working capital ,Mosaic Ltd sum

In the question it is given that total cost is 75 percentage of sales and in that 75 % , 80% is vc and 20% is fc. So total cost is 1125000 vc is 900000, fc is 225000 here when we cross check total cost to sales percentage it is 75% ok agreed. But when sales increased to 1750000 vc becomes 1035000 ( ie 80 % of 75 % total cost ). And fc will be same 225000 if we cross check total cost to sales % then percentage is not 75 % it is 72 % why does it occur since we have calculated 1035000 by taking total cost percentage as 75 %

Answers (6)

Sriram Somayajula

Admin

23-Sep-20 18:52

Because fixed cost have remained same - the total costs have not grown in same proportion as % of sales - so total costs as a % of Sales are less and hence % 72. Had fixed costs also grown in same proportion as variable costs - total cost % would be 75%

When sales are 175000 if total cost is not 75% then how can we take 80 % of 75% of 1750000 for calculating variable cost

Suraj Lakhotia

Admin

23-Sep-20 21:27

When sales increase, fixed costs will not increase. The % are valid for one level.

Even when sales increase % of variable cost remains the same. In this case 80% of 75% iis VC i.e 60% of sales is VC - balance 40% is split between FC and profit at initial stage. Even when sales increase by 15% , VC will continue to 60% of sales - that will not change. Balance % is split between FC and Profit. Do try an alternative working and you will come to same result

Suraj Lakhotia

Admin

23-Sep-20 21:27

When sales increase, fixed costs will not increase. The % are valid for one level.

Yes sir I understood it but if that Percentage of 75% is valid only for one level then why did we take 75% for calculating vc at 1750000 level ie 80 % of 75% of 1750000 . We can alternatively take it directly as 900000 +15% =1035000. Am I right sir

Sai E

CA Inter

★ 16K+

23-Sep-20 21:46

Yes sir I understood it but if that Percentage of 75% is valid only for one level then why did we take 75% for calculating vc at 1750000 level ie 80 % of 75% of 1750000 . We can alternatively take it directly as 900000 +15% =1035000. Am I right sir

Variable cost will remain constant at per unit and % basis. For e.g. Sales are 100 and variable costs are 60. If sales are 200, variable costs will be 120.