Example 1

Shahid Limited is engaged in manufacturing and sale of footwear. The company sells its products
through company operated retail outlets as well as through distributors. The management is in the
process of preparing the budget for the year 20X0-X1 on the basis of following information: i. The
marketing director has provided the following annual sales projections:

No. of units Retail price range

Men 1,200,000 Rs. 1,000 – 4,000

Women 500,000 Rs. 800 – 2,500

The previous pattern of sales indicates that 60% of units are sold at the minimum price; 10% units are
sold at the maximum price and remaining 30% at a price of Rs. 2,000 and Rs. 1,200 per footwear for men
and women respectively.

It has been estimated that 30% of the units would be sold through distributors who are offered 20%
commission on retail price. The remaining 70% will be sold through company operated retail outlets.

Sales through company outlets include sales of cut size footwears which are sold at 40% below the
normal retail price and represent 5% of the total sales of the retail outlets.

 Calculate Gross sales revenue

 Calculate commission to distributors
 Calculate cut size discount.

Example 2

Beta (Private) Limited (BPL) deals in manufacturing and marketing of bed sheets. The management of
the company is in the phase of preparation of budget for the year 20X3-X4. BPL has production capacity
of 4 million bed sheets per annum. Currently the factory is operating at 68% of the capacity. The results
for the recently concluded year are as follows:

Rs. in million

Sales 3,400

The management has planned to take following steps to increase the sale and improve cost efficiency:

 Increase selling price by Rs. 150 per unit.

 The sales are to be increased by 25%. To achieve this, commission on sales will be introduced besides
fixed salaries. The commission will be paid on the entire sale and the rate of commission will be as
follows:

No. of units Commission % on total sales

Less than 35,000 1.00%

35,000 – 40,000 1.25%

 40,000 – 50,000 1.50%

Above 50,000 1.75%

Currently the sales force is categorized into categories A, B and C. Number of persons in each category is
20, 30 and 40 respectively. Previous data shows that total sales generated by each category is same.
Moreover, sales generated by each person in a particular category is also the same. The trend is
expected to continue in future.

 Calculate gross sales

 Calculate commission and net sales.

Example 3

Beta (Private) Limited (BPL) deals in manufacturing and marketing of bed sheets. The management of
the company is in the phase of preparation of budget for the year 20X3-X4. BPL has production capacity
of 4 million bed sheets per annum. Currently the factory is operating at 68% of the capacity. The results
for the recently concluded year are as follows:

Rs. in million

Sales 3,400

Cost of goods sold

Material (1,493)

Labor (367)

Manufacturing overheads (635)

Gross profit 905

Other relevant information is as under:

The raw material and labor costs are expected to increase by 5%. All overheads and fixed expenses
except depreciation will increase by 5%.

Manufacturing overheads include depreciation of Rs. 285 million and other fixed overheads of Rs. 165
million. During the year 20X3–X4 major overhaul of a machine is planned at a cost of Rs. 35 million
which will increase the remaining life from 5 to 12 years. The current book value of the machine is Rs. 40
million and it has a salvage value of Rs. 5 million. At the end of 12 years, salvage value will increase on
account of general inflation to Rs. 9 million. The company uses straight line method for depreciating the
assets.

Variable manufacturing overheads are directly proportional to the production volume of production.

The management has planned to take following steps to increase the sale and improve cost efficiency: 
The sales are to be increased by 25%.
The overall efficiency of the workforce can be increased by 15% if management allows a bonus of 20%.
Further increase in production can be achieved by hiring additional labor at Rs. 180 per unit.

 Calculate Material cost.

 Calculate Labor cost.
 Calculate variable production overheads.
 Calculate fixed production overheads.
 Calculate cost of goods sold.

Example 4

Rose Industries Limited (RIL) is in process of preparation of its budget for the year ending 31 March
2020. In this respect, following information has been extracted from RIL's projected financial statements
for the year ending 31 March 2019:

Rs. in million

Sales (100% credit sales) 360,000 units 2,800

Information and projections for the budget year ending 31 March 2020:

(i) The management estimates that profitability can be increased by employing the following
measures: Introduction of cash sales at 5% less than the credit sales price. This would
increase the total sales volume by 30% whereas credit sales volume would reduce by 20% as
some of the existing customers would shift to cash sales.

Calculate gross sales.

Example 5

Rose Industries Limited (RIL) is in process of preparation of its budget for the year ending 31 March
2020. In this respect, following information has been extracted from RIL's projected financial statements
for the year ending 31 March 2019:

Rs. in million

Sales (100% credit sales) 360,000 units 2,800

Cost of sales

Raw material 1,120

Variable conversion cost 280

Fixed conversion cost (including depreciation of Rs. 24 million) 160

Operating cost Variable (varies with sales volume) 190

Fixed (including depreciation of Rs. 16 million) 45

Closing inventory
Raw material 70

Finished goods 40,000 units 110

Information and projections for the budget year ending 31 March 2020:

i. The management estimates that profitability can be increased by employing the following
measures:  It will increase the total sales volume by 30%.
ii. As the purchases increase, RIL would negotiate with the suppliers and receive 2% trade
discount.
iii. Cost reduction measures would be taken which would save 5% of the variable conversion
and variable operating costs.

iii. Effect of inflation on price of raw material and all other costs (excluding depreciation) would be
10%. iv. Closing raw material and finished goods inventories would increase by 8%. RIL uses marginal
costing and follows FIFO method for valuation of inventory. all transactions are evenly distributed
over the year (360 days),

Calculate production units and variable cost of sales

Example 6

Mazahir (Pakistan) Limited manufactures and sells a consumer product Zee. Relevant information
relating to the year ended June 30, 20X3 is as under:

Annual sales 19,000 units

Annual production 18,000 units

Salient features of the business plan for the year ending June 30, 20X4 are as under:

i. Sale is budgeted at 21,000 units at the rate of Rs. 1,100 per unit.

