Numerical

Dr Mohit Gupta
Professor
School of Business Studies
PAU, Ludhiana
Numerical 1
• Rama limited is selling at present 8000 units of a product at a selling
price of Rs 20 per unit. The variable cost is Rs 10 per unit and the
fixed costs are Rs 60000 per annum. The firm can use Break Even
Equation to answer the following questions
• What is the BE sales level of the firm?
• How many units the firm must sell to earn a profit od Rs 40000?
• What will be the profit if the fixed costs are reduced by Rs 10000 and the
variable costs are reduced by 10%
• What selling price will give a profit of Rs 40000 at the sales of 8000 units
• How much extra sales must be made to meet the extra fixed cost of Rs 5000
Numerical – Margin of Safety
• There are two firms – A and B Limited. The sales and cost information
for these two firms are given below. Analyse the cost information and
comment about the risk of the company

A Limited B Limited
Sales (Units) 10000 10000
Selling Price (Per Unit) 20 20
Variable cost (Unit) 15 10
Fixed cost 40000 90000
Solution…
• Margin of safety is an indicator of risk of the company
• More the margin of safety  lesser is the risk
• Margin of safety = Actual (Budgeted sales) – BE sales
• Margin of Safety (in %) = ((Expected sales – BE Sales) / Expected
sales))*100
• So for this numerical we can approach in this way
 Solution
A Limited B Limited

Sales 200000 200000

Variable cost 150000 100000

Contribution 50000 100000

Fixed cost 40000 90000

Net Profit 10000 10000

BE Sales 160000 180000

Margin of Safety (Rs) 40000 20000

Margin of Safety (in %) 20% 10%

What can be done if low margin of
safety?
• Increase the overall sales level
• Reduction in fixed cost or conversion of fixed cost into variable cost
• Reducing the BE level by increasing contribution
Numerical – Flexible Budget
• Following are the budgeted expenses for a factory operating at 70%
level of activity with 1400 hours
• Variable cost = Rs 2800
• Semi variable = Rs 3200
• Fixed cost = Rs 4000
• The semi variable expenses go up by 15% between 80 and 90 percent
level of activity and by 20% above 90% activity. Prepare a flexible
budget for 80, 90 and 100 percent level of activity and calculate
recovery rate per hour
 Solution
Level of Activity 70% 80% 90% 100%

Budgeted Hours 1400

Variable expenses 2800

Semi variable 3200

expenses

Fixed expenses 4000

Total cost

Recovery rate / hour =

Total cost / Budgeted
Hours
 Solution
Level of Activity 70% 80% 90% 100%

Budgeted Hours 1400 1600 1800 2000

Variable expenses 2800 3200 3600 4000

Semi variable 3200 3680 3680 3840

expenses

Fixed expenses 4000 4000 4000 4000

Total cost 10000 10880 11280 11840

Recovery rate / hour = 10000 / 1400 = 7.143 10880/1600 = 6.80 11280/1800 = 6.267 11840/2000 = 5.92
Total cost / Budgeted
Hours
Flexible Budget – Numerical 2
• The expenses for the production of 6000 units in a factory are given
as. Prepare the budget for production of 5000 units
Particulars Per Unit (Rs)
Materials 40
Labour 15
Variable overheads 20
Fixed overheads (Rs 42000) 7
Administrative expenses (10% Variable) 15
Selling expenses (10% fixed) 10
Distribution expense (20% fixed) 8
Total cost of sales per unit 115
Production Output 6000 Units Output 5000 Units

Particulars Per Unit Amount Per Unit Amount

Materials
Labour
Prime cost
Factory overheads
Variable overheads
Fixed overheads
Factory Cost
Administrative expense
Fixed expense
Variable expense
Cost of production
Selling Expense
Fixed expense
Variable expense
Distribution expense
Fixed expense
Variable
Total cost of sales
Production Output 6000 Units Output 5000 Units

