The cost structure of an article (the selling price of which is ₹45,000) is Materials - 30%, Labour - 20%, and Overheads - 30%. An increase of 15% in the cost of materials and 25% in the costs of labour is anticipated. These increased costs in relation to the selling price cause a 25% decrease in the profit per article. You are required to prepare a statement showing current and future profit at present selling price. What should be the selling price to maintain the present rate of profit?
Answer (1)
Let's start by analyzing the current cost and profit structure of the article.
Current Selling Price: ₹45,000
Current Cost Distribution:
Materials: 30% of ₹45,000 = ₹13,500
Labor: 20% of ₹45,000 = ₹9,000
Overheads: 30% of ₹45,000 = ₹13,500
Total Cost: ₹13,500 (Materials) + ₹9,000 (Labor) + ₹13,500 (Overheads) = ₹36,000
Current Profit:
Selling Price - Total Cost = ₹45,000 - ₹36,000 = ₹9,000
Next, we will calculate the future costs after the expected increase in material and labor costs.
Future Cost Increases:
Materials increase: 15%
New Material Cost = ₹13,500 + 15% of ₹13,500 = ₹13,500 + ₹2,025 = ₹15,525
Labor increase: 25%
New Labor Cost = ₹9,000 + 25% of ₹9,000 = ₹9,000 + ₹2,250 = ₹11,250
New Total Cost:
New Total Cost = New Material Cost + New Labor Cost + Overheads
New Total Cost = ₹15,525 + ₹11,250 + ₹13,500 = ₹40,275
Future Profit:
Given that the profit decreases by 25%,
New Profit = Current Profit - 25% of Current Profit = ₹9,000 - (0.25 × ₹9,000) = ₹9,000 - ₹2,250 = ₹6,750
Statement Showing Current and Future Profit:
Current Profit: ₹9,000
Future Profit: ₹6,750
Finally, to maintain the present rate of profit at the increased costs, we calculate the required selling price.
Required Selling Price for Same Profit:
New Selling Price = New Total Cost + Current Profit = ₹40,275 + ₹9,000 = ₹49,275
Hence, to maintain the same rate of profit (₹9,000), the selling price should be ₹49,275 .
