CA Inter Cost & Mgmt — Question Paper — January 2021

CVP Analysis — ABC Ltd (Revised Scenario)

Step 1 — Current Position Analysis

Given: Sales = ₹10,00,000 | C/S Ratio = 37% | Margin of Safety (MOS) = 25% of Sales

Current MOS (₹) = 25% × ₹10,00,000 = ₹2,50,000

Current BEP = Sales − MOS = ₹10,00,000 − ₹2,50,000 = ₹7,50,000

Current Fixed Cost = BEP × C/S Ratio = ₹7,50,000 × 37% = ₹2,77,500

Current Total Variable Cost = Sales × (1 − C/S) = ₹10,00,000 × 63% = ₹6,30,000

Key Assumption: Since only selling price decreases (not volume), the number of units sold remains unchanged. Therefore, total variable cost remains ₹6,30,000 for the revised scenario.

Step 2 — Revised Sales (ii)

Under revised conditions: New C/S Ratio = 30%, so Variable Cost / New Sales = 70%

Revised Sales = Total Variable Cost ÷ Variable Cost Ratio = ₹6,30,000 ÷ 70% = ₹9,00,000

Step 3 — New Break-Even Point (iii)

New MOS = 40% of New Sales = 40% × ₹9,00,000 = ₹3,60,000

New BEP = New Sales − New MOS = ₹9,00,000 − ₹3,60,000 = ₹5,40,000

Step 4 — Revised Fixed Cost (i)

Revised Fixed Cost = New BEP × New C/S Ratio = ₹5,40,000 × 30% = ₹1,62,000

Verification: Fixed cost has decreased from ₹2,77,500 to ₹1,62,000 — consistent with the problem statement.

Summary of Answers:
(i) Revised Fixed Cost = ₹1,62,000
(ii) Revised Sales = ₹9,00,000
(iii) New Break-Even Point = ₹5,40,000

Computation of Total Income of Mr. Krishna for Assessment Year 2020-21 (Previous Year 2019-20)

Item-wise Analysis of Debits:

1. Donation to Gurdwara – ₹20,000 (Cash): This is a personal donation, not a business expenditure. It is disallowed as a deduction under business income and must be added back. As regards deduction under Section 80G of the Income-tax Act, 1961, Section 80G(5D) provides that no deduction shall be allowed in respect of any donation exceeding ₹2,000 unless paid by any mode other than cash. Since ₹20,000 is paid entirely in cash, deduction under Section 80G is NIL (even though no cheques were accepted by the institution, the restriction applies without exception).

2. Contribution to University u/s 35(1)(ii) – ₹48,000: A contribution to an approved and notified university for scientific research is deductible under Section 35(1)(ii) of the Income-tax Act, 1961. For AY 2020-21, the deduction rate is 100% of the contribution (the enhanced deduction of 125% was withdrawn effective AY 2018-19 by the Finance Act 2016). Since ₹48,000 is already debited to the Profit & Loss Account and the allowable deduction equals the amount debited, no further adjustment is required.

3. Interest on E-Vehicle Loan – ₹1,67,000: The e-vehicle was purchased for the personal use of Mr. Krishna's wife, not for business purposes. Therefore, the interest of ₹1,67,000 is not an allowable business deduction and must be added back. However, a deduction of up to ₹1,50,000 is available under Section 80EEB of the Income-tax Act, 1961 (inserted by Finance Act 2019, operative from AY 2020-21), since: (a) Mr. Krishna is an individual; (b) the loan was sanctioned on 15-02-2020 from a bank, i.e., between 01-04-2019 and 31-03-2023; and (c) the loan was for purchase of an electric vehicle. Deduction under Section 80EEB = ₹1,50,000 (restricted to maximum limit).

4. Timber under Forest Lease – ₹20,20,000: Timber is the primary raw material for a furniture manufacturer. This is a legitimate business expenditure. Under Rule 6DD(e) of the Income-tax Rules, 1962, payments made for purchase of forest produce to the cultivator, grower, or producer are exempt from the disallowance under Section 40A(3), even if paid in cash. Hence, the full ₹20,20,000 is allowable as a business expense. No adjustment required.

Item-wise Analysis of Credits:

1. Royalty from Patent – ₹4,00,000: This income is correctly credited and forms part of business income. A deduction under Section 80RRB of the Income-tax Act, 1961 is available: Mr. Krishna, being an individual and resident patentee, earning royalty on a patent registered under the Patents Act, 1970, can claim a deduction equal to the lower of actual royalty income or ₹3,00,000. Deduction = ₹3,00,000.

2. Bad Debt Recovery – ₹3,00,000: Under Section 41(4) of the Income-tax Act, 1961, any amount subsequently recovered in respect of a bad debt previously allowed as a deduction is taxable as deemed business income in the year of recovery. The amount taxable = lower of (amount recovered) and (amount previously allowed as deduction) = lower of ₹3,00,000 and ₹3,00,000 = ₹3,00,000. This amount is already correctly credited to P&L. No adjustment required.

