# ECO602 Assignment 1 Solution and Discussion

• ``````SEMESTER FALL 2019
``````

FORECASTING & BUDGETING (ECO602)
ASSIGNMENT NO. 01
DUE DATE: NOVEMBER 26, 2019 MARKS: 15

``````Case 1:
``````

Nishat Linen is a famous clothing brand in Pakistan selling ready to wear, unstitched clothes and home accessories. Pakistan’s premier textile house Nishat Mills Limited opened its first outlet of Nishat Linen in Lahore in 1992. Now it has more than 70 outlets in 26 cities of Pakistan. This brand has become a pioneer in Pakistan fashion industry by focusing on quality of products range. The brand also has its presence in international markets. Suppose you have been hired to perform break-even analysis for this company to analyze its performance. The required data is given below.

I. Total fixed cost incurred by the company in production period is Rs. 25,00,000 and variable cost per unit is Rs. 1500. Sale price per unit is Rs. 3500. Calculate the breakeven level of output (units) required to get the desired income of Rs. 800,000 by using the information given in this part.

II. If value of actual sales is Rs. 59, 00,000 and the amount of break-even sales is Rs. 5,775,000 then find the value of margin of safety for the company (only use the information given in part 2 for calculation of margin of safety).
(Marks: 2+2)

`````` Case 2:
``````

Adam Milk & Foods (Pvt.) Ltd. is the largest local brand of dairy products particularly cheese in Pakistan. The company started its business in early 1990s in Sahiwal. Pure milk is collected directly from the farmers in order to deliver best products. It produces a wide variety of cheese and is competing successfully with imported cheese brands. The company prepares its components budgets and master budget to evaluate its performance. You have been given a task to prepare quarterly components budgets of this company for three quarters of year 2019 using the given data.

Q1 Q2 Q3
Expected Sales - units 25,000 30,000 35,000
Desired Inventories - Finished goods
Opening 18,000 15,000 10,000
Ending 15,000 10,000 8,000
Desired Inventories - Raw material
Opening 15,000 10,000 9,000
Ending 10,000 9,000 5,000

a) Unit sale price is Rs.380.
b) Company needs 2 pounds of material to produce one final unit at purchase price of Rs. 30 per unit.
c) Production of each unit requires 0.20 direct labor-hours at an hourly labor rate of Rs. 20
each.

Requirements:
Keeping in view the above information, you are required to prepare the following budgets.
I. Sales Budget
II. Production Budget
III. Direct material purchases budget
IV. Direct labor budget
(Marks: 2+3+3+3)

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• Solution:
Case 1:
(Marks: 2+3+3+3)

I. Break-even level of output (Units) = (Fixed costs +Target Income)/ Unit Contribution Margin
Unit Contribution margin = Sale price per unit – variable cost per unit
= 3500-1500 = 2000
Break-even level of output (Units) = (25, 00,000+800,000)/ 2000 = 1650 units

II. Margin of safety (value)= Actual sales – Break-even sales
= Rs. 59,
00,000 - Rs. 5,775,000
= Rs. 125000

Case 2:

• Solution:
Case 1:
(Marks: 2+3+3+3)

I. Break-even level of output (Units) = (Fixed costs +Target Income)/ Unit Contribution Margin
Unit Contribution margin = Sale price per unit – variable cost per unit
= 3500-1500 = 2000
Break-even level of output (Units) = (25, 00,000+800,000)/ 2000 = 1650 units

II. Margin of safety (value)= Actual sales – Break-even sales
= Rs. 59,
00,000 - Rs. 5,775,000
= Rs. 125000

Case 2:

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