This document is a group project report submitted to a lecturer for an accounting course. It provides details on analyzing the costs of producing a customized indoor fountain product. It discusses the manufacturing process, direct materials and labor costs, manufacturing overhead costs, support and selling costs, costing methods like simple costing and activity-based costing, budgets, break-even analysis, and a profitability comparison. The group focused on costing and pricing strategies for the fountain product as required by the course guidelines.

1. 2020
Report On Managerial
Accounting
Product Name: Fountain
Submitted To: Afrin Rifat (Ani)
2015
Date of submission:
11/27/2015

2. 1 | P a g e
Letter of Transmittal
Mrs. Afrin Rifat
Lecturer,
Dept. of Accounting & Finance (BBA)
North South University, Dhaka, Bangladesh
Subject: Permission for submitting the Group Project Report
Dear Madam,
As part of our ACT 333 course, we are pleased to submit the report on the topic, as per your
guide line set forth in this report. We have prepared this report on the accountings of our product,
fountain. We will be focusing mainly on the costing and pricing strategies for manufacturing the
product. The entire duration of preparing this report has been immensely helpful to us, a golden
opportunity to increase our ideas, concepts and interpersonal skills in terms of accounting
strategies and calculations.
We enjoyed working on this report and hope you will find it innovative.
Yours Sincerely,
Khorsed Alam Prince
Hussain Nabiul Mannan
Jubayer Islam

3. 2 | P a g e
Abstract
The name of our company is Fountain Corporation and we are making customized fountain.
The materials needed to make this fountain are clay fruit bowl, 3 mukhi prodip, clay stand
prodip, water pump, clay ring, pipe, stones. The cost included in making the product are direct
cost which includes only direct labor and indirect cost that is manufacturing overhead cost
includes rent and utility. The period cost for the product is commission. Here the simple cost
system is used and all the allocation is done. The prime cost, conversion cost and full cost for the
product are also assumed. The product line profitability report is compared under simple costing
and activity based costing. The revenue budget, production budget, direct material usage budget,
direct material purchase budget, manufacturing overhead cost budget, ending inventory budget
and cost of goods sold budget. A budgeted income statement in both traditional format and
contribution format has been prepared. Then breakeven point, breakeven margin and margin of
safety, and sensitivity analysis for the product are shown.

4. 3 | P a g e
Group Profile
Section: 03
Group Name: Achiever
Group Leader: Khorsed Alam Prince
Name ID
Khorsed Alam 141 1765 030
Jubayer Islam 141 1677 030
Hussain Nabiul Mannan 141 1679 030

5. 4 | P a g e
Table of Contents
Name of The Topics Page Number
1. Introduction 5
2. Industry Analysis 5
3.Manufacturing Process 5
4.Maximum Production Possibility 6
5.Costing ofThe Product (materials,labor, MOH) 6-7
6.Support & Selling Cost 8
7.Analysis ofThe Cost 8-10
8.Simple Costing 11
9.Cost Strategy OfAllocating Support Cost 12-13
10.Activity Base Costing 13-16
11.Profitibility Report 16-17
12.Pricing strategy 18
13.Budget 19-24
14.Break-Even 25
15.Margin ofsafety 25-26
16.Operating Leverage 26
17.Sensitivity Analysis 27

6. 5 | P a g e
Introduction
Fountains are used today to decorate interior of residence, city parks and squares for recreation
and for entertainment. We are not producing big fountain like outdoor fountain. Our company is
making customized indoor fountain and each product has its own distinguish design. We are not
producing at a mass amount rather we are focusing on customer order and try to make according
to their desire. People have become so much aware about interior decoration of their homes.
They do lots of decorations to make the interior look good. Fountain is also a part of home
decoration. This product is widely used in home decoration. Many companies are producing
different kinds of fountains at various prices. But we are making this product at a very
reasonable price in comparisons to our competitors. This is the main reason why we have chosen
this product.
Industry Analysis
Fountain belongs to home decor industry. Since this product has increasing demand, home decor
industry has flourished lately. People are focusing greatly on interior design. So, this industry has
a great future ahead. The main competitors of our product are A Plus Bangladesh, Fountech Ltd
and Royal Gypsum decoration. A Plus Bangladesh is the strongest competitor for us since they
sale at a very reasonable price.
Manufacturing Process
The materials that are needed to make this product are one clay bowl, one clay ring, one stand
prodip 3 mukhi, one stand 3 mouth prodip, one water pump and a small bag of stones. First we
need to put the caly ring in the middle of the fruit bowl. Then we need to make a hole on the
middle of the stand prodip 3 mukhi and 3 mouth prodip so the pipe can go through the hole
easily. After that we need to set a water pump under the stand 3 mouth prodip. Then we have to
place it in the middle of the ring. On the top of it we have to put the stand prodip 3 mukhi.
Lastly we need to throw some stones around the fruit clay bowl and connect the electricity line to
the product.