3. Sale of Furniture to Brother below FMV – ₹7,00,000 (FMV ₹9,00,000): When stock-in-trade is sold to a relative at a price below fair market value, the income is understated. The sale consideration should be taken at FMV (₹9,00,000), and the shortfall of ₹2,00,000 (₹9,00,000 − ₹7,00,000) must be added back to business income.

Computation of Total Income:

Income from Business/Profession = ₹9,15,000 (see working notes)

Gross Total Income = ₹9,15,000

Less: Deductions under Chapter VI-A:
- Section 80G: NIL (cash payment exceeding ₹2,000)
- Section 80EEB: ₹1,50,000
- Section 80RRB: ₹3,00,000

Total Deductions = ₹4,50,000

Total Income = ₹4,65,000

Tax Computation: Mr. Krishna is a Senior Citizen (65 years). Tax on ₹4,65,000: Nil on first ₹3,00,000 + 5% on ₹1,65,000 = ₹8,250. Less: Rebate under Section 87A (total income ≤ ₹5,00,000; rebate = lower of tax or ₹12,500) = ₹8,250. Tax after rebate = NIL. Health & Education Cess @ 4% = NIL. Tax Liability = NIL.

Statement of Comprehensive Machine Hour Rate — Machine Shop (Six Months Period)

Step 1 — Effective Machine Hours

Since each machine requires one operator wholly engaged, only 6 machines (= number of operators) can run simultaneously, even though 8 machines exist.

Effective hours per operator per month:
Normal available hours: 208
Less: Absenteeism (without pay): (18)
Less: Leave (with pay): (20)
Less: Normal unavoidable idle time: (10)
Effective hours per operator per month = 160 hours

Total effective machine hours for 6 months = 160 × 6 operators × 6 months = 5,760 machine hours

Step 2 — Wages Calculation (6 months)

Paid hours per operator per month = 208 − 18 (absent without pay) = 190 hours
Wage rate = ₹100 per 8-hour day = ₹12.50 per hour
Wages per operator for 6 months = 190 × 6 × ₹12.50 = ₹14,250
Total wages for 6 operators = ₹14,250 × 6 = ₹85,500
Production bonus @ 10% = ₹8,550

Step 3 — Annual Figures Apportioned to 6 Months

Depreciation = 10% × ₹3,20,000 × 6/12 = ₹16,000
Repairs & Maintenance = 5% × ₹3,20,000 × 6/12 = ₹8,000
Insurance = ₹3,60,000 × 6/12 = ₹1,80,000
Sundry Work Expenses = ₹50,000 × 6/12 = ₹25,000
Management Expenses = ₹5,00,000 × 6/12 = ₹2,50,000

Statement of Machine Hour Rate

| Particulars | ₹ |
|---|---|
| Wages (6 operators, paid hours) | 85,500 |
| Production Bonus @ 10% on wages | 8,550 |
| Power consumed | 40,250 |
| Supervision & Indirect Labour | 16,500 |
| Lighting & Electricity | 6,000 |
| Insurance (half-year) | 1,80,000 |
| Sundry Work Expenses (half-year) | 25,000 |
| Management Expenses (half-year) | 2,50,000 |
| Depreciation (half-year) | 16,000 |
| Repairs & Maintenance (half-year) | 8,000 |
| Total Cost (6 months) | 6,35,800 |

Effective Machine Hours for 6 months = 5,760 hours

Comprehensive Machine Hour Rate = ₹6,35,800 ÷ 5,760 = ₹110.38 per machine hour

*Note: All 8 machines' fixed costs (depreciation, repairs, insurance) are absorbed over hours worked by 6 machines, since idle machine costs are part of the shop's total cost.*

IMPORTANT NOTE: The numerical data referenced in the question (standard time, actual time, hourly rate) is not provided in the problem statement. The solution below uses illustrative figures typical of CA Intermediate exams to demonstrate methodology. Replace with actual values from your question data.

ASSUMED DATA FOR ILLUSTRATION:
Standard time allowed: 20 hours | Actual time taken: 16 hours | Hourly rate: ₹50 | Time saved: 4 hours

PART (i): SIMILARITY AND DIFFERENCE IN PERCENTAGE TERMS

Similarities: Both Halsey and Rowan schemes are incentive wage systems that reward workers for completing work faster than standard time. Both guarantee minimum wages equal to 100% of actual hours worked at the prescribed rate. Both express time saved as percentage of standard time: (Time saved ÷ Standard time) × 100. In this case: (4 ÷ 20) × 100 = 20% efficiency gain.

Differences: Under Halsey Scheme (50% bonus), the worker receives 50% of the monetary value of time saved as bonus—a fixed percentage regardless of efficiency level. Under Rowan Scheme (40% bonus), the bonus varies with efficiency: bonus = (Time saved ÷ Standard time) × Actual wages × 40%—a lower bonus percentage that provides diminishing returns as efficiency increases, making it more favorable to moderate performers than Halsey.

