Question
Download Solution PDFFrom the following information about a firm, what will be the contribution to sales (c/s) ratio and the profit?
Sales = ₹100,000
Fixed Cost = ₹20,000
Break-even Point = ₹40,000
Answer (Detailed Solution Below)
Detailed Solution
Download Solution PDFThe correct answer is C/S 50% and Profit = ₹30,000
Key Points Contribution to Sales Ratio:
- Contribution to sales (c/s) ratio is a tool used in profit management.
- C/S ratio = (Sales revenue - Variable cost of sales)/Sales revenue x 100
Break Even point:
- The quantity of units that must be sold in order to provide no profit no loss (but will recover all associated costs).
- The break-even point, in other words, is the point at which your product stops costing you money to produce and sell and begins to make money for your business.
Important Points Break − even point = \({\frac {\text {Fixed Cost}}{Contribution}}\times Sales\)
\(40000=\frac {20000} {Contribution}\times 100000\)
\(Contribution=\frac {20000} {40000}\times 100000\)
\(Contribution= 50000\)
C/S Ratio = \({Contribution \over Sales }\times 100\)
C/S Ratio = \({50000 \over 100000 }\times 100 = 50 {\text {%}}\)
\(\text {Fixed Cost} = Sales \times {\text {C/S Ratio}} - Profit\)
\(\text {20000} = 100000 \times {\text {50%}} - Profit\)
\(Profit = 30000\)
Hence, C/S 50% and Profit = ₹30,000
Additional Information Profit:
- Profit = Sales - Fixed Cost - Variable Cost
- We can rewrite this as: Sales = Profit + Fixed Cost + Variable Cost
Contribution to Sales Ratio (C/S Ratio):
- C/S Ratio = (Sales - Variable Cost) / Sales
- Substituting the first equation, we get: C/S Ratio = (Profit + Fixed Cost) / Sales
Calculation:
- Fixed Cost = ₹20,000
- Profit = ₹30,000
- Break-even Point = Fixed Cost + Contribution Margin x Sales
- 40,000 = 20,000 + 0.50 x Sales (assuming C/S Ratio is 50%)
- Sales = 40,000 / 0.50 = ₹80,000
Therefore, the correct values are:
- C/S Ratio: 50%
- Sales: ₹80,000
- Profit: ₹30,000
Last updated on Jun 6, 2025
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