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CS Professional · Strategic Management and Corporate Finance · Business Policy and Formulation of Functional Strategy

Ramesh Textiles Ltd. sells 20,000 metres of fabric at Rs 300 each. Variable cost is Rs 180 per metre and fixed cost is Rs 15,00,000. Management plans a promotion that raises fixed cost by Rs 3,00,000 and is expected to raise volume to 26,000 metres at the same price. What is the change in profit from the promotion?

Profit rises by Rs 4,20,000. Contribution per metre is Rs 120, so 6,000 extra metres add Rs 7,20,000 of contribution. Subtracting the additional Rs 3,00,000 promotional fixed cost leaves a net gain of Rs 4,20,000. Ignoring the promotion expense would overstate the gain.

  1. AIncrease of Rs 4,20,000Correct
  2. BIncrease of Rs 7,20,000
  3. CIncrease of Rs 3,00,000
  4. DIncrease of Rs 1,80,000

Explanation

Contribution per metre = 300-180 = Rs 120. Extra 6,000 metres give Rs 7,20,000 extra contribution. Deduct added fixed cost Rs 3,00,000 to get Rs 4,20,000 increase. Rs 7,20,000 ignores the promotion cost. Check: old profit 24,00,000-15,00,000 = 9,00,000; new 31,20,000-18,00,000 = 13,20,000; difference 4,20,000.

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