Cost And Management Accountings 2024 Board Question Paper

Two Key Advantages of Cost Accounting:

1. Ascertainment and Control of Cost:
   • Enables management to accurately determine the per-unit cost of products, processes, or jobs, identifying operational inefficiencies, material wastage, and idle time to institute effective cost control.
2. Guidance for Pricing and Managerial Decision-Making:
   • Provides vital cost data that helps management set competitive selling prices and evaluate critical short-term choices such as make-or-buy decisions, accepting special discount orders, and shutting down unprofitable product lines.

Meaning of Inventory Management:

• Definition: Inventory management is the systematic process of planning, ordering, storing, tracking, and controlling an enterprise’s raw materials, work-in-progress, and finished goods inventories.
• Primary Objective: To maintain an uninterrupted flow of materials for manufacturing and customer delivery while minimizing the aggregate costs of holding, ordering, and potential stockouts.

Opportunity Cost:

• Definition: Opportunity cost is the financial benefit, cash revenue, or return forgone from the next best alternative course of action when a company chooses one specific alternative over another.
• Example: If a business utilizes its self-owned warehouse for manufacturing operations rather than leasing it to an external tenant for Rs 60,000 per month, the forgone rental income represents an opportunity cost of production.

Unavoidable Cost:

• Definition: An unavoidable cost (or committed cost) is an expenditure that an organization cannot escape or eliminate, regardless of whether a particular operational activity, product line, or branch department is continued or terminated.
• Example: Contractual building lease rentals, property insurance premiums, and factory security expenses that must be paid even if production is temporarily suspended.

Piece Rate Wage System:

• Definition: A piece rate wage system is a remuneration method where workers are paid strictly based on the physical volume of acceptable units produced, regardless of the hours taken to complete the job.
• Formula:
  $$\text{Total Wages} = \text{Units Produced} \times \text{Piece Rate per Unit}$$
• Key Advantage: Directly incentivizes higher labor productivity and speed.

Calculation of Ordering Cost per Order ($O$):

Given:

• Annual Requirement ($A$) = $40,000 \text{ units}$
• Economic Order Quantity ($EOQ$) = $4,000 \text{ units}$
• Cost per unit of material ($C$) = $\text{Rs } 20$
• Carrying cost percentage ($I$) = $10\%$
• Carrying cost per unit per year ($c$) = $10\% \text{ of Rs } 20 = \text{Rs } 2$

EOQ Formula:

$$EOQ = \sqrt{\frac{2AO}{c}}$$

Substitution and Solution:

$$4000 = \sqrt{\frac{2 \times 40000 \times O}{2}}$$

$$4000 = \sqrt{40000 \times O}$$

Square both sides:

$$(4000)^2 = 40000 \times O$$

$$16,000,000 = 40,000 \times O$$

$$O = \frac{16,000,000}{40,000} = \mathbf{Rs \; 400}$$

Final Answer: The ordering cost per order is Rs 400.

Calculation of Wages Under Halsey Premium Plan:

Given:

• Standard time allowed ($S$) = $12 \text{ hours}$
• Hourly wage rate ($R$) = $\text{Rs } 40 \text{ per hour}$
• Actual time taken ($T$) = $10 \text{ hours}$
• Time saved ($S - T$) = $12 - 10 = 2 \text{ hours}$

Halsey Plan Formula (50% Premium):

$$\text{Total Wages} = (T \times R) + 50\% \times (S - T) \times R$$

Calculation:

$$\text{Basic Wages} = 10 \times 40 = \text{Rs } 400$$

$$\text{Bonus} = 0.50 \times 2 \times 40 = \text{Rs } 40$$

$$\text{Total Wages} = 400 + 40 = \mathbf{Rs \; 440}$$

Final Answer: The total wages of Mr. A under the Halsey Plan is Rs 440.