7. 6 | P a g e
Maximum production possible
We will have 4 labors. It will take 30 minutes for four labors to produce a single unit of fountain
working together. So, hourly production will be 2 units.
Direct Labor Hours per day = 8 hours.
Working days per week = 6 days.
Total working days per month = 24 days.
Total Direct Labor Hour per month = 8 hours per day*24days per month = 192 hours
So, Maximum production per month = 192hours*2units per hour = 384 units.
Direct materials
Items Cost per unit
Clay fruit bowl Tk. 100
Clay stand prodip Tk. 15
Clay 3 mukhiprodip Tk. 50
Clay ring Tk. 10
Water pump Tk. 250
Stone Tk. 50
Direct material per unit Tk. 475
Direct Manufacturing Labor Cost
Monthly direct labor cost will be = 4 labors*Tk. 7200 per month
= Tk. 28,800
So, direct labor cost per unit = Tk. 28,800/384 units
= Tk. 75

8. 7 | P a g e
Manufacturing Overhead Cost
Items Calculation Cost
Indirect Materials
Pipe 0.5 feet*Tk. 4 per
feet
Tk. 2
Colors Tk. 10
Per unit indirect
materials
Tk. 12
Other MOH
Rent Tk. 15 per s.f*700s.f Tk. 10,500
Utility Tk.1,000
Total Tk. 11,500
Other MOH per unit Tk. 30
MOH cost per unit Tk. 42
Production Cost
Production cost is the summation of direct materials, direct labor, and manufacturing overhead.
Following table shows the production cost per unit of fountain.
Inputs Cost per unit
Direct Materials Tk. 475
Direct manufacturing labor Tk. 75
Manufacturing overhead Tk. 42
Production cost Tk. 592

9. 8 | P a g e
Support cost & selling cost
Support cost: The costs that are not directly related to production but assists production and
other support departments. In our company support cost will be Telephone bill and Internet bill
because both of this will help in production indirectly.
Selling cost: These are the expenses incurred in marketing and distribution of products. Our
selling costs will be Transportation (that will help in shifting of product to customers) and
Commission (5% of sales).
Following table gives total support and selling of our company.
Support cost Calculation Total cost
Telephone bill Tk. 500
Internet bill Tk. 500
Total support cost Tk. 1,000
Selling cost
Transportation Tk. 5 per unit*384
units
Tk. 1,920
Commission 5% of sales Tk. 15,570
Total selling cost Tk. 17,490
Analysis of Costs
Variable cost: A cost that changes in total in proportion to a change in the level of activity but
per unit variable cost remains the same within the relevant range.
Fixed cost: A cost that remains unchanged in total for a given time period and within the
relevant range but per unit fixed cost changes inversely to a change in production volume.
Following shows per unit variable cost and total and unit fixed cost:

10. 9 | P a g e
Variable cost Cost per
unit
Fixed cost Total cost
Clay fruit bowl Tk. 100 Rent Tk. 10,500
Clay stand prodip Tk. 15 Utility Tk. 1,000
Clay 3 muki prodip Tk. 50 Telephone Tk. 500
Clay ring Tk. 10 Internet Tk. 500
Water pump Tk. 250 Transportation Tk. 1,920
Stone Tk. 50 Total fixed cost Tk. 14,420
Pipe Tk. 2 Unit to be
produced
384 units
Color Tk. 10 Fixed cost per unit Tk. 38
(Approx.)
Direct labor cost Tk. 75
Total Tk. 562
Note: For simplicity, we have assumed that we have no mixed cost
Direct cost: Costs related to a particular cost object and can be traced to it in an economically
feasible way.
Indirect cost: Costs related to a particular cost object but cannot be traced to it in an
economically feasible way. We have to allocate these costs on the basis of particular cost object
Following table shows direct cost and indirect cost per unit of fountain:
Direct cost Cost per unit Indirect cost Cost per unit
Direct materials: Indirect materials:
Clay fruit bowl Tk. 100 Pipe Tk. 2
Clay stand prodip Tk. 15 Color Tk. 10
Clay 3 mukhipodip Tk. 50 Other indirect cost:
Clay ring Tk. 10 Rent (Tk. 10,500/384 units) Tk. 27.34
Water pump Tk. 250 Utility (Tk. 1,000/384 units) Tk. 2.60