PART (ii): DETERMINED WAGES UNDER BOTH SCHEMES

Halsey Scheme:
Basic/Determined Wages = Actual time wages + [50% × Time saved × Hourly rate]
= (16 × ₹50) + [50% × 4 × ₹50]
= ₹800 + ₹100
= ₹900

Rowan Scheme:
Basic/Determined Wages = Actual time wages + [(Time saved ÷ Standard time) × Actual wages × 40%]
= (16 × ₹50) + [(4 ÷ 20) × ₹800 × 40%]
= ₹800 + [0.20 × ₹800 × 0.40]
= ₹800 + ₹64
= ₹864

PART (iii): ADDITIONAL/BONUS WAGES UNDER BOTH SCHEMES

Halsey Scheme Additional Wages:
Bonus = 50% × Time saved × Rate
= 50% × 4 hours × ₹50
= ₹100

Alternatively expressed as percentage of actual wages: (₹100 ÷ ₹800) × 100 = 12.5% additional

Rowan Scheme Additional Wages:
Bonus = (Time saved ÷ Standard time) × Actual wages × 40%
= (4 ÷ 20) × ₹800 × 0.40
= 0.20 × ₹800 × 0.40
= ₹64

Alternatively expressed as percentage of actual wages: (₹64 ÷ ₹800) × 100 = 8% additional

KEY FINDING: At the same efficiency level (20% time saved), Halsey Scheme provides ₹100 bonus while Rowan Scheme provides only ₹64 bonus, making Halsey more attractive to workers. The difference of ₹36 represents the trade-off between simplicity (Halsey) and efficiency-proportional rewards (Rowan).

Note: The question as provided appears to have incomplete source data (several cost line items are missing from the original table). The following solution is constructed using the available figures — Factory Overhead = ₹1,20,000 at 120% of Direct Wages, Opening Finished Goods Stock = ₹4,00,000, Closing Finished Goods Stock = ₹5,00,000 — along with standard assumed values for remaining items, clearly labelled. The cost sheet format and method are fully exam-compliant.

Standard Cost Sheet for the period ending 30th April 2020

(i) Prime Cost (प्रचार लागत):

Prime Cost comprises all Direct Costs — Direct Materials + Direct Wages + Direct Expenses.

Direct Materials consumed: ₹2,00,000
Direct Wages (Direct Labour): ₹1,00,000
Direct Expenses: ₹50,000
Prime Cost = ₹3,50,000

(ii) Works Cost (कार्यकर्ता लागत):

Works Cost = Prime Cost + Factory/Works Overheads ± WIP Adjustment.

Factory Overheads are absorbed at 120% of Direct Wages = 120% × ₹1,00,000 = ₹1,20,000.

Add: Opening WIP = ₹60,000
Less: Closing WIP = ₹80,000

Works Cost = ₹3,50,000 + ₹1,20,000 + ₹60,000 − ₹80,000 = ₹4,50,000

(iii) Cost of Production (उत्पादन की लागत):

Cost of Production = Works Cost + Office & Administration Overheads.

Office & Admin Overheads (assumed): ₹40,000

Cost of Production = ₹4,50,000 + ₹40,000 = ₹4,90,000

(iv) Cost of Goods Sold / Cost of Production of Goods Sold (निर्मित माल की लागत):

Adjusted for opening and closing stock of Finished Goods.

Opening Stock of Finished Goods = ₹4,00,000
Less: Closing Stock of Finished Goods = ₹5,00,000

Cost of Goods Sold = ₹4,90,000 + ₹4,00,000 − ₹5,00,000 = ₹3,90,000

(v) Total Cost / Cost of Sales (कुल विक्रय लागत):

Add: Selling & Distribution Overheads (assumed): ₹30,000

Total Cost = ₹3,90,000 + ₹30,000 = ₹4,20,000

Summary of Cost Sheet:

Prime Cost — ₹3,50,000 | Works Cost — ₹4,50,000 | Cost of Production — ₹4,90,000 | Cost of Goods Sold — ₹3,90,000 | Total Cost — ₹4,20,000

Governing Law: All TDS/TCS provisions discussed below are under the Income Tax Act, 1961 for Previous Year 2019-20 (Assessment Year 2020-21).

(i) Fixed Deposits – Mr. Brijesh | Section 194A

Section 194A requires TDS on interest (other than on securities) paid/credited by a banking company. The threshold limit for banks (raised by Finance Act 2019 w.e.f. 01.04.2019) is ₹40,000 per annum per bank.

Interest per FD = ₹3,00,000 × 9% × 9/12 = ₹20,250 per FD.

Oriental Bank, Delhi Branch (1 FD): Interest = ₹20,250. Since only one branch and ₹20,250 < ₹40,000, no TDS is deductible.

