# BASIC CONCEPTS AND FORMULAE

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1 12 Marginal Costing BASIC CONCEPTS AND FORMULAE Basic Concepts 1. Absorption Costing: a method of costing by which all direct cost and applicable overheads are charged to products or cost centers for finding out the total cost of production. Absorbed cost includes production cost as well as administrative and other cost. 2. Break even chart: A mathematical or graphical representation, showing approximate profit or loss of an enterprise at different levels of activity within a limited range. 3. Break Even Point: This is the level of activity there is neither a profit nor a loss. 4. Cash Break Even Point: It is the level of activity where there is neither a cash profit nor a cash loss. 5. Cost Breakeven Point: It is the level of activity where the total cost under two alternatives are the same. It is also known as Cost indifference point. 6. Differential Costing: It is a technique used in the preparation of adhoc information in which only cost and income differences in between alternative courses of action are taken into consideration. 7. Direct Costing: This is a principle under which all costs which are directed related are charged to products, processes, operations or services, of which they form an integral part. 8. Marginal contribution: This is the difference between selling price and variable cost of production. 9. Marginal Cost: This is the variable cost of one unit of product or a service. 10. Marginal Costing: It is a principle whereby variable cost are charged to cost units and fixed cost attributable to the relevant period is written off in full against contribution for that period. 11. Profit Volume Chart: It is a diagram showing the expected relationship between costs, revenue at various volumes with profit being the residual. 12. Profit Volume ratio: It is the ratio establishing the relationship between the

2 12.2 Cost Accounting contribution and the sales value. 13. Margin of Safety: This is the difference between the expected level of sales and the break even sales Basic Formulas 1. *S V = F + P By multiplying and dividing L.H.S. by S 2. S(S V) = F + P S 3. S P/V Ratio = F + P or Contribution S V ( Q P/V Ratio = ) S 4. **BES P/V Ratio = Fixed Cost (Q at BEP profit is zero) 5. Fixed Cost BES = P/V Ratio 6. Fixed Cost P/V Ratio = BES 7. S P/V Ratio = Contribution (Refer to iii) 8. Contribution P/V Ratio = Sales 9. (BES + MS) P/V Ratio = contribution (Total sales = BES + MS) 10. (BES P/V Ratio) + (MS P/V Ratio) = F + P By deducting (BES P/V Ratio) from L.H.S. and F from R.H.S. in x we get : 11. ***M.S. P/V Ratio = P 12. Change in profit P/V Ratio = Change in sales 13. P/V Ratio = 14. Profitability = Change in contribution Change in sales Contribution Key factor 15. Margin of Safety = Total sales BES. 16. BES = Total sales MS

3 Marginal Costing Margin of safety ratio = Total sales - BES Total sales * S = Sales, V= Variable Cost, F= Fixed Cost, P= Profit ** BES = Break Even Sales, P/V Ratio = Profit Volume Ratio ***M.S = Margin of Safety Question 1 A company produces single product which sells for ` 20 per unit. Variable cost is ` 15 per unit and Fixed overhead for the year is ` 6,30,000. Required: (a) (b) Calculate sales value needed to earn a profit of 10% on sales. Calculate sales price per unit to bring BEP down to 1,20,000 units. (c) Calculate margin of safety sales if profit is ` 60,000. (a) Suppose sales units are x then S = V + F + P S = Sales V = Variable Cost F = Fixed Cost P = Profit 20x = 15x + 6,30, x 20x 17x = 6,30,000 6,30,000 x = = 2,10,000 units 3 Sales value = 2,10, = ` 42,00,000 (b) Sales price to down BEP 1,20,000 units F 6,30,000 S = V + S = 15 + Rs New BEP 1,20,000 Profit 60,000 C (c) M S Sales = where P/ V = 100. P/ V ratio P/ V S

4 12.4 Cost Accounting Question 2 5 Or, = 25% 60, = 2,40,000 Or 25 Explain and illustrate cash break-even chart. In cash break-even chart, only cash fixed costs are considered. Non-cash items like depreciation etc. are excluded from the fixed cost for computation of break-even point. It depicts the level of output or sales at which the sales revenue will equal to total cash outflow. It is computed as under: CashFixed Cost Cash BEP (Units) = Cost per Units Hence for example suppose insurance has been paid on 1st January, 2006 till 31st December, 2010 then this fixed cost will not be considered as a cash fixed cost for the period 1st January, 2008 to 31st December, Question 3 A company has fixed cost of ` 90,000, Sales ` 3,00,000 and Profit of ` 60,000. Required: Sales volume if in the next period, the company suffered a loss of ` 30,000. (ii) What is the margin of safety for a profit of ` 90,000?

