CA INTERMEDIATE: COSTING & FM · MARGINAL COSTING

Sales needed for a target profit

Required units = (Fixed cost + Target profit) ÷ Contribution per unit. For an after-tax target, first gross it up: pre-tax = after-tax ÷ (1 − tax rate).

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Worked examples

Example 1 · level 1

Sharma Industries Ltd sells water purifiers at ₹110; variable cost ₹60 per unit; fixed costs ₹1,95,000. How many units must be sold to earn a profit of ₹1,30,000?

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Required contribution = ₹1,95,000 + ₹1,30,000 = ₹3,25,000.
Units = ₹3,25,000 ÷ ₹50 = 6,500.

Answer: 6,500 units

Example 2 · level 2

Reddy Cements sells steel chairs at ₹250; variable cost ₹185 per unit; fixed costs ₹4,09,000. How many units must be sold to earn a profit of ₹46,000?

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Required contribution = ₹4,09,000 + ₹46,000 = ₹4,55,000.
Units = ₹4,55,000 ÷ ₹65 = 7,000.

Answer: 7,000 units

Example 3 · level 3

Patel Packaging sells gear boxes at ₹215; variable cost ₹165 per unit; fixed costs ₹9,45,000; tax rate 20%. How many units must be sold to earn a profit after tax of ₹84,000?

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Pre-tax profit = ₹84,000 ÷ 0.8 = ₹1,05,000.
Required contribution = ₹9,45,000 + ₹1,05,000 = ₹10,50,000.
Units = ₹10,50,000 ÷ ₹50 = 21,000.

Answer: 21,000 units