(Solved by Humans)-Problem 7 Alpha Ltd. and Beta Ltd., two competing companies, produced and sold the same type of...

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Problem 7 Alpha Ltd. and Beta Ltd., two competing companies, produced and sold the same type of product in the same market for the year ended March 2002. Their forecasted profit and loss accounts are as follows: Alpha Ltd. Beta Ltd. Rs. Rs. Rs. Rs. Sales 250000 250000 Less: Variable Cost of Sales 200000 150000 Fixed Costs 25000 225000 75000 225000 Forecasted Net Profit Before Tax 25000 25000 You are required to compute the following: • P/V ratio • Breakeven sales volume You are also required to state which company is likely to earn greater profit in the following conditions of: • low demand • high demand Solution Alpha Ltd. Beta Ltd. Sales 250000 250000 Contribution (F + P) P/V Ratio 50000 x 100 100000 x 100 250000 250000 = 20% = 40% Breakeven Sales 25000 = 125000 75000 = 187500 20% 40% Profit situation for Alpha Ltd. will be better than that of Beta Ltd. in case of low demand, since even if sales are halved Alpha Ltd. will still not incur a loss. Beta Ltd. has a safety margin of only Rs. 62500. If sales drop to Rs. 200000, in both the cases the profit position would be as follows: Alpha Ltd. Beta Ltd. Contribution Rs. 40000 Rs. 80000 Fixed Expenses 25000 75000 15000 5000 In case of high demand, Beta Ltd. will do better than Alpha Ltd. since additional sales will produce profit at the rate of 40% of sales as against only 20% in the case of other company. If sales improve to Rs. 300,000, the profit position will be as follows: Alpha Ltd. Beta Ltd. Contribution Rs. 60000 Rs. 120000 Fixed Expenses 25000 75000 35000 45000