Segregation of Mixed Cost Using High-Low Method:

Step 1: Identify High and Low Points

• High Point: Output = $5,000 \text{ units}$, Mixed Cost = $\text{Rs } 60,000$
• Low Point: Output = $3,000 \text{ units}$, Mixed Cost = $\text{Rs } 40,000$

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Step 2: Calculate Variable Cost per Unit ($b$)

$$b = \frac{\text{Cost at High Level} - \text{Cost at Low Level}}{\text{Output at High Level} - \text{Output at Low Level}} = \frac{60000 - 40000}{5000 - 3000} = \frac{20000}{2000} = \mathbf{Rs \; 10 \text{ per unit}}$$

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Step 3: Calculate Fixed Cost ($a$)

$$a = \text{Total Cost at High Point} - (b \times \text{Output at High Point})$$

$$a = 60,000 - (10 \times 5,000) = 60,000 - 50,000 = \mathbf{Rs \; 10,000}$$

Cost Equation: Total Cost $Y = 10,000 + 10X$

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Step 4: Estimate Total Cost for 6,000 Units

$$Y = 10,000 + 10(6,000) = 10,000 + 60,000 = \mathbf{Rs \; 70,000}$$

Final Answer:

• Variable Cost: Rs 10/unit, Fixed Cost: Rs 10,000
• Estimated Total Cost for 6,000 units: Rs 70,000

Calculation of Overhead Capacity Variance:

Given Data:

• Normal capacity hours ($BH$) = $8,000 \text{ hours}$
• Budgeted fixed overhead = $\text{Rs } 64,000$
• Actual hours worked ($AH$) = $8,200 \text{ hours}$
• Standard fixed overhead rate ($SR_{\text{fixed}}$) = $\frac{64000}{8000} = \text{Rs } 8 \text{ per hour}$

Formula:

$$\text{Overhead Capacity Variance} = (\text{Actual Hours} - \text{Budgeted Hours}) \times \text{Standard Fixed Overhead Rate}$$

Calculation:

$$\text{Capacity Variance} = (8,200 - 8,000) \times \text{Rs } 8 = 200 \times 8 = \mathbf{Rs \; 1,600 \text{ (Favorable / F)}}$$

Final Answer: The Overhead Capacity Variance is Rs 1,600 (Favorable).

Primary Apportionment of Overhead Costs to Departments A and B:

Apportionment Bases and Ratios:

1. Rent (Rs 15,000): Apportioned on the basis of Floor Area (sq. ft.)

   • Area: Dept A = $200$, Dept B = $300$ $\implies$ Ratio $= 2 : 3$ (Sum $= 5$)
   • Dept A: $15,000 \times \frac{2}{5} = \mathbf{Rs \; 6,000}$
   • Dept B: $15,000 \times \frac{3}{5} = \mathbf{Rs \; 9,000}$

2. Depreciation of Machinery (Rs 50,000): Apportioned on the basis of Machinery Value

   • Value: Dept A = $200,000$, Dept B = $300,000$ $\implies$ Ratio $= 2 : 3$ (Sum $= 5$)
   • Dept A: $50,000 \times \frac{2}{5} = \mathbf{Rs \; 20,000}$
   • Dept B: $50,000 \times \frac{3}{5} = \mathbf{Rs \; 30,000}$

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Total Apportioned Overhead:

• Department A: $6,000 + 20,000 = \mathbf{Rs \; 26,000}$
• Department B: $9,000 + 30,000 = \mathbf{Rs \; 39,000}$

Final Answer: Total overhead for Department A is Rs 26,000 and for Department B is Rs 39,000.

Differences Between Variable Overhead and Fixed Overhead:

Differentiation Between Product Cost and Period Cost

“Cost-Volume-Profit (CVP) Analysis is an Important Tool for Profit Planning” — Commentary:

Cost-Volume-Profit (CVP) analysis is a foundational managerial tool that examines the interrelated behavior of selling prices, production/sales volume, variable costs, fixed costs, and resulting operating profit.

1. Key Contributions to Strategic Profit Planning:

1. Determining the Break-Even Point (BEP):
   • Establishes the baseline sales volume required for the firm to cover all operating costs without incurring a loss ($Total Revenue = Total Cost$).
2. Target Profit Formulation:
   • Calculates the precise unit volume or sales revenue necessary to achieve a specific target profit before or after tax:
     $$\text{Required Sales} = \frac{\text{Fixed Costs} + \text{Desired Profit}}{P/V \text{ Ratio}}$$
3. Evaluating Margin of Safety (MOS):
   • Quantifies the buffer by which sales can decline before the company enters a loss zone ($MOS = \text{Actual Sales} - \text{BEP Sales}$).
4. “What-If” Scenario Simulation and Sensitivity Analysis:
   • Enables managers to model the profit impacts of dynamic commercial scenarios—such as a 10% price reduction offset by an anticipated 25% sales volume expansion.
5. Product Mix Optimization:
   • Evaluates multi-product contribution margins per unit of limiting resource to determine the optimal production mix that maximizes overall net profit.

