CA Intermediate · Cost and Management Accounting · Marginal Costing
Ritu Foods Ltd reports sales of Rs 8,00,000, variable costs of Rs 4,80,000 and fixed costs of Rs 1,60,000. If sales increase by 10% with no change in fixed costs or the variable cost ratio, what will be the new profit?
New profit is Rs 1,92,000. Sales of Rs 8,80,000 at a 40% P/V ratio give contribution of Rs 3,52,000, and deducting fixed costs of Rs 1,60,000 leaves Rs 1,92,000, a 20% rise matching a degree of operating leverage of 2.
- ARs 2,40,000
- BRs 2,72,000Correct
- CRs 1,60,000
- DRs 2,00,000
Explanation
Present contribution = 8,00,000 - 4,80,000 = 3,20,000; profit = 3,20,000 - 1,60,000 = 1,60,000. New sales = 8,80,000; P/V ratio = 40%, so contribution = 3,52,000. New profit = 3,52,000 - 1,60,000 = Rs 1,92,000. Check via operating leverage: 2 x 10% = 20% rise, 1,60,000 x 1.2 = 1,92,000.
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