5 Marginal Costing 12.5 Contribution 1,50,000 P/V ratio = 100 = 100 = 50% Sales 3,00,000 (ii) If in the next period company suffered a loss of ` 30,000, then Contribution = Fixed Cost ± Profit = ` 90,000 ` 30,000 (as it is a loss) = ` 60,000. Then Sales = Contribution 60,000 or = ` 1,20,000 P / V ratio 0.50 So, there will be loss of ` 30,000 at sales of ` 1,20,000. Pr ofit 90,000 Margin of safety = or = ` 1,80,000 PV ratio 0.50 Alternative solution of this part: Break-even Sales = Sales at profit of ` 90,000 = Margin of Safety Question 4 Fixed Cost 90,000 = = ` 1,80,000 PV Ratio 0.5 = Fixed Cost + Profit PV Ratio 90, , = 1,80, = Sales Break-even Sales = 3,60,000 1,80,000 = ` 1,80,000 = ` 3,60,000. ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable production costs are ` 40 per unit and the variable selling expenses are ` 12 per sold unit. The budgeted fixed production expenses were ` 24,00,000 per annum and the fixed selling expenses were ` 16,00,000. During the year ended 31st March, 2008, the company worked at 80% of its capacity. The operating data for the year are as follows: Production 3,20,000 units ` 80 per unit 3,10,000 units Opening stock of finished goods 40,000 units Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses are recovered on the basis of period.

6 12.6 Cost Accounting You are required to prepare Statements of Cost and Profit for the year ending 31st March, 2008: On the basis of marginal costing (ii) On the basis of absorption costing. Statement of Cost and Profit under Marginal Costing for the year ending 31st March, 2008 Output = 3,20,000 units Particulars Amount (`) Amount (`) Sales: 3,10,000 ` 80 2,48,00,000 Less: Marginal cost / variable cost: Variable cost of production (3,20,000 ` 40) 1,28,00,000 Add: Opening stock 40,000 ` 40 16,00,000 1,44,00,000 Less: Closing Stock [(3,20, ,000 ` 40 = 50,000 ` 40] 20,00,000 Variable cost of production of 3,10,000 units 1,24,00,000 Add: Variable selling ` 12 per unit 37,20,000 1,61,20,000 Contribution (sales variable cost) 86,80,000 Less: Fixed production cost 24,00,000 Fixed selling expenses 16,00,000 40,00,000 Actual profit under marginal costing 46,80,000 (ii) Statement of Cost and Profit under Absorption Costing for the year ending 31st March, 2008 Output = 3,20,000 units Particulars Amount (`) Amount (`) Sales: 3,10,000 ` 80 2,48,00,000 Less: Cost of sales:

7 Marginal Costing 12.7 Variable cost of production ` 40) 1,28,00,000 Add: Fixed cost of production absorbed 3,20,000 ` 6 (1) 19,20,000 1,47,20,000 1,47,20,000 18,40,000 Add: Opening Stock: 40,000 3,20,000 Less: Closing Stock: 1,47,20,000 50,000 3,20,000 1,65,60,000 23,00,000 Production cost of 3,10,000 units 1,42,60,000 Selling expenses: Variable: ` 12 3,10,000 units 37,20,000 Fixed 16,00,000 1,95,80,000 Unadjusted profit 52,20,000 Less: Overheads under absorbed: (2) Fixed production overheads 4,80,000 Actual profit under absorption costing 47,40,000 Workings: 1. ` 24,00,000 Absorption rate for fixed cost of production = = ` 6 per unit 4,00,000 units 2. Fixed production overhead under absorbed = ` (24,00,000 19,20,000) = ` 4,80,000. Question 5 PQ Ltd. reports the following cost structure at two capacity levels: (100% capacity) 2,000 units 1,500 units Production overhead I ` 3 per unit ` 4 per unit Production overhead II ` 2 per unit ` 2 per unit If the selling price, reduced by direct material and labour is ` 8 per unit, what would be its break-even point?

