A startup tech firm intends to launch a new mobile app. The expected sales for the next 3 months are: Month 1 – 10,000 units, Month 2 – 12,000 units, Month 3 – 11,000 units. The selling price per unit is Rs.200 and the variable cost per unit is Rs.120. Fixed development cost is Rs.2,000,000. Prepare a production budget for the quarter and compute the expected profit for the quarter.
Answer
Rs.640,000
The correct answer is Rs.640,000 — Step 5: Subtract fixed cost (2,000,000) from contribution to get profit = 2,640,000 – 2,000,000 = 640,000 rupees.
Step-by-step solution
- Step 1: Total units for the quarter = 10,000 + 12,000 + 11,000 = 33,000 units.
- Step 2: Total revenue = 33,000 × 200 = 6,600,000 rupees.
- Step 3: Total variable cost = 33,000 × 120 = 3,960,000 rupees.
- Step 4: Contribution = revenue – variable cost = 6,600,000 – 3,960,000 = 2,640,000 rupees.
- Step 5: Subtract fixed cost (2,000,000) from contribution to get profit = 2,640,000 – 2,000,000 = 640,000 rupees.
Common mistake: Forgetting to include fixed costs in profit computation.
Concept tested: Production budget and profit calculation
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