Problem No. 19
The following data are available in a manufacturing company for a yearly period. At present the company is utilizing only 60% of the plant capacity.
Sales revenue: Rs. 3,00,000
Selling price per unit: Rs. 10
Variable cost per unit: Rs. 5
Fixed cost: Rs. 50,000
Step fixed cost: Rs. 20,000
Additional information:
(i) At above 60% capacity, the selling price falls by 10%.
(ii) The step fixed cost will remain constant (or unchanged) at 50% to 75%, but will increase by Rs. 5,000 between 76% and 100% capacity.
Required: Flexible budget for 70% and 90% of capacity
Answer (1)
The budgeted total cost and profit are R s .2 , 45 , 000 and R s .70 , 000 for 70% capacity, and R s .3 , 00 , 000 and R s .1 , 05 , 000 for 90% capacity.
Explanation
Understanding the Problem First, we need to understand the problem. We are given the sales revenue, selling price per unit, variable cost per unit, fixed cost, and step fixed cost at 60% capacity. We need to prepare a flexible budget for 70% and 90% capacity, considering that the selling price falls by 10% above 60% capacity and the step fixed cost increases by Rs. 5,000 between 76% and 100% capacity.
Calculating Units at 60% Capacity Next, we calculate the number of units sold at 60% capacity. We know that Sales revenue = Selling price per unit * Number of units. Therefore, Number of units = Sales revenue / Selling price per unit. At 60% capacity: Number of units = Rs. 3,00,000 / Rs. 10 = 30,000 units.
Calculating Units at 70% and 90% Capacity Now, we calculate the number of units at 70% and 90% capacity. We can use the proportion: Units at 60% Units at 70% = 60 70 Units at 70% = 30000 × 60 70 = 35000 Units at 60% Units at 90% = 60 90 Units at 90% = 30000 × 60 90 = 45000 So, at 70% capacity, the number of units is 35,000, and at 90% capacity, the number of units is 45,000.
Calculating Selling Price at 70% and 90% Capacity Since the capacity is above 60%, the selling price falls by 10%. Therefore, the selling price at 70% and 90% capacity is: Selling price = Original selling price * 0.9 Selling price at 70% = Rs. 10 * 0.9 = Rs. 9 Selling price at 90% = Rs. 10 * 0.9 = Rs. 9
Calculating Total Fixed Cost at 70% Capacity The total fixed cost at 70% capacity is the sum of the fixed cost and the step fixed cost. Since 70% is between 50% and 75%, the step fixed cost remains constant at Rs. 20,000. Total fixed cost at 70% = Rs. 50,000 + Rs. 20,000 = Rs. 70,000
Calculating Total Fixed Cost at 90% Capacity The total fixed cost at 90% capacity is the sum of the fixed cost, the step fixed cost, and the additional step fixed cost. Since 90% is between 76% and 100%, the step fixed cost increases by Rs. 5,000. Therefore, the step fixed cost is Rs. 20,000 + Rs. 5,000 = Rs. 25,000. Total fixed cost at 90% = Rs. 50,000 + Rs. 25,000 = Rs. 75,000
Calculating Total Variable Cost at 70% and 90% Capacity Now, we calculate the total variable cost at 70% and 90% capacity. Total variable cost = Variable cost per unit * Number of units Total variable cost at 70% = Rs. 5 * 35,000 = Rs. 1,75,000 Total variable cost at 90% = Rs. 5 * 45,000 = Rs. 2,25,000
Calculating Total Cost at 70% and 90% Capacity The total cost at 70% and 90% capacity is the sum of the total fixed cost and the total variable cost. Total cost at 70% = Rs. 70,000 + Rs. 1,75,000 = Rs. 2,45,000 Total cost at 90% = Rs. 75,000 + Rs. 2,25,000 = Rs. 3,00,000
Calculating Sales Revenue at 70% and 90% Capacity The sales revenue at 70% and 90% capacity is the product of the selling price per unit and the number of units. Sales revenue at 70% = Rs. 9 * 35,000 = Rs. 3,15,000 Sales revenue at 90% = Rs. 9 * 45,000 = Rs. 4,05,000
Calculating Profit at 70% and 90% Capacity Finally, we calculate the profit at 70% and 90% capacity. Profit = Sales revenue - Total cost Profit at 70% = Rs. 3,15,000 - Rs. 2,45,000 = Rs. 70,000 Profit at 90% = Rs. 4,05,000 - Rs. 3,00,000 = Rs. 1,05,000
Final Answer Therefore, the flexible budget for 70% capacity shows a total cost of Rs. 2,45,000 and a profit of Rs. 70,000. The flexible budget for 90% capacity shows a total cost of Rs. 3,00,000 and a profit of Rs. 1,05,000.
Examples
Flexible budgeting is a crucial tool in business management, allowing companies to adjust their budgets based on actual activity levels. For example, a clothing manufacturer can use flexible budgeting to estimate costs and revenues at different production volumes, helping them make informed decisions about pricing, production levels, and resource allocation. By understanding how costs and revenues change with varying levels of output, businesses can better manage their financial performance and adapt to changing market conditions. This approach ensures that financial planning remains relevant and responsive, leading to more accurate forecasting and improved profitability.
