Discussion
MTC Ltd. sold 275,000 units of its product at Rs. 37.50 per unit. Variable cost are Rs. 17.50 per unit. (Manufacturing cost Rs. 14 and selling cost Rs. 3.50 per unit). Fixed costs are incurred uniformally throughout the year an amount to Rs. 35,00,000 (including depreciation of Rs. 15,00,000). There are no beginning and ending inventory. How much sales company should make to earn a desired profit of Rs. 250,000 ?
Answer: D
The required sales are about Rs. 70,31,689.
Required sales = (fixed costs + desired profit) / P/V ratio. Contribution per unit is 37.50 - 17.50 = Rs. 20, so:
\[ \begin{aligned} \text{P/V ratio} &= \frac{20}{37.50} = 53.33\% \\ \text{Required contribution} &= 35{,}00{,}000 + 2{,}50{,}000 \\ &= 37{,}50{,}000 \\ \text{Sales} &= \frac{37{,}50{,}000}{0.5333} \approx 70{,}31{,}689 \end{aligned} \]
The option figure comes from rounding the P/V ratio to 53.33%. With the exact ratio of 8/15 the answer is 187,500 units × Rs. 37.50 = Rs. 70,31,250, which is still nearest option D. Depreciation is part of the Rs. 35,00,000 of fixed cost and needs no separate treatment here; it matters only for a cash break-even point.
Rs. 75,00,000 is what results from taking the P/V ratio as 50%, and Rs. 70,00,000 and Rs. 73,50,000 do not cover the required contribution at the actual ratio.
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