11. 10 | P a g e
Stone Tk. 50 Telephone bill (Tk. 500/384) Tk. 1.30
Direct labor Tk. 75 Internet bill (Tk. 500/384) Tk. 1.3
Total direct cost Tk. 550 Total indirect cost Tk. 44.54
(Approx.)
Note: We have assumed product as the cost object.
Prime cost: Prime cost is the summation of all direct costs (our direct costs are only direct
materials and direct manufacturing labor).
Conversion cost: All manufacturing cost other than direct material cost. It represents all
manufacturing cost incurred to convert direct materials into finished good.
Following table shows per unit prime cost and conversion cost:
Prime cost Cost per
unit
Conversion cost Cost per
unit
Direct materials Tk. 475 Direct labor Tk. 75
Direct manufacturing labor Tk. 75 Manufacturing overhead Tk. 42
Prime cost per unit Tk. 550 Conversion cost per unit Tk. 117
Full cost: Includes all variable cost fixed cost needed to produce a product. It is used to compute
the total cost of a unit of product while considering all costs.
Following table shows full cost per unit of fountain:
Variable cost per unit Tk. 562
Fixed cost per unit Tk. 38
Total Tk. 600

12. 11 | P a g e
Simple costing system
Under simple costing system companies use a broad average rate for assigning the cost of
resources to cost object when individual product use those resources in non-uniform way. Under
this system company allocates its total indirect cost using a single cost allocation base.
We will use Direct Manufacturing labor hour as the cost allocation base to allocate indirect
cost to each fountain under simple costing system
Overhead rate =
𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑜𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡
𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 ℎ𝑜𝑢𝑟
=
𝑇𝑘.16,128
768
= 21 per direct labor hour
Unit product cost under simple costing:
Inputs Cost per unit
Direct Materials Tk. 475
Direct labor Tk. 75
MOH allocated (21*2) Tk. 42
Unit cost Tk. 592

13. 12 | P a g e
Cost strategy of allocating support cost
We have chosen direct method to allocate our support department’s cost to operating department
in which we do not need to consider the fact that one support department may provide support to
another support department. Direct method is simple and involves less calculation to do. It is also
less time consuming and easy to perform. On the other hand we have less support department
and cost. As a result of these factors we have decided to use direct method to allocate costs of
support department to operating department.
Details Support Department
(communication Dept.)
Internet Bill Telephone
bill
Operating dept.
Longevity Setup Decoration
Testing
Cost incurred Tk. 500 Tk. 500
Allocation of internet bill:
(Tk. 500*
𝟏𝟎
𝟏𝟎𝟎
,
𝟒𝟎
𝟏𝟎𝟎
𝟓𝟎
𝟏𝟎𝟎
)
(Tk. 500) ___ Tk. 50 Tk. 200 Tk. 250
Allocation of telephone bill:
(Tk. 500 *
𝟐𝟓
𝟏𝟎𝟎
,
𝟓𝟎
𝟏𝟎𝟎
,
𝟐𝟓
𝟏𝟎𝟎
)
____ (Tk. 500) Tk. 125 Tk. 250 Tk. 125
Total Tk. 0 Tk. 0 Tk. 175 Tk. 450 Tk. 375
Our company has one support department, Communication department, which has two cost
internet bill and telephone bill. And has three operating department, Longevity testing, Setup,
and Decoration.
Most of our internet cost occur in decorating fountain because we need get different idea from
different sources online about how to make our product more lucrative. As a result we have
assigned 50% of our internet bill on Decoration department. 40% of our internet bill has been
assigned to setup department because also need to get different ideas about how to set up