PNB (CBS adopted) – Delhi Branch + Chandigarh Branch: Since PNB has adopted Core Banking Solution (CBS), all branches are treated as a single unit for computing the threshold. Total interest = ₹20,250 + ₹20,250 = ₹40,500, which exceeds ₹40,000. TDS is applicable.

Rate: 10% | TDS Amount: 10% × ₹40,500 = ₹4,050 (to be deducted by PNB).

(ii) Gold Bonds – Mr. Mukesh | Section 193

Section 193 governs TDS on interest on securities. The proviso to Section 193 exempts TDS on interest on 6½% Gold Bonds, 1977 and 7% Gold Bonds, 1980 only if the nominal value does not exceed ₹10,000 in the case of an individual.

Mr. Mukesh's holdings exceed this limit (₹2,00,000 and ₹3,00,000 respectively). Therefore, TDS is applicable under Section 193. The age of Mr. Mukesh (80 years) does not confer any higher threshold under Section 193 (unlike Section 194A which benefits senior citizens).

Total interest = (₹2,00,000 × 6%) + (₹3,00,000 × 7%) = ₹12,000 + ₹21,000 = ₹33,000.

Rate: 10% | TDS Amount: 10% × ₹33,000 = ₹3,300.

(Note: Mr. Mukesh may submit Form 15H if his estimated tax liability for the year is nil, to avoid TDS deduction.)

(iii) M/s AG Pvt. Ltd. – Interest to Mr. Haridas | Section 194A

Section 194A requires deduction of TDS on interest paid/credited by any person (other than an individual/HUF not covered by tax audit). The proviso to Section 194A exempts only individuals and HUFs whose accounts are not subject to tax audit under Section 44AB in the immediately preceding previous year. This exemption does not extend to companies.

M/s AG Pvt. Ltd. is a company and is therefore obligated to deduct TDS irrespective of its tax audit status. The threshold under Section 194A for non-banking payers is ₹5,000.

Interest credited = ₹79,000 > ₹5,000. TDS is applicable.

Rate: 10% | TDS Amount: 10% × ₹79,000 = ₹7,900.

(iv) LIC Maturity Proceeds – Mr. Prabhakar | Section 194DA

Step 1 – Check Section 10(10D) exemption: For policies issued after 01.04.2012, maturity proceeds are exempt under Section 10(10D) only if the annual premium does not exceed 10% of the sum assured.

Annual premium = ₹1,40,000; 10% of sum assured = 10% × ₹5,00,000 = ₹50,000.

Since ₹1,40,000 > ₹50,000, the policy does not qualify for exemption under Section 10(10D). Hence, Section 194DA applies.

Step 2 – Finance Act 2019 Amendment (w.e.f. 01.09.2019): Section 194DA was amended to charge TDS @ 5% on the income component (i.e., maturity proceeds minus aggregate premiums paid), instead of the earlier 1% on gross.

Since payment is on 31.03.2020 (after 01.09.2019), the amended provision applies.

Total premiums paid = ₹1,40,000 × 4 years = ₹5,60,000.

Income component = ₹6,00,000 − ₹5,60,000 = ₹40,000.

The gross payment (₹6,00,000) exceeds the threshold of ₹1,00,000 under Section 194DA. TDS is applicable.

Rate: 5% on income | TDS Amount: 5% × ₹40,000 = ₹2,000.

Section 10AA of the Income-tax Act, 1961 provides a profit-linked deduction to units set up in a Special Economic Zone (SEZ) for export of articles, things, or services. The deduction is available for 15 consecutive assessment years beginning from the year in which the unit commences production or service.

Quantum and Period of Deduction under Section 10AA:

The deduction is structured in three blocks:

Block 1 – First 5 years (AY 2016-17 to AY 2020-21): 100% of profits and gains derived from export of articles/things or from provision of services is deductible.

Block 2 – Next 5 years (AY 2021-22 to AY 2025-26): 50% of such profits and gains is deductible.

Block 3 – Subsequent 5 years (AY 2026-27 to AY 2030-31): 50% of profits is deductible, subject to the condition that an equivalent amount is credited to the Special Economic Zone Re-investment Reserve Account (SEZ RRA) before the due date of filing return under Section 139(1). The reserve must be utilised within 3 years from the end of the year of creation for acquiring plant and machinery, or for the business of the SEZ unit. If misused or not used within 3 years, the amount is deemed as profits of the year in which it is misused/lapses.

Formula for computing deduction:

Deduction = Profits of SEZ unit × (Export Turnover of SEZ unit ÷ Total Turnover of the SEZ unit)

'Export Turnover' means consideration in respect of export by the SEZ unit received in, or brought into, India by the assessee in convertible foreign exchange within the prescribed time, excluding freight, telecommunication charges, or insurance attributable to the delivery of articles outside India.

Position of Mr. Xavier for AY 2025-26 (FY 2024-25 – Relevant for May 2026 Exam):

Since the unit commenced production in FY 2015-16 (AY 2016-17), AY 2025-26 represents the 10th year — the last year of Block 2. Mr. Xavier is entitled to a deduction of 50% of export profits for AY 2025-26 without any reinvestment reserve condition.

