“S produces and sells one product, P, for which the data are as follows: Selling price Rs 28 Variable cost Rs 16 Fixed cost Rs 4 The fixed costs are based on a budgeted production and sales level of 25,000 units for the next period. Due to market changes both the selling price and the variable cost are expected to increase above the budgeted level in the next period. If the selling price and variable cost per unit increase by 10% and 8% respectively, by how much must sales volume change, compared with the original budgeted level, in order to achieve the original budgeted profit for the period?”

The correct answer is C. 13.3% decrease.

Let’s break down the question and each option:

• S produces and sells one product, P, for which the data are as follows: Selling price Rs 28 Variable cost Rs 16 Fixed cost Rs 4

This means that the company makes a profit of Rs 8 per unit sold.

• The fixed costs are based on a budgeted production and sales level of 25,000 units for the next period.

This means that the company expects to sell 25,000 units in the next period and incur fixed costs of Rs 4 x 25,000 = Rs 100,000.

• Due to market changes both the selling price and the variable cost are expected to increase above the budgeted level in the next period. If the selling price and variable cost per unit increase by 10% and 8% respectively, by how much must sales volume change, compared with the original budgeted level, in order to achieve the original budgeted profit for the period?

This means that the selling price will increase to Rs 28 x 1.1 = Rs 30.8 and the variable cost will increase to Rs 16 x 1.08 = Rs 17.28. The new profit per unit will be Rs 30.8 – Rs 17.28 = Rs 13.52.

In order to achieve the original budgeted profit of Rs 100,000, the company must sell 100,000 / 13.52 = 7,407 units. This is a decrease of 25,000 – 7,407 = 17,593 units, or 13.3%.

Therefore, the correct answer is C. 13.3% decrease.