Question
Wellbeing cycle Company was established in the year 1990 for manufacturing. During the pre-COVID year 2019-20, the company sold 90,000 cycles but it was just
Wellbeing cycle Company was established in the year 1990 for manufacturing. During the pre-COVID year 2019-20, the company sold 90,000 cycles but it was just three-fourth of the capacity since there was no production during the last quarter January March 2020. Wellbeing distributes its bicycle through a number of independent merchants and had no presence discount retail chain. Despite having no presence in departmental stores, Wellbeing had reached sales revenues of about INR 600 million. The income statement of Wellbeing is provided in Exhibit 1. Post the COVID year in 2021-22, Wellbeing received an offer from a popular retail chain to supply 30000 units annually initially for three years. The cycle would be a valuable addition to the retail chains house-brand sporting goods. Mrs. Ripsy Mittal is the Vice President (Marketing) of the company was really feeling great as the offer being guaranteed would reduce the operating risk and increase the capacity utilization. But the price offered was far less than the price of its existing products. The cycle would be named as ATLAS with materials and look little different than the existing products of Wellbeing. Ripsy assumed that the variable cost per cycle and the total fixed cost in 2021- 22 would almost remain the same without much change.
Exhibit 1 Income Statement of Wellbeing for 2019-20 (In INR)
Revenue 65,23,20,000
COGS 48,27,00,000
Gross Profit 16,96,20,000
Operating Expenses 14,12,40,000
EBIT 2,83,80,000
Interest 1,30,80,000
Pre-tax Profit 1,53,00,000
Tax 30,60,000
Net Profit 1,22,40,000
Exhibit 2 Revenue and estimated cost of ATLAS (In INR) Revenue 5,800
Direct Labour 1,176
Direct Material 2,388
Manufacturing Overhead 1,470 *60% of the manufacturing overhead is fixed and calculated at full capacity
Ripsy wants you to estimate the following figures for an informed decision
(1) Contribution of the existing products and the proposed product ATLAS
(2) The BEP and margin of safety of Wellbeing in the year 2019-20
(3) Calculate the estimated profit of 2021-22 at full capacity if the order is accepted
(4) If Wellbeing does not accept the offer, then what should be the number of cycles Ripsy needs to sell in 2021-22 to achieve the same level of profit determined above
(5) Estimate the BEP (in units and volume) for the year 2021-22.
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