From AY 2026-27 onwards (Block 3), the 50% deduction will be subject to the SEZ RRA condition.

Other Important Conditions:
- The deduction is available only from profits of business (not below zero, i.e., losses are not allowed as negative deduction).
- Where the assessee has more than one SEZ unit, the total deduction shall not exceed the profits of such units taken together.
- The benefit is available only if the unit is not formed by splitting up or reconstruction of an existing business (exceptions for natural calamities apply).
- The unit must not use second-hand plant and machinery exceeding 20% of total value of machinery.
- Section 10AA deduction is available even under the old tax regime; however, it is not available if the assessee opts for the concessional tax regime under Section 115BAC of the Income-tax Act, 1961.
- The deduction is computed before set-off of brought-forward losses under Section 72.

Conclusion: Mr. Xavier's SEZ unit is entitled to a 50% deduction on export profits for AY 2025-26 (10th year – Block 2). From AY 2026-27 (Block 3), the 50% deduction is conditional upon creation of SEZ Reinvestment Reserve Account.

Statement of Wages under Halsey and Rowan Incentive Schemes for Z Ltd.

Before computing wages, the key parameters are established. Each worker works 24 days × 8 hours = 192 hours per month. For 50 workers, total actual hours = 50 × 192 = 9,600 hours. The standard time (time allowed) for producing one unit is 1.975 hours (the previous performance level serves as the standard). Standard hours for actual production of 6,120 units = 6,120 × 1.975 = 12,087 standard hours.

Time Saved = Standard Hours − Actual Hours = 12,087 − 9,600 = 2,487 hours

Basic Wages (Guaranteed) = 9,600 hours × ₹50 = ₹4,80,000 (for 50 workers)

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(a) Halsey Scheme (50% Bonus):

Under Halsey, bonus = 50% × Time Saved × Hourly Rate = 50% × 2,487 × ₹50 = ₹62,175

Total Wages = ₹4,80,000 + ₹62,175 = ₹5,42,175

Earnings per worker per month = ₹5,42,175 ÷ 50 = ₹10,843.50

Previous earnings per worker = 192 × ₹50 = ₹9,600

% Increase in earnings = (₹10,843.50 − ₹9,600) ÷ ₹9,600 × 100 = 12.95%

This does not meet the company's assurance of 20% increase.

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(b) Rowan Scheme:

Under Rowan, Bonus = (Time Saved ÷ Standard Time) × Actual Time × Hourly Rate

Bonus = (2,487 ÷ 12,087) × 9,600 × ₹50 = 0.20577 × ₹4,80,000 = ₹98,764 (approx.)

Total Wages = ₹4,80,000 + ₹98,764 = ₹5,78,764

Earnings per worker per month = ₹5,78,764 ÷ 50 = ₹11,575.28

% Increase in earnings = (₹11,575.28 − ₹9,600) ÷ ₹9,600 × 100 = 20.57%

This meets and slightly exceeds the company's assurance of 20% increase.

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Conclusion: The Rowan Scheme should be introduced by Z Ltd. Under Halsey, workers receive only a ~13% increase in earnings, falling short of the promised 20%. Under Rowan, workers receive ~20.57% more, fulfilling the company's assurance. The Rowan scheme is also worker-friendly at higher efficiency levels (bonus % is capped at 50% of basic wages when actual time = half of standard time), making it sustainable for the company as well.

Computation of Total Income and Tax Payable by Mr. Krishna for Assessment Year 2020-21 (Previous Year 2019-20)

Note: The 'Other information' items provided are analysed below. A complete total income statement would require the base business income/other income figures from the main scenario. The treatment of each item is as follows:

1. Depreciation on Car (Point 2)

The car was purchased on 1st September, 2019 for ₹12,00,000 and put to use on the same date. For assets acquired during the year, if the asset is used for less than 180 days, depreciation is restricted to 50% of the normal rate. Period of use: 1st September, 2019 to 31st March, 2020 = 212 days, which exceeds 180 days. Hence, full depreciation rate of 15% is applicable on motor cars under the Income Tax Act, 1961 (Schedule XIV / Rule 5 read with Appendix I).

Depreciation = 15% × ₹12,00,000 = ₹1,80,000. Since no depreciation was recorded in books (as per Point 1, rates are as per IT Act), this amount is admissible as a deduction and will reduce the business income by ₹1,80,000.

2. Long Term Capital Gains — Treatment under Section 54 of the Income Tax Act, 1961 (Point 3)

(a) First House (sold 30th March, 2017): The LTCG of ₹25,00,000 was deposited in the Capital Gain Account Scheme (CGAS) by the due date of return filing for AY 2017-18. Under Section 54, construction of a new house must be completed within 3 years from the date of transfer. Three years from 30th March, 2017 = 30th March, 2020. Since investment of ₹1 crore in construction was made on 25th March, 2020, which is before the 3-year deadline, the exemption originally claimed in AY 2017-18 continues to hold. There is no taxable capital gain in AY 2020-21 arising from this transaction.

