Marginal Costing - Doubt ?????

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Krish

CA Final

2323 Points Posted on 05 August 2010

I am not being able to find the "C" Point. After all effort i couldn't find the answer i.e. 800 Tickets. Please help me out. If any one know the procedure how to solve. Even hint to solve will also be helpful for me.

Q) ABC Ltd is planning a concert in a remote village in India. The following costs have been

estimated,

Rs.

Rent of premises 1,300

Advertising 1,000

Printing of tickets 250

Ticket sellers , security 400

Wages of ABC Ltd personnel employed at the concert 600

Fee to artist 1,000

There are no variable costs of staging the concert. The company is considering a selling price for tickets at either Rs. 4 or Rs. 5 each.

Required:

(a) Calculate the number of tickets that must be sold at each price in order to breakeven.

(b) Recalculate, the number of tickets which must be sold at each price in order to breakeven, if the artist agrees to change from a fixed fee of Rs. 1,000 to a fee equal to 25% of the gross sales proceeds.

(c) Calculate the level of ticket sales, for each price, at which the company would be indifferent as between the fixed and percentage fee alternatives. ??????????

Answers to Numerical Question.

2. (a) At price of Rs. 4 BES = 1,138 tickets

At price of Rs. 5 BES = 910 tickets.

(b) At price of Rs. 4 BES = 1,183 tickets

At price of Rs. 5 BES = 947 tickets.

Replies (7)

Manoj BG

Tax Professional and in Service

1637 Points Posted on 05 August 2010

HI KRISHNA,

YES, 800 IS RIGHT FOR PRICE LEVEL OF RS.5 PER TICKET.

HERE IS THEEXPLANATION FOR THIS...

U WANT TO FIND OUT THE SALES LEVEL AT WHICH FIXED COST OF ARTISTS AND ARTIST FEES BASED ON THE % OF GROSS SALES WOULD BE THE SAME..

Company would be indifferent as between the fixed and percentage fee alternatives ONLY WHEN THE COST UNDER BOTH THIS ALTERNATIVES IS THE SAME. FIRST TRY TO FIND OUT THE NO, OF TICKETS SOLD SO THAT PROFIT WOULD REMIN THE SAME. PROFIT WOULD REMIN SAME WHEN COST UNDER BOTH ALTERNATIVES REMAINS THE SAME. THUS, WE HAVE TO KEEP THE ARTISTS FEES RS. 1000 WHETHER IT IS BASED ON FIXED FEE OR % OF GROSS SALES.

NOW, IF I HAD GIVEN % OF GROSS SALES TO ARTISTS, NO OF TICKETS NEED TO BE SOLD SO THAT COST WOULD BE REMAINED AT RS.1000 IS AS FOLLOWS :

= RS.1000 = RS. 4000 GROSS SALES

25%

NO. OF TICKETS SOLD = RS. 4000/ RS5 PER TICKET = 800 TICKETS

THUS, IF U SOLD 800 TICKETS, COMPANY WOULD BE INDIFFERENT AS TO PAY ON THE FIXED OR % OF GROSS SALES BASIS

U CAN VALIDATE THIS ANSWER BY FINDING OUT PROFIT UNDER BOTH OPTIONS I.E FIXED PAY AND VARIABLE PAY, U WILL GET THE SAME ANSWER.

HOPE THIS SOLVES U'R QUERY.

REGARDS,

MANOJ