Conclusion:

CVP analysis provides the quantitative roadmap that converts corporate strategic goals into actionable operational targets, making it indispensable for enterprise profit planning.

Differential Cost Analysis for Special Order (20,000 Units):

1. Capacity Analysis

• Installed plant capacity = $30,000 \text{ labour hours}$
• Production rate = $4 \text{ units per labour hour} \implies 0.25 \text{ hours per unit}$
• Current production = $100,000 \text{ units}$$\text{Hours currently used} = \frac{100,000}{4} = 25,000 \text{ labour hours}$$
• Spare (idle) capacity: $30,000 - 25,000 = \mathbf{5,000 \text{ labour hours}}$
• Hours required for special order ($20,000 \text{ units}$):
  $$\frac{20,000}{4} = \mathbf{5,000 \text{ labour hours}}$$
  (The special order fits exactly within idle capacity without disturbing regular domestic sales).

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2. Relevant / Differential Cost Calculation

• Direct Material = $\text{Rs } 4.00$
• Direct Labor = $\text{Rs } 3.00$
• Manufacturing Overhead (Total = Rs 5.00 per unit):
  • Fixed manufacturing overhead = $\frac{240,000}{100,000} = \text{Rs } 2.40$ (Sunk & unavoidable).
  • Variable manufacturing overhead = $5.00 - 2.40 = \mathbf{Rs \; 2.60}$
• Total Differential Cost per Unit:
  $$4.00 + 3.00 + 2.60 = \mathbf{Rs \; 9.60 \text{ per unit}}$$

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3. Differential Profitability Statement

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Recommendation:

The company should accept the special offer. Accepting the order generates an incremental contribution margin of Rs 1.40 per unit, increasing total operating profit by Rs 28,000 while utilizing otherwise idle factory capacity.

Comprehensive Material Variance Analysis:

1. Standard and Actual Data Setup

• Standard Input for 1 Batch: $A = 4 \text{ kg}, B = 5 \text{ kg}, C = 11 \text{ kg} \implies \text{Total Input} = 20 \text{ kg}$.
• Standard Loss = $10\% \text{ of } 20 = 2 \text{ kg} \implies$ Standard Output per Batch = 18 kg.
• Actual Output = 190 kg.
• Actual Input ($AQ$): $A = 50 \text{ kg}, B = 60 \text{ kg}, C = 90 \text{ kg} \implies \text{Total } AQ = 200 \text{ kg}$.

Standard Quantity for Actual Output of 190 kg ($SQ = \frac{\text{Std Mix}}{18} \times 190$):

• $SQ_A = \frac{4}{18} \times 190 = 42.22 \text{ kg}$
• $SQ_B = \frac{5}{18} \times 190 = 52.78 \text{ kg}$
• $SQ_C = \frac{11}{18} \times 190 = 116.11 \text{ kg}$

Revised Standard Quantity for Total Actual Input of 200 kg ($RSQ = \frac{\text{Std Mix}}{20} \times 200$):

• $RSQ_A = \frac{4}{20} \times 200 = 40 \text{ kg}$
• $RSQ_B = \frac{5}{20} \times 200 = 50 \text{ kg}$
• $RSQ_C = \frac{11}{20} \times 200 = 110 \text{ kg}$

Prices:

• Standard Prices ($SP$): $A = \text{Rs } 8, B = \text{Rs } 7, C = \text{Rs } 5$
• Actual Prices ($AP$): $A = \text{Rs } 7, B = \text{Rs } 6, C = \text{Rs } 5$

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2. Variance Calculations:

1. Material Price Variance ($MPV = AQ \times [SP - AP]$):

   • $A = 50 \times (8 - 7) = 50 \text{ (F)}$
   • $B = 60 \times (7 - 6) = 60 \text{ (F)}$
   • $C = 90 \times (5 - 5) = 0$
   • Total MPV = Rs 110 (Favorable)