14. 13 | P a g e
fountains. Only 10% of the internet cost has been assigned to Longevity Testing department
because we need a very little internet in this area.
50% of the telephone bill incurred on setup department to get to know from customers which
type of setup they want. 25% of telephone bill has been assigned to Longevity testing
department. Because we will need to get information from different sources through telephone
about how to make fountain more durable and long lasting. 25% of the telephone cost incurred
on Decoration department to get different ideas from different sources to decorate our product.
Activity based costing
ABC system is a costing system in which each individual activity is identified as a cost object
and there is separate cost driver for each of the activity.
Following table shows all the indirect costs and cost drivers for each of them:
Cost items Allocation bases Unit of allocation
bases
Cost
Pipe Number of feet 192 feet Tk. 768
Color Number of unit produced 384 units Tk. 3,840
Rent Number of square feet 700 square feet Tk. 10,500
Utility Number direct labor hour 192 hours Tk. 1,000
Telephone bill Number of phone call 100 phone calls Tk. 500
Internet bill Number of unit produced 384 units Tk. 500
Transportation Number of unit sold 350 units Tk. 1,750
Pipe is purchased on the basis of feet. Total cost of pipe varies over the number feet purchased,
which is Tk. 4 per feet so number of feet is the best cost driver for pipe. Total cost of color
changes with respect to a change in the number of unit produced which is Tk. 10 per unit
produced. So, number of unit produced is the best cost driver for color. Room is taken rent on the

15. 14 | P a g e
basis of square feet and total cost varies with respect to a change in the size of the room. So,
number of square feet is the best cost driver for rent. Our utility costs include electricity, water
bill, pin of drill machine etc. And these costs tend to vary over different level of direct labor
hour. So, Number of direct labor hour is the best cost allocation base for utility. Telephone bill
depends on the number of phone calls. Cost will be less if number of call is less and cost will be
more if number of call is more. So, number of phone call has the best cause and effect
relationship with telephone bill cost. Total internet bill changes if there is a changes in the unit
produced. So, number of unit produced is the best cost drivers for Internet and telephone bill.
Transportation cost changes with a change in units sold.
Overhead rate for pipe =
𝐶𝑜𝑠𝑡
Number of feet
=
768
192
= Tk. 4 per square feet
Overhead rate for color =
Coloring cost
Unit produced
=
3,840
384
= Tk. 10 per unit
Overhead rate for rent =
Rent cost
Number of square feet
=
10,500
700
=Tk. 15 per s.f
Overhead rate for utility =
Utility cost
Number direct labor hour
=
1,000
192
= Tk. 5.21 per DLH
Overhead rate for telephone bill =
Telephone bill
Number of phone call

16. 15 | P a g e
=
500
100
= Tk. 5 per phone call
Overhead rate for internet bill =
Internet bill
Number of unit produced
=
500
384
= Tk. 1.30 per unit
Transportation cost =
Transportation cost
Number of unit sold
=
1750
350
= Tk. 5 per unit

17. 16 | P a g e
Unit Cost under ABC:
Costs Items Calculations Cost per unit
Direct materials Tk. 475
Direct manufacturing labor Tk. 75
Indirect Costs:
Pipe Tk 4 per feet *0.5 per unit Tk. 2
Color Tk. 10
Rent Tk. 15 per feet*1.82 feet per
unit
Tk. 27.3
Utility Tk. 5.21 per DLH*0.5 DLH Tk. 2.6
Telephone bill Tk. 5 per phone call*0.26
phone call per unit
Tk. 1.3
Internet bill Tk. 1.3
Transportation cost Tk. 5
Total cost Tk. 599.5
Product line profitability report
Simple costing
Items Calculation Amount
Sales Revenue Tk. 900*350 Tk. 3,15,000
Less. Cost of goods Sold Tk. 592*350 Tk. 2,07,200
Operating income Tk. 1,07,800
Profit margin 34.22%

18. 17 | P a g e
Activity based costing
Items Calculation Amount
Revenue Tk. 900*350 Tk. 3,15,000
Less. Cost of goods sold Tk. 592*350 Tk. 2,07,200
Gross margin Tk. 1,07,800
Less. Activities
Telephone bill Tk. 500
Internet bill Tk. 500
Transportation Tk. 1,750
Commission Tk. 15,570 (0.05*3,11,400)
Total activity costs Tk. 18,320
Operating income Tk. 89,480
Profit margin 28.41%
Under simple costing system profit margin was 34.22% but under ABC system profit margin
was 28.35%. This is because, under simple costing all the MOH cots are allocated to product
using a single plant-wide overhead rate (cost per hour of DMLH) no matter how they actually
incurred. On the other hand, simple costing system does not recognize some of the indirect costs.
Under ABC system each of the indirect cost are allocated to product using separate OH rate and
cost allocation base considering their cause and effect relationship. On the other hand, ABC
system consider all the costs. As a result of these factors profit margin under simple costing
system is higher than that of activity based costing systems.