8 12.8 Cost Accounting Computation of Break-even point in units: 2,000 units 1,500 units Production Overhead I: Fixed Cost (`) 6,000 6,000 (2,000 unit ` 3 per unit) (1,500 unit ` 4 per unit) Selling price Material and labour (`) (A) 8 8 Production Overhead II (Variable Overhead) (B) 2 2 Contribution per unit (A) (B) 6 6 Fixed cost 6,000 Break - even point = = = 1,000 units Contribution per unit 6 Question 6 Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to product Z during the quarter II of the financial year will be ` 2,80,000. Calculate the sales revenue required to achieve a quarterly profit of ` 70,000. P/V ratio = 28% Quarterly fixed Cost = ` 2,80,000 Desired Profit = ` 70,000 Sales revenue required to achieve desired profit Fixed Cost + Desired Pr ofit 2,80, ,000 = = = ` 12,50,000 P / V ratio 28% Question 7 A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The contribution margins per unit are ` 40 for J and `20 for K. Fixed costs are ` 6,16,000 per month. Compute the break-even point. Let 4x = No. of units of J Then 3x = no. of units of K Fixed Cost BEP in x units = = ` Contribution 4(40) + 3(20)

9 Marginal Costing 12.9 Or =2800 units 220 Break even point of Product J = = units Break even point of Product K = = 8400 units Question 8 Mega Company has just completed its first year of operations. The unit costs on a normal costing basis are as under: (`) Direct material 4 `4 = Direct labour 3 `18 = Variable overhead 3 `4 = Fixed overhead 3 `6 = Selling and administrative costs: Variable `20 per unit Fixed `7,60,000 During the year the company has the following activity: Units produced = 24,000 Units sold = 21,500 Unit selling price = `168 Direct labour hours worked = 72,000 Actual fixed overhead was `48,000 less than the budgeted fixed overhead. Budgeted variable overhead was ` 20,000 less than the actual variable overhead. The company used an expected actual activity level of 72,000 direct labour hours to compute the predetermine overhead rates. Required : Compute the unit cost and total income under: (a) Absorption costing (b) Marginal costing (ii) Under or over absorption of overhead. (iii) Reconcile the difference between the total income under absorption and marginal costing.

10 12.10 Cost Accounting Computation of Unit Cost & Total Income Unit Cost Absorption Costing (`) Marginal Costing (`) Direct Material Direct Labour Variable Overhead Fixed Overhead Unit Cost Income Statements Absorption Costing Sales 36,12,000 (21500 `168) Less: Cost of goods sold ( ) 21,50,000 Less: Over Absorption 28,000 21,22,000 14,90,000 Less: Selling & Distribution Expenses 11,90,000 Profit 3,00,000 Marginal Costing Sales 36,12,000 Less: Cost of goods sold ( ) 17,63,000 Add: Under Absorption 20,000 17,83,000 18,29,000 Less: Selling & Distribution Expenses 4,30,000 Contribution 13,99,000 Less: Fixed Factory and Selling & Distribution Overhead (38, ,60,000) 11,44,000 Profit 2,55,000 (ii) Under or over absorption of overhead: Budgeted Fixed Overhead (`) 72,000 Hrs. `6 4,32,000 Less: Actual Overhead was less than Budgeted Fixed Overhead 48,000 Actual Fixed Overhead 3,84,000

11 Marginal Costing Budgeted Variable Overhead 72,000 Hrs. `4 2,88,000 Add: Actual Overhead was higher than Budgeted 20,000 Budgeted 3,08,000 Both Fixed & Variable Overhead applied 72,000 Hrs ` 10 7,20,000 Actual Overhead (3,84, ,08,000) 6,92,000 Over Absorption 28,000 (iii) Reconciliation of Profit Difference in Profit: ` 3,00,000 2,55,000 = `45,000 Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing not in Marginal Costing. Therefore, Difference in Profit = Fixed Overhead Rate (Production Sale) 18 (24,000 21,500) = `45,000 Question 9 What do you understand by Key factor? Give two examples of it. Key factor is a factor which at a particular time or over a period limits the activities of an undertaking. It may be the level of demand for the products or service or it may be the shortage of one or more of the productive resources. Examples of key factors are: (a) Shortage of raw material. (b) Shortage of Labour. (c) Plant capacity available. (d) Sales capacity available. (e) Cash availability. Question 10 Following information are available for the year 2008 and 2009 of PIX Limited: Year Sales ` 32, 00,000 ` 57, 00,000 Profit/(Loss) (` 3,00,000) ` 7, 00,000 Calculate (a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of ` 12,00,000.