2. Material Usage Variance ($MUV = SP \times [SQ - AQ]$):

   • $A = 8 \times (42.22 - 50) = 8 \times (-7.78) = 62.24 \text{ (A)}$
   • $B = 7 \times (52.78 - 60) = 7 \times (-7.22) = 50.54 \text{ (A)}$
   • $C = 5 \times (116.11 - 90) = 5 \times (+26.11) = 130.55 \text{ (F)}$
   • Total MUV = Rs 17.77 (Favorable)

3. Material Cost Variance ($MCV = MPV + MUV$):

   • $MCV = 110 \text{ (F)} + 17.77 \text{ (F)} = \mathbf{Rs \; 127.77 \text{ (Favorable)}}$ (Verification: $SC - AC = 1287.77 - 1160.00 = 127.77 \text{ F}$).

4. Material Mix Variance ($MMV = SP \times [RSQ - AQ]$):

   • $A = 8 \times (40 - 50) = 80 \text{ (A)}$
   • $B = 7 \times (50 - 60) = 70 \text{ (A)}$
   • $C = 5 \times (110 - 90) = 100 \text{ (F)}$
   • Total MMV = Rs 50 (Adverse)

5. Material Yield Variance ($MYV = [\text{Actual Output} - \text{Std Output for Actual Input}] \times \text{Std Cost per kg of Output}$):

   • $\text{Std Output for } 200 \text{ kg} = 200 \times 0.90 = 180 \text{ kg}$.
   • Std Cost per kg of Output = $\frac{122}{18} = \text{Rs } 6.778$.
   • $MYV = (190 - 180) \times 6.778 = \mathbf{Rs \; 67.78 \text{ (Favorable)}}$

Verification: $MUV = MMV + MYV = -50 + 67.78 = +17.78 \text{ (F)}$. Checked!

Computation of Machine Hour Rate:

1. Working Hours Computation:

• Gross annual machine hours = $6,000 \text{ hours}$
• Setting up time = $10\% \text{ of } 6,000 = 600 \text{ hours}$
• Effective productive machine hours = $6,000 - 600 = \mathbf{5,400 \text{ hours}}$ (If setup time is treated as productive, base is 6,000 hours; both calculations shown below).

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2. Schedule of Overhead Costs (Annual & Per Hour):

Final Answer:

• When setup time is unproductive: Rs 30.22 per machine hour
• When setup time is productive: Rs 28.00 per machine hour

Income Statement Under Variable Costing and Profit Reconciliation:

Data Reconciliation:

• Normal Capacity = $30,000 \text{ units}$
• Production = $20,000 \text{ units}$
• Sales = $21,000 \text{ units}$
• Closing Stock = $1,000 \text{ units}$
• Opening Stock = $\text{Sales} + \text{Closing} - \text{Production} = 21,000 + 1,000 - 20,000 = \mathbf{2,000 \text{ units}}$

Cost Elements:

• Variable Production Cost per unit = Raw Material ($4$) + Direct Labor ($3$) = Rs 7 per unit
• Fixed Factory Overhead at Normal Capacity = $\text{Rs } 120,000 \implies$ Standard Rate $= \frac{120,000}{30,000} = \mathbf{Rs \; 4 \text{ per unit}}$
• Selling Price = $\text{Rs } 20$
• Variable Selling Expense = $\text{Rs } 2 \text{ per unit}$
• Fixed Selling & Administrative = $\text{Rs } 42,000$

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Part 1: Income Statement Under Variable Costing

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Part 2: Profit Reconciliation with Absorption Costing

Under Absorption Costing, Fixed Factory Overhead is capitalized into inventory at Rs 4 per unit:

• Fixed Overhead in Opening Stock = $2,000 \text{ units} \times \text{Rs } 4 = \text{Rs } 8,000$
• Fixed Overhead in Closing Stock = $1,000 \text{ units} \times \text{Rs } 4 = \text{Rs } 4,000$$\text{Absorption Profit} - \text{Variable Profit} = (\text{Closing Stock Units} - \text{Opening Stock Units}) \times \text{Fixed OH Rate}$$
  $$\text{Absorption Profit} - \text{Variable Profit} = (1,000 - 2,000) \times 4 = -1,000 \times 4 = -\text{Rs } 4,000$$

$$\mathbf{\text{Net Profit Under Absorption Costing}} = 69,000 - 4,000 = \mathbf{Rs \; 65,000}$$

“Management Accounting Provides Information for Decision Making and Control” — Analytical Discussion:

Introduction

Unlike financial accounting, which primarily serves external stakeholders (shareholders, tax authorities, banks) with historical financial summaries, Management Accounting is an internally focused intelligence system designed specifically to supply organizational leaders with quantitative and qualitative data necessary for operational planning, strategic decision-making, and managerial control.