(b) Second House (sold 1st March, 2020): Sale of a self-occupied residential house property. LTCG = ₹50,00,000. Under Section 54 of the Income Tax Act, 1961, LTCG on sale of a residential house is exempt if the taxpayer purchases a residential house within 2 years or constructs one within 3 years from the date of transfer.

Here, the total investment in the new house = ₹1,00,00,000. Out of this, ₹25,00,000 was withdrawn from CGAS and is attributable to the first house Section 54 obligation. The net investment attributable to the second house = ₹1,00,00,000 − ₹25,00,000 = ₹75,00,000. Since ₹75,00,000 > ₹50,00,000 (LTCG), the entire LTCG of ₹50,00,000 is exempt under Section 54. Taxable LTCG = NIL.

3. Deduction under Section 80D of the Income Tax Act, 1961 (Point 4)

(a) Medical Insurance Premium: A lump-sum premium of ₹30,000 is paid for 5 years (30th March, 2020 to 29th March, 2025). As per Section 80D(4A), where a lump-sum premium is paid for more than one year, the deduction shall be allowed on a proportionate basis for the number of years of risk coverage. Deduction for AY 2020-21 = ₹30,000 × 1/5 = ₹6,000. Mode of payment is relevant: premium must be paid by any mode other than cash (deemed complied here as it is 'paid', assumed via non-cash mode).

(b) Preventive Health Check-Up: ₹8,000 paid in cash for self and spouse. Under Section 80D, preventive health check-up expenses are specifically permitted to be paid in cash (exception to the general non-cash rule). The maximum deduction for preventive health check-up is ₹5,000 (within the overall Section 80D limit). Therefore, deduction = ₹5,000 (restricted from ₹8,000).

Total deduction under Section 80D = ₹6,000 + ₹5,000 = ₹11,000 (well within the overall limit of ₹25,000 for self, spouse and dependent children where none is a senior citizen).

Summary of Adjustments for AY 2020-21:
- Business income reduced by depreciation on car: ₹1,80,000
- Long Term Capital Gains (after Section 54 exemption): NIL
- Deduction under Section 80D: ₹11,000

Tax Rates for AY 2020-21 (Individual, below 60 years): Up to ₹2,50,000 — NIL; ₹2,50,001–₹5,00,000 — 5%; ₹5,00,001–₹10,00,000 — 20%; Above ₹10,00,000 — 30%; plus Health and Education Cess @ 4% on income tax. Section 87A rebate of ₹12,500 is available if total income does not exceed ₹5,00,000.

Merged Plant — Preliminary Data

Upon merger, the combined figures are: Total Sales = ₹1,11,00,000; Total Variable Cost = ₹62,10,000; Total Contribution = ₹48,90,000; Total Fixed Cost = ₹28,00,000.

P/V Ratio = Contribution ÷ Sales = 48,90,000 ÷ 1,11,00,000 = 163/370 = 44.054%

Full Capacity Sales of merged plant: Company A at 100% = 63,00,000 ÷ 0.90 = ₹70,00,000; Company B at 100% = 48,00,000 ÷ 0.60 = ₹80,00,000. Total Full Capacity Sales = ₹1,50,00,000.

(i) Break-Even Sales and Capacity Utilisation

Break-Even Sales = Fixed Cost ÷ P/V Ratio = 28,00,000 ÷ (163/370) = 28,00,000 × 370/163 = ₹63,55,828 (approx.).

Capacity Utilisation at BEP = 63,55,828 ÷ 1,50,00,000 × 100 = 42.37%.

(ii) Profitability at 80% Capacity Utilisation

Sales at 80% = 80% × 1,50,00,000 = ₹1,20,00,000.
Contribution = 1,20,00,000 × 163/370 = ₹52,86,486.
Less: Fixed Cost = ₹28,00,000.
Profit = ₹24,86,486.

(iii) Turnover Required to Earn Profit of ₹60,00,000

Required Turnover = (Fixed Cost + Desired Profit) ÷ P/V Ratio = (28,00,000 + 60,00,000) ÷ (163/370) = 88,00,000 × 370/163 = ₹1,99,75,461 (approx.).

Note: This turnover exceeds the merged plant's full capacity of ₹1,50,00,000 (implying ~133% capacity), indicating the profit target of ₹60,00,000 cannot be achieved within existing capacity. The answer is a theoretical computation as required by the question.

(iv) Percentage Increase in Selling Price to Sustain 5% Increase in Fixed Overheads

At the turnover level of ₹1,99,75,461 (capacity level from (iii)):
Increase in Fixed Cost = 5% × ₹28,00,000 = ₹1,40,000.

Since production volume (units) remains unchanged, any increase in selling price results in an equivalent increase in contribution (no additional variable cost). Therefore, additional contribution required = additional fixed cost = ₹1,40,000.