12 12.12 Cost Accounting (a) P/V Ratio = Changeinprofit 100 Changeinsales = 7,00,000+ 3,00, = 10,00, (57,00,000 32,00,000) 25,00,000 = 40% (b) Total fixed cost = Total contribution - Profit =(Sales P/V ratio) Profit 40 = (`57, 00,000 ) = `7, 00, =`22, 80,000 `7, 00,000 =`15, 80,000 (c) Contribution required to earn a profit of `12, 00,000 = Total fixed cost + Profit required =`15, 80, , 00,000 = `27, 80,000 27,80,000 27,80,000 Required Sales = = = `69, 50,000 P / VRatio 40% Question 11 MNP Ltd sold 2,75,000 units of its product at ` per unit. Variable costs are ` per unit (manufacturing costs of ` 14 and selling cost ` 3.50 per unit). Fixed costs are incurred uniformly throughout the year and amount to ` 35,00,000 (including depreciation of `15,00,000). there are no beginning or ending inventories. Required: (ii) Estimate breakeven sales level quantity and cash breakeven sales level quantity. Estimate the P/V ratio. (iii) Estimate the number of units that must be sold to earn an income (EBIT) of ` 2,50,000. (iv) Estimate the sales level achieve an after-tax income (PAT) of ` 2,50,000. Assume 40% corporate Income Tax rate. Fixed cost Break even Sales Quantity = Contribution margin per unit = ` 35,00,000 =1,75,000 units ` 20 Cash Break even Sales Qty= Cash Fixed Cost Contribution margin per unit = ` 20,00,000 =1, 00,000 units. ` 20

13 Marginal Costing (ii) P/V ratio = Contribution/ unit 100 Selling Pr ice / unit = = % (iii) No. of units that must be sold to earn an Income (EBIT) of ` 2, 50,000 Fixed cost + Desired EBIT level = Contribution margin per unit (iv) After Tax Income (PAT) = `2, 50,000 Tax rate = 40% 35,00,000+ 2,50, Desired level of Profit before tax = `2,50, = `4,16,667/- 60 Estimate Sales Level = FixedCost + DesiredPr ofit P/Vratio = ` 35,00,000+ ` 4,16,667 = `73,43,750/ % Question 12 = units The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units for ` 5,00,000. You are required to calculate: Break even point, and (ii) Sales in units to earn a profit of 10% on sales P/V Ratio - 50% Margin of Safety - 40% Sales 500 Units for ` 5,00,000 Sales Per Unit - ` 1000 Calculation of Break Even Point (BEP) Margin of Safety Ratio = Sales BEP 100 Sales 40 = 5,00,000 BEP 100 5,00,000 BEP = ` 3,00,000 BEP Per Unit = 3,00,000/1000 = 300 Units

14 12.14 Cost Accounting (ii) Sales in units to earn a profit of 10 % on sales Sales = Fixed Cost + Desired Pr ofit P/VRatio Let the sales be x Profit = 10% of x i.e. 0.1X. Thus - x = 1,50, X 50% or x = ` 3,75,000 To find out sales in units amount of sales ` 3,75,000 is to be divided by Selling Price Per unit Thus - Sales (in units ) = 3,75, = 375 Units Working Notes 1. Selling price = ` 5,00,000/` 500 = ` 1000 per unit 2. Variable cost per unit Selling Price - (Selling Price x P/V Ratio) 1000 (1000 x 50%) = ` Profit at present level of sales Margin of Safety Pr ofit = P / V Ratio Margin of Safety = 40% of ` 5,00,000 = ` 2,00,000 2,00,000 Pr ofit = 50% Profit = ` 1,00, Fixed Cost = (Sales x P/V Ratio) Profit = 5,00,000 x 50% 1,00,000 = `1,50,000 Note: Alternative ways of calculation of Break Even Point and required sales to earn a profit of 10% of sales can be adopted to solve the problem.