19. 18 | P a g e
Pricing strategy
We will use Market Based pricing strategy. Our target market is very competitive where the
price of the product is relatively less. The product that we will be producing has substitute
available in the market. So the price of it will be determined by the market. If we charge a higher
price than the market, customers will move to competitors. In this approach we will first consider
the customers’ perceived value on our product, how competitors may react to a change in our
price, and then we will look at the cost. On the other hand, customers have become more
knowledgeable and demand quality products at reasonable price. So, we have to focus on what
the customers want. As a result of these reasons we have decided to use Market Based pricing
strategy.
The price of our product will be Tk. 900.This price will result in a markup on full cost of 50%.
(300/600).
This price is relatively much lower than our competitors. Fountech Ltd sales this fountain at Tk.
1,300. A Plus Bangladesh sales at Tk. 1,200. Royal gypsum decoration sales at Tk. 1,200 to
1,500.

20. 19 | P a g e
Budget
The demand for our product will estimated to be 500 units, but as a result of less capacity we will
be able to produce 384 units and will market 350 units of fountain.
Total budgeted production = 384 units
Target ending inventory = 34 units (rounded up)
So, budgeted sales will be = 350 units
We have assumed ending finished good inventory to be 10% of maximum production possible.
We will have no beginning inventory.
Schedule 1: Sales Budget
Sales Budget
Product Unit Selling Price/Unit Total
Fountain 053 TK.033 Tk. 333015
Schedule 2: Production Budget
Production Budget
Total Units
Budgeted Sales Unit 053
)+(Target Ending Finished Goods Inventory 03
(-) Beginning Finished Goods Inventory 3
Units To Be Produced 384

21. 20 | P a g e
Schedule 3 (A): Direct Material Usage Budget
Direct Material Usage Budget
Clay Fruit
Bowl
Stand
Prodip 0
Mukhi
Stand 0
Mouth
Clay
Ring
Water
pump
Stone Total
Physical Units
Budget:
Clay Fruit
Bowl( 083*1)
083
Stand Prodip 0
Mukhi( 083*1)
083
Stand 0Mouth 083
Clay Ring( 083*1) 083
Water
Pump( 083*1)
083
Stone( 083*1) 083
Cost Budget
Available Form
Beginning
Inventory(N 3)
Available From
Purchase:
Caly Fruit
Bowl( 083* TK. 133)
TK.08333
Stand Prodip 0
Mukhi
( 083* TK. 15)
TK.5673
Stand 0Mouth
( 083* TK. 53)
TK.10233
Clay
Ring( 083* Tk. 13)
Tk.0833
Water
Pump( 083* Tk. 253)
Tk.07333
Stone( 083* TK. 53) 10233
Total Cost Of Direct
Material To Be Used
TK.08333 TK.5673 TK.10233 Tk.0833 Tk.07333 10233 Tk.182333

22. 21 | P a g e
Schedule 3 (B): Direct Material Purchased Budget:
Direct Material Purchased Budget
Clay Fruit
Bowl
Stand
Prodip 0
Mukhi
Stand 0
Mouth
Clay
Ring
Water
pump
Stone Total
Production Usage 083 083 083 083 083 083
)+(Target Ending
DM Inventory
66 66 66 66 66 66
(-) Beginning DM
Inventory
3 3 3 3 3 3
Total Purchased 371 371 371 371 371 371
Cost Budget
Clay Fruit
Bowl( 371* TK. 133)
TK.37133
Stand Prodip 0
Mukhi( 371* TK. 15)
Tk.7015
Stand 0
Mouth( 371* TK. 53)
TK.20353
Ring( 371* Tk. 13) TK.3713
Water
Pump( 371* Tk. 253)
Tk.115253
Stone( 371* TK. 53) TK.20353
Total Cost Of Direct
Materials To Be
Purchased
TK.37133 Tk.7015 TK.20353 TK.3713 Tk.115253 TK.20353 TK.218065

23. 22 | P a g e
Schedule 4: Direct Manufacturing Labor Budget
Direct Manufacturing Labor Budget
Product Output Units
Produced
DMLH Total DMLH Hourly Wage Total DML
Cost
Fountain 083 2Hrs 678 0675 TK.28833
Schedule 5: Manufacturing Overhead Budget
Manufacturing Overhead Budget
Variable MOH
Pipe(TK. 12*083 Units) TK.678
Color (TK. 13*083 Units) 0833
Fixed MOH
Rent 13533
Utility 1333
Total 17138
Schedule 6: Unit Cost Manufacturing Finished Goods
Unit Cost Manufacturing Finished Goods
Cost Per Unit Of
Input
Inputs Total
Direct Materilas
Clay Fruit Bowl TK.133 1 TK.133
Stand Prodip 0
Mukhi
15 1 15
Stand 0Mouth 53 1 53
Ring 13 1 13
Water Pump 253 1 253
Stone 53 1 53
Direct Labor 0675 2 hour 65
MOH 32 32
Total TK.502