% Increase in Selling Price = (Additional Fixed Cost ÷ Turnover) × 100 = (1,40,000 ÷ 1,99,75,461) × 100 = 0.70% (approx.).

Process Costing — FIFO Method

Preliminary Workings:

Total Input = Opening WIP + New Input = 10,000 + 55,000 = 65,000 units

Normal Loss = 5% × 65,000 = 3,250 units (scrap value = 3,250 × ₹8.50 = ₹27,625)

Total Scrapped = 9,300 units → Abnormal Loss = 9,300 − 3,250 = 6,050 units

Started & Completed (current period) = Finished − Opening WIP = 43,500 − 10,000 = 33,500 units

*(Note: The given data produces a 200-unit reconciliation gap — 65,000 input vs 64,800 total output — likely a typographic error in the question. Calculations proceed with the given figures.)*

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(i) Statement of Equivalent Production (FIFO Method)

Under FIFO, equivalent units reflect only current period work done.

| Output Category | Units | Material % | EU–M | Labour % | EU–L | OH % | EU–OH |
|---|---:|---:|---:|---:|---:|---:|---:|
| Opening WIP — Completion | 10,000 | 0% | — | 30% | 3,000 | 30% | 3,000 |
| Started & Completed | 33,500 | 100% | 33,500 | 100% | 33,500 | 100% | 33,500 |
| Abnormal Loss | 6,050 | 100% | 6,050 | 60% | 3,630 | 60% | 3,630 |
| Closing WIP | 12,000 | 100% | 12,000 | 90% | 10,800 | 90% | 10,800 |
| Normal Loss | 3,250 | — | — | — | — | — | — |
| Total Equivalent Units | 64,800 | | 51,550 | | 50,930 | | 50,930 |

*(Opening WIP material is already 100% complete → 0% additional material needed this period; labour/OH were 70% done → 30% added this period.)*

Statement of Cost per Equivalent Unit:

Normal loss scrap value (₹27,625) is deducted from material cost to arrive at net cost recoverable from output.

| Element | Gross Cost (₹) | Less: NL Scrap (₹) | Net Cost (₹) | Equiv. Units | Cost per EU (₹) |
|---|---:|---:|---:|---:|---:|
| Material | 2,20,000 | 27,625 | 1,92,375 | 51,550 | 3.73 |
| Labour | 26,500 | — | 26,500 | 50,930 | 0.52 |
| Overheads | 61,500 | — | 61,500 | 50,930 | 1.21 |
| Total | 3,08,000 | 27,625 | 2,80,375 | | 5.46 |

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(ii) Abnormal Loss Account

Value of Abnormal Loss (at cost per EU):
- Material: 6,050 × ₹3.73 = ₹22,566.50
- Labour: 3,630 × ₹0.52 = ₹1,887.60
- Overheads: 3,630 × ₹1.21 = ₹4,392.30
- Total Cost = ₹28,846.40

Scrap realisation on Abnormal Loss = 6,050 × ₹8.50 = ₹51,425.00

Since scrap realisation (₹51,425) exceeds cost (₹28,846.40), a profit of ₹22,578.60 arises and is credited to Costing P&L A/c.

Abnormal Loss Account (in ₹)

| Dr. | ₹ | Cr. | ₹ |
|---|---:|---|---:|
| To Process A/c (cost of AL) | 28,846.40 | By Scrap Sales A/c (6,050 × ₹8.50) | 51,425.00 |
| To Costing P&L A/c (Profit) | 22,578.60 | | |
| Total | 51,425.00 | Total | 51,425.00 |

Conclusion: The total equivalent units are: Material — 51,550; Labour & Overheads — 50,930 each. The Abnormal Loss Account discloses a net profit of ₹22,578.60 due to scrap realisation exceeding the process cost per unit.

Part (i): Optimum Run Size (Economic Order Quantity)

The annual demand for GHI Ltd. is calculated as 2.5% of 40 Million stents = 10,00,000 stents per annum.

The holding cost is ₹1.50 per stent per month = ₹18 per stent per annum. The setup cost per run = ₹225.

Using the EOQ formula: EOQ = √(2 × D × S / H)

EOQ = √(2 × 10,00,000 × 225 / 18) = √(4,50,00,000 / 18) = √2,50,00,000 = 5,000 stents per run

The optimum run size is 5,000 stents.

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Part (ii): Minimum Inventory Holding Cost

At the optimum run size, average inventory = 5,000 / 2 = 2,500 stents.

Minimum inventory holding cost = 2,500 × ₹18 = ₹45,000 per annum.

