SECTION B: DATA INTERPRETATION AND QUANTITATIVE ABILITY

Answer the questions 62 to 64 on the basis of the following information.

KK, an aspiring entrepreneur wanted to set up a pen drive manufacturing unit. Since technology was changing very fast, he wanted to carefully gauge the demand and the likely profits before investing. Market survey indicated that he would be able to sell 1 lac units before customers shifted to different gadgets. KK realized that he had to incur two kinds of costs – fixed costs (the costs which do not change, irrespective of number of units of pen drives produced) and variable costs (= variable cost per unit multiplied by number of units). KK expected fixed cost to be Rs.40 lac and variable cost to be Rs.100 per unit. He expected each pen drive to be sold at Rs. 200.

62. What would be the break-even point (defined as no profit, no loss situation) for KK's factory, in term of sales?

A. Rs. 80 lac

B. Rs.100 lac

C. Rs.120 lac

D. Rs.140 lac

E. Cannot be found with the given data.

Solution:

The fixed cost = Rs.40 lac

Cost per unit = Rs.100

Profit per unit = Rs.100

In order to cover the fixed cost of Rs.40 lacs, he has to sell at least

= 40,000 units.

\ the corresponding sales = 40,000 ´ 200

= Rs.80 lac Choice (A)

63. KK was sceptical that per unit variable cost might increase by 10% though the demand might remain same. What will be the expected changes in profit in such a case?

A. Profit would decrease by 10.33%

B. Profit will increase will by 15.75%

C. Profit would decrease by 15.75%

D. Profit will decrease by 16.67%

E. Profit will increase by 16.67%

Solution:

Assuming production of 1 lac units, the costs incurred are Fixed cost = Rs.40 lac

Variable cost = Rs.100 lac ´ 1.1

= Rs.110 lac

Total cost = Rs.150 lac

\ the total cost which would have been Rs.140 lacs increases to Rs.150 lac.

Total sales = Rs.200 lac

Initial profit = Rs.60 lac

Profit after cost increase = Rs.50 lac

\ The percentage decrease

= = 16.67% Choice (D)

64. He discussed his business plan with a chartered accountant. KK informed that he was contemplating a loan of Rs.20 lac at simple interest of 10% per annum for starting the business. The chartered accountant informed him that in such a case KK has to pay interest, followed by 30 % tax. By how much does KK's earnings change with 20% growth in sales vis-a-vis the original sales volume, in both cases considering tax and interest on loan?

A. 20% B. 16.7% C. 25.6% D. 33.3% E. 34.5%

Solution:

The profit after interest for sales of 1 lac units

200 – 140 – 2 = 58

Tax = 58 ´ = 40.6 lakhs

Profit after interest for sales of 1.2 lac units

240 – 160 – 2 = 78

Tax = = 54.6

\ change in earnings

= Choice (E)