Particulars Per Unit Amount Per Unit Amount

Materials 40 240000 40 200000
Labour 15 90000 15 75000
Prime cost 55 330000 55 275000
Factory overheads
Variable overheads 20 120000 20 100000
Fixed overheads 7 42000 8.40 42000
Factory Cost 82 492000 83.40 417000
Administrative expense
Fixed expense 13.5 81000 16.20 81000
Variable expense 1.5 9000 1.5 7500
Cost of production 97 582000 101.10 505500
Selling Expense
Fixed expense 1 6000 1.2 6000
Variable expense 9 54000 9 45000
Distribution expense
Fixed expense 1.6 9600 1.92 9600
Variable 6.4 38400 6.4 32000
Total cost of sales 115 690000 119.62 598100
Sales Overhead Budget - Example
• You are required to prepare a sales overhead budget from the following
• Advertisement – Rs 2500
• Salaries to sales dept – Rs 5000
• Expenses of sales dept – Rs 1500
• Counter salesman salaries – Rs 6000
• Commission to counter salesman is at 1% on their sales. Travelling salesman commission is @ 10%
and expenses @ 5% on their sales. The sales during the period are estimated at different levels as
under
Counter Sales Travelling Salesman Sales
80000 10000
120000 15000
140000 20000
Solution
Estimated Sales
Counter Sales
Travelling Salesman
Total Sales
Total fixed expenses
Variable overheads
Counter sales commission
Travelling salesman
commission
Travelling expenses
Total
Solution
Estimated Sales
Counter Sales 80000 120000 140000
Travelling Salesman 10000 15000 20000
Total Sales 90000 135000 160000
Total fixed expenses 15000 15000 15000
Variable overheads
Counter sales commission 800 1200 1400
@1%
Travelling salesman 1000 1500 2000
commission @10%
Travelling expenses @ 5% 500 750 1000
Total 17300 18450 19400
Production Budget
• The following are the estimated sales of ABC Co for 8 months ending
30-10-2024
Month Estimates Sales
April 2024 12000
May 2024 13000
June 2024 9000
July 2024 8000
Aug 2024 10000
Sept 2024 12000
Oct 2024 14000
Nov 2024 12000
Contd..
• As a matter of policy, the company maintains the closing balance of
finished goods and raw materials as follows
• Finished goods: Closing stock of month will be 50% of the estimated
sales for the next month
• Raw Material: Closing stock of the month will be equal to estimated
consumption for the next month
• Each unit of production consumes 2 Kg of raw material costing Rs 6/- per
Kg. Prepare the following budgets for the half year ending 30-09-2024
• Production Budget (month wise in units)
• Raw material purchase budget (month wise) in units and cost
Solution – Production Budget
April May June July Aug Sept
Estimated
Sales
Add: Closing
Stock
Required
Units
Less: Opening
Stock
Estimated
Production
Solution – Production Budget
April May June July Aug Sept
Estimated 12000 13000 9000 8000 10000 12000
Sales
Add: Closing 6500 4500 4000 5000 6000 7000
Stock
Required 18500 17500 13000 13000 16000 19000
Units
Less: Opening 6000 6500 4500 4000 5000 6000
Stock
Estimated 12500 11000 8500 9000 11000 13000
Production
Solution – Raw Material Budget
April May June July Aug Sept
Material @ 25000 22000 17000 18000 22000 26000
2/Kg
Add: Closing 22000 17000 18000 22000 26000 26000
Stock
Required 47000 39000 35000 40000 48000 52000
Units
Less: Opening 25000 22000 17000 18000 22000 26000
Stock
Estimated 22000 17000 18000 22000 26000 26000
Production
Cost of 132000 102000 108000 132000 156000 156000
Purchase @
6/Kg
Question
• Sales promotion and advertisement is an important key variable of
Bristol Home Limited. Prepare a sales overhead budget from the
estimates for the year 2024 as given below

Advertisement Rs 2500000
Salaries of the sales department 5000000
Expenses of the sales department 1500000
Counter sales man salaries 6000000
Contd..
• Commission to counter salesman at 1% of their sales
• Travelling salesman commission at 10% on their sales and expenses at
5% on their sales
• The sales during the period are estimated as follows

Counter Sales Travelling Total

Salesman
Case I 80000000 10000000 90000000
Case II 120000000 15000000 135000000
Case III 140000000 20000000 160000000
Solution
Case I Case II Case III
Sales 90000000 135000000 160000000
Variable Overheads:
Counter salesman 800000 1200000 1400000
commission @ 1%
Travelling salesman 1000000 1500000 1000000
commission @ 10%
Expenses @ 5% 500000 750000 1000000
Fixed overheads
Advertisement 2500000 2500000 2500000
Salaries of sales 5000000 5000000 5000000
Expenses of sales 1500000 1500000 1500000
Salaries of counter 6000000 6000000 6000000
salesman
Total sales overhead 17300000 18450000 19400000