15 Marginal Costing Question 13 Write short notes on Angle of Incidence This angle is formed by the intersection of sales line and total cost line at the breakeven point. This angle shows the rate at which profits are being earned once the breakeven point has been reached. The wider the angle the greater is the rate of earning profits. A large angle of incidence with a high margin of safety indicates extremely favourable position. Question 14 Discuss basic assumptions of Cost Volume Profit analysis. CVP Analysis:-Assumptions Changes in the levels of revenues and costs arise only because of changes in the number of products (or service) units produced and sold. (ii) Total cost can be separated into two components: Fixed and variable (iii) Graphically, the behaviour of total revenues and total cost are linear in relation to output level within a relevant range. (iv) Selling price, variable cost per unit and total fixed costs are known and constant. (v) All revenues and costs can be added, sub traded and compared without taking into account the time value of money. Question 15 The following figures are related to LM Limited for the year ending 31st March, 2012 : Sales - 24,000 ` 200 per unit; P/V Ratio 25% and Break-even Point 50% of sales. You are required to calculate: (ii) Fixed cost for the year Profit earned for the year (iii) Units to be sold to earn a target net profit of ` 11,00,000 for a year. (iv) Number of units to be sold to earn a net income of 25% on cost. (v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

16 12.16 Cost Accounting Break even point (in units) is 50% of sales i.e. 12,000 units Hence, Break even point (in sales value) is 12,000 units x ` 200 = ` 24,00,000 We know that Break even sales = Fixed Cost P/V ratio or ` 24,00,000 = Fixed Cost 25% or Fixed Cost = ` 24,00,000 x 25% = ` 6,00,000 So Fixed Cost for the year is ` 6,00,000 (ii) Contribution for the year =(24,000 units x ` 200) x 25% = ` 12,00,000 Profit for the year = Contribution Fixed Cost = ` 12,00,000 - ` 6,00,000 = ` 6,00,000 (iii) Target net profit is ` 11,00,000 Hence, Target contribution = Target Profit + Fixed Cost = ` 11,00,000 + ` 6,00,000 = ` 17,00,000 Contribution per unit = 25% of ` 200 = ` 50 per unit ` 17,00,000 No. of units = = 34,000 unit ` 50 per unit So, 34,000 units to be sold to earn a target net profit of ` 11,00,000 for a year. (iv) Net desired total Sales (Number of unit x Selling price) be Χ, then desired profit is 25% on Cost or 20% on Sales i.e. 0.2 Χ Desired Sales = Fixed Cost + Desired Profit P/V ratio Χ = 6,00, Χ 25% or, 0.25 Χ = 6,00, Χ or, 0.05 Χ = 6,00,000

17 Marginal Costing (v) or, Χ = ` 1,20,00,000 No. of units to be sold - 1,20,00, = 60,000 units If Break even point is to be brought down by 4,000 units then Breakeven point will be units 4000 units = 8000 units Let selling price be ` X and fixed cost and variable cost per unit remain unchanged i.e. ` 6,00,000 and ` 150 respectively. Break even point: Sales revenue = Total cost 8,000 X = 8,000 x ` ` 6,00,000 Or, 8,000 X = ` 12,00,000 + ` 6,00,000 ` 18,00,000 Or, X = = ` 225 8,000 Selling Price should be ` 225 Hence, selling price per unit shall be ` 225 if Breakeven point is to be brought down by 4000 units. Questions for Practice EXERCISE 1. TAJ Ltd. manufactures a single product, MAHAL. The following figures relate to MAHAL for a one-year period: Activity Level 50% 100% Sales and production (units) ` lakhs ` lakhs Sales Production costs: Variable Fixed Selling and administration costs: Variable Fixed The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year, and actual fixed costs are the same as budgeted. There were no stocks of MAHAL at the beginning of the year. In the first quarter, 220 units were produced and 160 units were sold. Required: (a) (b) What would be the fixed production costs absorbed by MAHAL, if absorption costing is used? What would be the under/over-recovery of overheads during the period?

18 12.18 Cost Accounting (c) What would be the profit using absorption costing? (d) What would be the profit using marginal costing? a. ` b. ` 4000 c. ` 40,000 d. ` You are given the following data for the year 2007 of Rio Co. Ltd: Variable cost 60,000 60% Fixed cost 30,000 30% Net profit 10,000 10% Sales 1,00, % Find out (a) Break-even point, (b) P/V ratio, and (c) Margin of safety. Also draw a break-even chart showing contribution and profit. a. ` 75000, b. 40% c. ` 25, An Automobile manufacturing company Bharti produces different models of cars. The budget in respect of model 1000 for the month of September, 2006 is as under: Budgeted output 40,000 units Variable Costs: (` Lakhs) Materials 264 Labour 52 Direct expenses Fixed costs: Specific fixed costs Allocated fixed costs Total costs Add: Profit Sales Calculate: Profit with 10% increase in selling price with a 10% reduction in sales volume. (ii) Volume to be achieved to maintain the original profit after a 10% rise in material costs, at the originally budgeted selling price per unit lakhs (ii) units 4. Mr. X has ` 2,00,000 investments in his business firm. He wants a 15 per cent return on his money. From an analysis of recent cost figures, he finds that his variable cost of operating is 60% of sales, his fixed costs are ` 80,000 per year. Show computations to answer the following questions: What sales volume must be obtained to break even?