24. 23 | P a g e
Schedule 7: Ending Inventory Budget
Ending Inventory Budget
Input Unit Unit Per Cost Total
Direct Material
Clay Fruit Bowl 66 TK.133 TK.6633
Stand Prodip 0Mukhi 66 15 1155
Stand 0Mouth 66 153 0853
Ring 66 13 663
Water Pump 66 253 10253
Stone 66 53 0853
Finished Goods
Fountain 03 502 23128
Total Cost Of Ending Inventory TK. 63057
Schedule:8 Cost Of Goods Sold Budget
Cost Of Goods Sold Budget
Beginning Finished Goods TK.3
Cost Of Goods Manufacture
DM Used In Production(0A) TK.182333
Direct Labor Cost ( 3) 28833
MOH Cost( 5) 17138 226038
Total Cost Of Goods
Available For Sales
226038
(-) Ending Finished Goods
Inventory( 6)
23128
Cost Of Goods Sold TK.236183

25. 24 | P a g e
Budgeted income statement
Items From schedule Amount
Revenues Schedule 1 Tk.015333
Cost of goods sold Schedule 7 TK.236183
Gross margin Tk. 107820
Operating costs:
Telephone bill Tk. 500
Internet bill Tk. 500
Transportation Tk. 1730
Commission Tk. 15570
Total operating cost Tk. 18300
Total operating
income
Tk. 89520
Budgeted Contribution Format Income Statement:
Items Calculation Total(TK) Per Unit(TK)
Sales Revenue TK.900*350 315000 900
(-)Variable Cost Tk.567*350 198450 567
Contribution Margin 116550 333
(-)Fixed Cost 14420 41.2
Operating Income 102130 292

26. 25 | P a g e
Break-Even Point
BE Units =
Fixed cost
Cm/unit
=
14420
333
= 43 units
Sales revenue =
Fixed cost
CMR
=
14420
37%
= Tk.38973
CMR =
CMu
SP
=
333
900
= 37%
Margin of safety
MOS (unit) = Budgeted Sales - BE Sales
= 350 – 43
= 307 units
MOS (Tk.) = Budgeted Sales - BE Sales
= 315000 – 38973
= Tk.276027

27. 26 | P a g e
Our MOS ratio is (MOS/Budgeted Sales=307/350) 87.71%. This seems that we are in a very safe
situation. Our actual sales is (350/43) 8.14 times our BE sales which means if we need to sale
one unit to BE, we will sale more than 8 units which is 7 units more than BE. We know that
higher the MOS lower the risk. Even though our revenue decreases by TK. 276027, we will be
able to cover our FC and reach break-even. As a result of having a lower FC, we have a very
lower risk in terms of MOS.
Degree of Operating Leverage
Degree of Operating Leverage =
CM
Operating Income
=
116550
102130
=1.14 times
It means our CM is 1.14 times our OI. We know that higher the degree of operating leverage
higher the fixed cost, and lower the degree of operating leverage lower the FC. Our operating
leverage is very low which indicates a lower FC. So there is less possibility that CM will be
offset by FC which reflects lower risk. So, if our unit sold and CM decrease by a small amount,
our OI will not reduce by a large amount. Therefore, we have lower risk.

28. 27 | P a g e
Sensitivity Analysis
Case 1: 12% increase in demand
Revenue VC CM FC OI Old OI New OI
Increase
in
42
units*Tk.900
= 37800
42*Tk.567
=Tk.23814
Tk.13986 0 Tk.13986 Tk.102130 Tk.102130+13986
=116116
N.B: As a result of increase in demand by 12%, our sales will increase by 42 units. An increase
in unit sold has no impact on FC. So our OI will increase by Tk.13986
Case 2: 16% decrease in demand:
Revenue VC CM FC OI Old OI New OI
decrease
in
56units*Tk.900
= Tk.50400
56*Tk.567
=Tk.31752
Tk.18648 0 Tk.18648 Tk.102130 Tk.102130-
18648
=Tk.83482
N.B: As a result of decrease in demand by 16%, our sales will decrease by 56 units. A decrease
in unit sold has no impact on FC. So our OI will decrease by Tk.18648