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Find out selling price.

Arka Bose (None) (313 Points)

16 February 2010

Hi,I am stuck in this particular question and if anyone of you can help me out,I would be very grateful.The question is as under:

Find out the selling price of an article whose cost of production and sale of 100000 units are:

Material Rs 50000,Labour Rs 40000,Overhead Rs 160000.

The fixed portion of capital employed is Rs 50000 and the varying portion is 40% of sales turnover.A profit of 8% net on capital employed after payment of tax at 40% of the earnings is desired.

Thanks in advance.

Arka

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5 Replies

Amir (Learner) (4016 Points)
Replied 16 February 2010

Dear Arka,

Let sales be "X",

Pre tax rate of profit will be 13.33% [50,000+40/100*X]

Simple Equation will be

SALES = COST + PROFIT

X = 2,50,000 + 13.33% [50,000+40/100*X],

Answer is Rs. 2.71/unit

Material		50,000.00
Labour		40,000.00
Overhead		160,000.00
Cost of Production		250,000.00
Profit (PreTax)
- Fixed Capital	50,000.00
- Variable Capital	108,450.40
	158,450.40	21,126.00*

		271,126.00

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Arka Bose (None) (313 Points)
Replied 16 February 2010

thank you very much

Amir (Learner) (4016 Points)
Replied 17 February 2010

Dear Arka,

I hope u have got the clarity regarding working of PRE tax rate of profit,........

Anyway I am posting it now -

Post tax Profit = 8%

Tax Rate = 40%

Therefore Pre Tax Profit = 8 / (1-40%) = 13.33%

Capital Employed can be divided into two Fixed & Floating(Variable) Capital employed......

Now, Fixed Capital ployed is something which will remain invested till the project continuesor may be alter only by a policy decision (for eg--Security deposit, Minimum Level of Inventory,etc)

Whereas Fluctuating/Variable Capital employed means Amount stuck up with Debtors, Inventory above minimum level, etc.