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1. The Role in Managerial Decision-Making

Management accounting equips leadership with forward-looking analytical frameworks:

1. Relevant Cost Analysis:
   • Evaluates incremental revenues and differential costs to resolve complex short-term dilemmas: accepting special export orders below standard list price, choosing whether to make components internally or outsource (Make-or-Buy), and deciding whether to drop unprofitable product segments.
2. Cost-Volume-Profit (CVP) Modeling:
   • Identifies break-even thresholds and determines required sales volumes to achieve corporate profit targets.
3. Capital Investment Appraisal:
   • Applies discounted cash flow techniques (NPV, IRR) to evaluate major long-term asset investments.

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2. The Role in Operational Control and Performance Evaluation

Control ensures that organizational execution aligns with strategic intent:

1. Comprehensive Budgetary Control:
   • Translates annual business objectives into departmental functional budgets (Sales, Production, Cash).
2. Standard Costing and Variance Analysis:
   • Establishes benchmark costs for materials, labor, and overhead, comparing actual incurred costs against standard allowances to detect operational inefficiencies (Variance Analysis).
3. Responsibility Accounting:
   • Establishes decentralized Cost, Profit, and Investment Centers, holding individual unit managers accountable only for the revenues and expenditures within their direct managerial control.

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Conclusion

By converting transactional data into forward-looking strategic insights and providing rigorous mechanisms for performance evaluation, management accounting functions as the central nervous system of corporate governance and profit optimization.

“The Main Objective of Holding Inventory is to Maintain Efficiency in Production and Sales Operations” — Discussion:

Introduction

Inventories constitute one of the largest active current assets on an enterprise’s balance sheet. While holding inventory ties up working capital and incurs carrying costs (warehousing, insurance, obsolescence), maintaining optimal inventory balances is essential to ensure operational continuity.

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1. Ensuring Uninterrupted Production Efficiency

1. Decoupling Production Stages:
   • Raw materials and work-in-progress (WIP) inventories act as operational buffers. If an upstream machine malfunctions or a supplier delays delivery, subsequent assembly lines can continue operating without costly worker idle time.
2. Securing Bulk Purchasing Economies of Scale:
   • Holding inventory enables companies to order materials in Economic Order Quantities (EOQ), securing volume trade discounts and minimizing recurring ordering and transit expenses.
3. Hedge Against Supply Chain Shocks and Price Volatility:
   • Buffers protect manufacturing plants against seasonal commodity shortages, transport strikes, and inflationary raw material price spikes.

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2. Supporting Customer Satisfaction and Sales Operations

1. Eliminating Stockouts and Lost Sales:
   • Finished goods inventories allow firms to fulfill customer orders instantly. Stockouts not only forfeit current sales margins but often drive customers permanently to competitors.
2. Handling Seasonal Demand Peaks:
   • Firms producing goods with seasonal sales surges (e.g., beverages, festival apparel) maintain level manufacturing throughout the year, accumulating finished inventory to absorb peak market demand smoothly.

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3. Balancing Holding Costs with Operational Risks

Holding excessive inventory generates severe carrying costs. Modern inventory management employs control techniques to optimize inventory levels:

• ABC Analysis: Prioritizing strict control over high-value items.
• Safety Stocks and Reorder Levels: Maintaining statistically calculated buffers.
• Just-In-Time (JIT) Collaboration: Streamlining supply networks to minimize holding costs without risking production halts.

