Query - Marginal Costing Sum

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Resham

Carpe Diem !!!

6535 Points Joined July 2010

Please help me out with this.. especially (c) & (d).

Ques from module of the chapter Marginal Costing

GIVEN

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

Rent of Premises - Rs. 1300

Advertising - Rs. 1000

printing of tickets - Rs. 250

Ticket sellers, Security - Rs. 400

Wages of ABC Ltd personnel employed at the concert - Rs. 600

Fee to artist - Rs. 1000

There are no variable costs of staging the concert. The company is considering 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. 1000 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.

(d) Comment on the factors which you think the company might consider in choosing between the fixed fee and the percentage fee alternative.

Answer as per module:

(a) at price Rs. 4 BES= 1138 tickets

at price Rs. 5 BES= 910 tickets

(b) at price Rs. 4 BES= 1183 tickets

at price Rs. 5 BES = 947 tickets

Am getting answers of (a) and (b).

Replies (5)

santhoshi

article assistant

179 Points Joined November 2009

Ans) a) no.of tickets that must be sold in order to BEP :

at Rs.4 = Rs.4550/4 =1138 tickets

at Rs.5= Rs.4550/5 = 910 tickets

b) if ticket price is Rs.4 then contribution =Rs.3 (Rs.3 is 75% of Rs.4 ,since 25% of gross sale is

artist fee)

therefore, (4550-1000)/3 = 1183 tickets

if ticket price is Rs.5 then contribution =Rs.3.75 (Rs.3.75 is 75% of Rs.5 ,since 25% of gross sale is

artist fee)

therefore, (4550-1000)/3.75 = 947 tickets

CA bhargava

2017 Points Joined July 2008

Ans. For C is as belo

Fixed Cost under a.-4550 and b.-3550

difference in fixed cost is 1000/-

know if the company want to sell the ticket at 4 rs. and the options are to go for option a or b then 1000/4-3=1000, which means at 1000tickets it is indefferent to sell the tickets at 4 rs. either in option a or b,

2.if company wants to sell at 5/- and the above aptions , then difference in fixed cost 1000/5-3.75=800 tickets indiffernce point in two options.

(how i got 3.75=(5-25%of 5))

(how i got 3=(4-25%of 4)

SUMIT

46 Points Joined July 2010

IF TICKET PRICE IS RS. 4

CONT = RS. 3, FIXED COST = RS. 3550 (UNDER % METHOD)

CONT = RS. 4, FIXED COST = RS. 4550 (UNDER FIXED METHOD)

THEN

REQUIRED LEVEL WILL BE ( 4550-3550 ) / (4-3) = 1000

IF TICKET PRICE IS RS. 5

CONT = RS. 3.75, FIXED COST = RS. 3550 (UNDER % METHOD)

CONT = RS. 5.00, FIXED COST = RS. 4550 (UNDER FIXED METHOD)

THEN

REQUIRED LEVEL WILL BE ( 4550-3550 ) / (5.00 -3.75 ) = 800

d) ONE OF THE FACTOR WHICH CO. SHOULD CONSIDER IS THE TICKET SALES LEVEL.

IF SALE IS EXPECTED TO INCREASE CO. SHOULD OPT FOR FIXED METHOD.

Resham

Carpe Diem !!!

6535 Points Joined July 2010

Thanks a lot Santoshi, Bhargava and Sumit.

If anyone else knows other factors for ans of (d) then please reply..

RamKumar

Article Trainee - Big 4

89 Points Joined September 2007

d) The company should distinguish between the FIXED and VARIABLE Cost . Since here there is no variable cost the company should consider FEE alternative only after its BREAK EVEN COST has been obtainted and pay the ARTIST .

Concept is Variable Cost varies with production but FIXED for PER UNIT and Fixed cost Varies with Cost per unit and fixed for all levels of production.