The company has a policy of maintaining closing stock at 5% of sales. In order to avoid stock-outs,
closing stock would now be maintained at 10% of sales. The closing stocks are valued on FIFO basis.

Calculate production units

Part b

Mazahir (Pakistan) Limited manufactures and sells a consumer product Zee. Relevant information
relating to the year ended June 30, 20X3 is as under:

Raw material per unit 5 kg at Rs. 60 per kg

Actual labor time per unit (same as budgeted) 4 hours at Rs. 75 per hour

Actual machine hours per unit (same as budgeted) 3 hours

Variable production overheads Rs. 15 per machine hour

 Fixed production overheads Rs. 6 million

Salient features of the business plan for the year ending June 30, 20X4 are as under

ii. Cost of raw material is budgeted to increase by 4%.

iii. A quality control consultant will be hired to check the quality of raw material. It will help improve the
quality of material procured and reduce raw material usage by 5%. Payment will be made to the
consultant at Rs. 2 per kg.

iv. The management has negotiated a new agreement with labor union whereby wages would be
increased by 10%. The following measures have been planned to improve the efficiency:  30% of the
savings in labor cost would be paid as bonus.  A training consultant will be hired at a cost of Rs. 300,000
per annum to improve the working capabilities of the workers. On account of the above measures, it is
estimated that labor time will be reduced by 15%.

iv. Variable production overheads will increase by 5%.

v. Fixed production overheads are expected to increase at the rate of 8% on account of inflation.fixed
overheads are allocated on basis of machine hours
vi. The closing stocks are valued on FIFO basis.

Calculate cost of goods sold ?

Example 7

The home appliances division of Umair Enterprises assembles and markets television sets. The
company has a long term agreement with a foreign supplier for the supply of electronic kits for its
television sets. Relevant details extracted from the budget for the next financial year are as follows:

C&F value of each electronic kit 9,500

Estimated cost of import related expenses, duties etc. 900

Variable cost of local value addition for each set 3,500

Variable selling and admin expenses per set 900

Annual fixed production expenses 12,000,000

Fixed production overheads are allocated on the basis of budgeted production which is 5,000 units.
The present supply chain is as follows: i. The company sells to distributors at cost of production plus
25% mark-up.

Calculate sale price under current conditions.

Example 8

The present supply chain is as follows:

i. The company sells to distributors at cost of production plus 25% mark-up.

ii. ii. Distributors sell to wholesalers at 10% margin.
iii. iii. Wholesalers sell to retailers at 4% margin.
 iv. iv. Retailers sell to consumers at retail price i.e. at 10% mark-up on their cost.

Performance of the division had not been satisfactory for the last few years. A business consulting
firm was hired to assess the situation and it has recommended the following steps:

a) Reduce the existing supply chain by eliminating the distributors and wholesalers.

b) Reduce the retail price by 5%.

C) Launch advertisement campaign; expected cost of campaign would be around Rs. 5 million. It is
expected that the above steps will increase the demand by 1,500 sets.

Calculate revised retail price.

Example 9

RS Enterprises is a family concern headed by Mr. Rameez. It is engaged in manufacturing of a single

product but under two brand names i.e. A and B. Brand B is of high quality and over the past many
years, the company has been charging a 60% higher price as compared to brand A. As the company
has progressed, Mr. Rameez has felt the need for better planning and control. He has compiled the
following data pertaining to the year ended November 30,20X8:

Rupees

Sales 5,522,400

A B

No. of units sold 5400 3600

Labor hours required per unit 5 6

Other information is as follows:

i. 20% of B was sold to a corporate buyer who was given a discount of 10%. The buyer has
agreed to double the purchases in 20X9 and Mr. Rameez has agreed to increase the
discount to 15%.
ii. ii. In view of better margins in B, Mr. Rameez has decided to promote its sale at a cost of Rs.
250,000. As a result, its sales to customers other than the corporate customer, are expected
to increase by 30%. However, the production capacity is limited. He intends to reduce the
production/sale of A if necessary. Mr. Rameez has ascertained that 90% capacity was
utilized during the year ended November 30, 20X8 whereas the time required to produce
one unit of B is 20% more than the time required to produce a unit of A.

Calculate sales and production units in 20X8.

Calculate sales and production units in 20X9.

Example 10

Part b
 RS Enterprises is a family concern headed by Mr. Rameez. It is engaged in manufacturing of a single
product but under two brand names i.e. A and B. Brand B is of high quality and over the past many
years, the company has been charging a 60% higher price as compared to brand A. As the company
has progressed, Mr. Rameez has felt the need for better planning and control. He has compiled the
following data pertaining to the year ended November 30,20X8:

Rupees

Sales 5,522,400

A B

No. of units sold 5400 3600

Labor hours required per unit 5 6

Production costs:

Raw materials 2,310,000

Direct labor 777,600

2.4 kgs of the same raw material is used for both brands but the process of manufacturing B is slightly
complex and 10% of all raw material is wasted in the process. Wastage in processing A is 4%.

The price of raw material has remained the same for the past many years. However, the supplier has
indicated that the price will be increased by 10% with effect from March 1, 20X9.

v. Direct labor per hour is expected to increase by 15%.

Calculate material cost and labor cost for 2oX9.