Operating Cost Sheet and Room Rate Determination: New Hotel, Kathmandu

1. Calculation of Equivalent Single Room-Days:

(Standard assumption: 30 days per month $\implies$ 360 days per year)

A. Single Rooms (40 rooms):

• Peak season ($100\%$ occupancy for 5 months):
  $$40 \times 1.00 \times 5 \times 30 = 6,000 \text{ room-days}$$
• Off-peak season ($60\%$ occupancy for 7 months):
  $$40 \times 0.60 \times 7 \times 30 = 5,040 \text{ room-days}$$
• Total Single Room-Days $= 6,000 + 5,040 = \mathbf{11,040 \text{ room-days}}$

B. Double Rooms (30 rooms):

• Peak season ($70\%$ occupancy for 5 months):
  $$30 \times 0.70 \times 5 \times 30 = 3,150 \text{ room-days}$$
• Off-peak season ($50\%$ occupancy for 7 months):
  $$30 \times 0.50 \times 7 \times 30 = 3,150 \text{ room-days}$$
• Total Double Room-Days $= 3,150 + 3,150 = \mathbf{6,300 \text{ room-days}}$

C. Equivalent Single Room-Days: Since 1 double room $= 1.5$ single rooms:

$$\text{Equivalent Single Room-Days} = 11,040 + (6,300 \times 1.5) = 11,040 + 9,450 = \mathbf{20,490 \text{ equivalent days}}$$

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2. Statement of Annual Operating Cost

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3. Room Charge per Day:

$$\text{Rate per Equivalent Single Room-Day} = \frac{\text{Total Revenue}}{\text{Equivalent Single Room-Days}} = \frac{4,170,000}{20,490} = \mathbf{Rs \; 203.51}$$

• Single Room Charge per Day: Rs 203.51
• Double Room Charge per Day: $203.51 \times 1.5 = \mathbf{Rs \; 305.27}$

Cost-Volume-Profit (CVP) Analysis Computations:

Given Baseline Information:

• Sales Units = $30,000$
• Selling Price per unit ($SP$) = $\text{Rs } 30$
• Variable Cost per unit ($VC$) = $\text{Rs } 18$
• Contribution Margin per unit ($CM$) = $30 - 18 = \mathbf{Rs \; 12}$
• Profit-Volume Ratio ($P/V$) = $\frac{CM}{SP} = \frac{12}{30} = \mathbf{40\%} \quad (0.40)$
• Fixed Cost ($FC$) = $\text{Rs } 240,000$

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i) Break-Even Point in Rs:

$$BEP_{\text{Rs}} = \frac{FC}{P/V \text{ Ratio}} = \frac{240,000}{0.40} = \mathbf{Rs \; 600,000}$$

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ii) Break-Even Point in Units:

$$BEP_{\text{Units}} = \frac{FC}{CM} = \frac{240,000}{12} = \mathbf{20,000 \text{ units}}$$

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iii) Sales to Earn Desired Profit After Tax of Rs 75,000 ($t = 25\%$):

$$\text{Desired Profit Before Tax} = \frac{\text{Profit After Tax}}{1 - t} = \frac{75,000}{1 - 0.25} = \frac{75,000}{0.75} = \text{Rs } 100,000$$

$$\text{Required Sales (Rs)} = \frac{FC + \text{Desired Profit Before Tax}}{P/V \text{ Ratio}} = \frac{240,000 + 100,000}{0.40} = \frac{340,000}{0.40} = \mathbf{Rs \; 850,000}$$

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iv) Profit When Sales are Rs 1,000,000:

$$\text{Profit} = (\text{Sales} \times P/V \text{ Ratio}) - FC = (1,000,000 \times 0.40) - 240,000 = 400,000 - 240,000 = \mathbf{Rs \; 160,000}$$

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v) Margin of Safety if Profit is Rs 150,000:

$$MOS = \frac{\text{Profit}}{P/V \text{ Ratio}} = \frac{150,000}{0.40} = \mathbf{Rs \; 375,000}$$

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vi) Margin of Safety Ratio if Actual Sales is Rs 750,000:

$$MOS = \text{Actual Sales} - BEP_{\text{Rs}} = 750,000 - 600,000 = \text{Rs } 150,000$$

$$MOS \text{ Ratio} = \frac{MOS}{\text{Actual Sales}} \times 100 = \frac{150,000}{750,000} \times 100 = \mathbf{20\%}$$

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vii) Break-Even Ratio if Actual Sales is Rs 800,000:

$$BE \text{ Ratio} = \frac{BEP_{\text{Rs}}}{\text{Actual Sales}} \times 100 = \frac{600,000}{800,000} \times 100 = \mathbf{75\%}$$