(ii) Break-even sales

Break-even sales = Fixed cost ÷ P/V ratio = ₹2,10,000 ÷ 40% = ₹5,25,000.

Check: total cost at ₹5,25,000 = ₹2,10,000 + 0.6 × ₹5,25,000 = ₹2,10,000 + ₹3,15,000 = ₹5,25,000 = sales.

(iii) Sales for an income of ₹1,40,000

Required sales = (Fixed cost + Desired income) ÷ P/V ratio = (₹2,10,000 + ₹1,40,000) ÷ 40% = ₹3,50,000 ÷ 0.40 = ₹8,75,000.

Check: total cost = ₹2,10,000 + 0.6 × ₹8,75,000 = ₹2,10,000 + ₹5,25,000 = ₹7,35,000; income = ₹8,75,000 − ₹7,35,000 = ₹1,40,000.

Where the 12 marks sit

#	Component	Marks
1	P/V ratio	3
2	Break-even sales with check	4
3	Sales for the target income with check	5
	Total	12

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