XYZ Ltd. has supplied you the following information in respect of one of its products:Total fixed costs Rs. 18,000Total variable costs Rs. 30,000Total sales Rs. 60,000Unit sold 20,000Calculate the volume of sales to earn a profit of Rs. 24,000
Question
XYZ Ltd. has supplied you the following information in respect of one of its products:Total fixed costs Rs. 18,000Total variable costs Rs. 30,000Total sales Rs. 60,000Unit sold 20,000Calculate the volume of sales to earn a profit of Rs. 24,000
Solution
To calculate the volume of sales needed to earn a profit of Rs. 24,000, we can use the contribution margin ratio. The contribution margin ratio is calculated by subtracting the total variable costs from the total sales and then dividing it by the total sales.
First, let's calculate the contribution margin ratio: Contribution Margin Ratio = (Total Sales - Total Variable Costs) / Total Sales Contribution Margin Ratio = (Rs. 60,000 - Rs. 30,000) / Rs. 60,000 Contribution Margin Ratio = Rs. 30,000 / Rs. 60,000 Contribution Margin Ratio = 0.5 or 50%
The contribution margin ratio represents the portion of each sale that contributes to covering the fixed costs and generating profit. In this case, 50% of each sale contributes towards profit.
To calculate the volume of sales needed to earn a profit of Rs. 24,000, we can use the following formula: Volume of Sales = (Fixed Costs + Desired Profit) / Contribution Margin Ratio
Volume of Sales = (Rs. 18,000 + Rs. 24,000) / 0.5 Volume of Sales = Rs. 42,000 / 0.5 Volume of Sales = 84,000 units
Therefore, to earn a profit of Rs. 24,000, XYZ Ltd. needs to sell 84,000 units of the product.
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