19 Marginal Costing (ii) What sales volume must be obtained to get 15 per cent return on investment? Break Even Point = ` 2,00,000 (ii) Sales Volume Required = ` 2,75, Two manufacturing companies which have the following operating details decide to merge: Company I Company 2 Capacity utilization % Sales (` lakhs) Variable Costs (` lakhs) Fixed Costs (` lakhs) Assuming that the proposal is implemented, calculate: (ii) (iii) (iv) Break even sales of the merged plant and the capacity utilization at that stage. Profitability of the merged plant at 80% capacity utilization. Sales turnover of the merged Plant to earn a profit of ` 75 lakhs. When the merged Plant is working at a capacity to earn a profit of ` 75 lakhs what percentage increase in selling price is required to sustain an increase of 5% in fixed overheads. (ii) (iii) Break Even Point of the merged plant = ` lakhs Profitability of the merged plant at 80% capacity = 98 lakhs Sales required to earn a profit of ` 75 lakhs = ` lakhs (iv) Percentage increase in S.P. to sustain 5% increase in F.O. (with ` 75 lakhs profit) = % 6. Following is the data taken from the records of a concern manufacturing a special part ZED. Selling price per unit ` 20 Direct material cost per unit ` 5 Direct labour cost per unit ` 3 Variable overhead cost per unit ` 2 Budgeted level of output and sales 80,000 units Budgeted recovery rate of fixed overheads cost per unit ` 5 You are required to: (a) Draw a break-even chart showing the break-even point. (b) In the same chart show the impact of break-even point. (c) If selling price per unit is increased by 30% and (ii) if selling price per unit is decreased by 10%. (a) B.E. Point = 40,000 units or ` 8,00,000 (c) The B.E. Point at increased price (30% increase in SP) is 25,000 units or sales value of ` 6,50,000.

20 12.20 Cost Accounting (ii) The B.E. Point at reduced price (10% reduction in SP) is 50,000 units or sales value of ` 9,00, The Ward Company sold 1,00,000 units of its product at ` 20 per unit. Variable costs are ` 14 per unit (manufacturing costs of ` 11 and selling costs of ` 3). Fixed costs are incurred uniformly throughout the year and amount to ` 7,92,000 (manufacturing costs of ` 500,000 and selling costs of ` 292,000). There are no beginning or ending inventories. Required: Determine the following: a. The break-even point for this product b. The number of units that must be sold to earn an income of ` 60,000 for the year (before income taxes) c. The number of units that must be sold to earn an after-tax income of ` 90,000, assuming a tax-rate of 40 percent. d. The break-even point for this product after a 10 percent increase in wages and salaries (assuming labour costs are 50 percent of variable costs and 20 percent of fixed costs). (a) 1,32,000 units (b) 1,42,000 units (c) 1,57,000 units (d) 1,52,423 units 8. ABC Ltd is planning a concert in a remote village in India. The following costs have been estimated, (`) Rent of premises 1,300 Advertising 1,000 Printing of tickets 250 Ticket sellers, security 400 Wages of ABC Ltd personnel employed at the concert 600 Fee to artist 1,000 There are no variable costs of staging the concert. The company is considering a selling price for tickets at either ` 4 or ` 5 each. Required: (a) Calculate the number of tickets that must be sold at each price in order to breakeven. (b) Recalculate, the number of tickets which must be sold at each price in order to breakeven, if the artist agrees to change from a fixed fee of ` 1,000 to a fee equal to 25% of the gross sales proceeds. (c) Calculate the level of ticket sales, for each price, at which the company would be indifferent as between the fixed and percentage fee alternatives. (d) Comment on the factors which you think the company might consider in choosing between the fixed fee and percentage fee alternative. (a) At price of ` 4 BES = 1,138 tickets At price of ` 5 BES = 910 tickets. (b) At price of ` 4 BES = 1,183 tickets At price of ` 5 BES = 947 tickets. (c) 800 tickets.

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