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The sales and profit of Maxim Ltd. during two years 2021 and 2022 were as follows:

| Year | Sales | Profit |
|---|---|---|
| 2021 | 450000 | 60000 |
| 2022 | 510000 | 75000 |

You are required to calculate:

1. P/V ratio
2. Fixed cost
3. Break even point
4. Margin of safety for 2022
5. Profit when sales are Rs. 2000000
6. Sales required to earn a profit of Rs. 120000.

Answer :

To solve the given problem, let's go step-by-step.

1. P/V Ratio:

The Profit/Volume (P/V) ratio can be calculated using the formula:

[tex]\text{P/V Ratio} = \frac{\text{Profit}}{\text{Sales}} \times 100[/tex]

For 2021:

[tex]\text{P/V Ratio 2021} = \frac{60000}{450000} \times 100 = 13.33\%[/tex]

For 2022:

[tex]\text{P/V Ratio 2022} = \frac{75000}{510000} \times 100 = 14.71\%[/tex]

2. Fixed Cost:

The fixed cost can be found using the formula:

[tex]\text{Fixed Cost} = \text{Total Sales} - \text{Total Variable Cost}[/tex]

Since we are using the profits and sales, let's use the P/V ratio method:

First, find the contribution using the profit and sales:

Contribution = Profit + Fixed Cost

We have:

[tex]\text{Sales} \times \text{P/V Ratio} = \text{Profit} + \text{Fixed Cost}[/tex]

Use the average P/V ratio from the years given (for more accuracy):

[tex]\text{Average P/V Ratio} = \frac{13.33 + 14.71}{2} = 14.02\%[/tex]

Using 2021:

[tex]450000 \times 0.1402 = 60000 + \text{Fixed Cost}[/tex]
[tex]63090 = 60000 + \text{Fixed Cost}[/tex]
[tex]\text{Fixed Cost} = 3090[/tex]

3. Break-even Point (in Sales):

The break-even point is where total sales equal total costs.

[tex]\text{Break-even Sales} = \frac{\text{Fixed Cost}}{\text{P/V Ratio}}[/tex]

Using the average P/V ratio:

[tex]\text{Break-even Sales} = \frac{3090}{0.1402} = 22047.08[/tex]

4. Margin of Safety for 2022:

The margin of safety is calculated using:

[tex]\text{Margin of Safety} = \text{Actual Sales} - \text{Break-even Sales}[/tex]

For 2022:

[tex]\text{Margin of Safety} = 510000 - 22047.08 = 487952.92[/tex]

5. Profit when Sales are Rs. 2000000:

Using the average P/V Ratio:

[tex]\text{Contribution} = 2000000 \times 0.1402 = 280400[/tex]

[tex]\text{Profit} = \text{Contribution} - \text{Fixed Cost}[/tex]

[tex]\text{Profit} = 280400 - 3090 = 277310[/tex]

6. Sales required to earn a profit of Rs. 120000:

The sales needed to reach a specific profit target can be calculated using:

[tex]\text{Required Sales} = \frac{\text{Profit Target} + \text{Fixed Cost}}{\text{P/V Ratio}}[/tex]

[tex]\text{Required Sales} = \frac{120000 + 3090}{0.1402} = 878071.34[/tex]

These calculations help understand the financial positioning and planning for Maxim Ltd. in terms of profit analysis, breakeven calculations, and sales projections.

Thanks for taking the time to read The sales and profit of Maxim Ltd during two years 2021 and 2022 were as follows Year Sales Profit 2021 450000 60000 2022 510000 75000. We hope the insights shared have been valuable and enhanced your understanding of the topic. Don�t hesitate to browse our website for more informative and engaging content!

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