(Note: At EOQ, total setup cost also equals ₹45,000, confirming optimality — Total Cost = ₹90,000)

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Part (iii): Extra Cost at Company Policy of 4,000 Stents per Run

At a run size of 4,000 stents:
- Number of runs = 10,00,000 / 4,000 = 250 runs
- Setup cost = 250 × ₹225 = ₹56,250
- Average inventory = 4,000 / 2 = 2,000 stents
- Holding cost = 2,000 × ₹18 = ₹36,000
- Total cost at 4,000 per run = ₹92,250

Total cost at optimum (5,000 per run) = ₹90,000

Extra cost incurred = ₹92,250 − ₹90,000 = ₹2,250 per annum

Answer: ₹10,84,100

INCOME FROM HOUSE PROPERTY

House 1 (Self-occupied, Mumbai):
Gross rent = Nil (self-occupied). Less: Municipal taxes ₹7,500 and Interest on loan ₹3,50,000 (limited to ₹2,00,000 under Section 24(2) from 1.4.2019). Less: Standard Deduction = 30% of Nil = Nil. Net Loss = -₹2,07,500

House 2 (Let-out, Mumbai):
Gross rent = ₹4,000 × 12 = ₹48,000. Less: Standard Deduction ₹14,400 (30% of ₹48,000). Less: Interest on loan ₹3,00,000 (no limit for let-out property). Less: Municipal taxes Nil. Net Loss = -₹2,66,400

House 3 (Delhi, Transferred):
Property was transferred to Ms. Vannika in FY 2010-11 with condition that 10% of rental income is paid to Mrs. Raghav. Under Section 64(1)(vi), income payable to spouse of transferor is in the transferor's hands. Income included = 10% of ₹3,30,000 = ₹33,000

Total from House Property: -₹2,07,500 - ₹2,66,400 + ₹33,000 = -₹4,40,900

INCOME FROM OTHER SOURCES

From M/s M Pvt. Ltd.:
Interest on Debentures = ₹7,50,000. Salary = ₹3,75,000 (entire amount taxable as no standard rate provided for unqualified employees). Subtotal = ₹11,25,000

From Partnership Firm:
Firm income = Interest on fixed deposit ₹4,00,000. Mr. Raghav's share (50%) = ₹2,00,000

From M/s K Pvt. Ltd.:
Dividend ₹1,30,000 diverted to Ms. Geetanshi. Although covered under Section 64(1)(v) (transfer of income without transfer of source), dividend from domestic company is not included in gross total income under Section 115-O (applicable from 1.4.2020 / AY 2020-21). Amount = ₹0

Other Income:
Interest from saving bank account = ₹2,00,000. Cash gift of ₹5,000 from niece = Nil (gifts are not taxable; Section 56(2)(x))

Total from Other Sources: ₹11,25,000 + ₹2,00,000 + ₹2,00,000 = ₹15,25,000

TOTAL INCOME = Loss from House Property + Income from Other Sources = (-₹4,40,900) + ₹15,25,000 = ₹10,84,100

Taxability of Sub-let Income in the hands of Mr. Rajpal

Head of Income: Mr. Rajpal is not the owner of the land; he is merely a lessee who has sub-let the property. Income from House Property under Section 22 of the Income Tax Act, 1961 is chargeable only in the hands of the owner of the property. Since Rajpal does not own the land, the sub-let rental income of ₹11,500 per month cannot be assessed under the head 'Income from House Property'. Such sub-let income is therefore taxable under the head 'Income from Other Sources' as per Section 56(2) of the Income Tax Act, 1961.

Whether the income qualifies as Agricultural Income (exempt u/s 10(1)): As per Section 2(1A) of the Income Tax Act, 1961, 'agricultural income' means any rent or revenue derived from land situated in India and used for agricultural purposes. The term 'agriculture' necessarily involves basic agricultural operations such as tilling the land, sowing seeds, planting, and similar operations. Mere use of land for growing or rearing cattle does not constitute agriculture, even if the cattle are used in agricultural activities. The income in the hands of Rajpal does not arise from his own agricultural operations; it is rental income from sub-letting. Accordingly, Rajpal's sub-let income is not exempt as agricultural income.

Deductibility of rent paid to Ms. Shilpa: Mr. Rajpal wants to claim a deduction of ₹10,000 per month (rent paid to Ms. Shilpa) from the sub-let income of ₹11,500 per month. Since the income is assessed under 'Income from Other Sources', the deductions allowable are governed by Section 57 of the Income Tax Act, 1961. Section 57(iii) permits deduction of any other expenditure (not being capital expenditure) laid out or expended wholly and exclusively for the purpose of earning such income. The rent of ₹10,000 per month paid to Ms. Shilpa is a direct and exclusive expenditure incurred by Rajpal to hold and sub-let the land. It is wholly and exclusively for earning the sub-let income. Therefore, this deduction of ₹10,000 per month (₹1,20,000 per annum) is allowable under Section 57(iii).

Conclusion: The sub-let income received by Mr. Rajpal is taxable under 'Income from Other Sources'. The claim for deduction of rent paid to Ms. Shilpa is valid and allowable. The net taxable income in Rajpal's hands is ₹1,500 per month, i.e., ₹18,000 per annum.

Joint Product Costing — Mayum Chemicals Ltd. (Year 2019-2020)

Step 1: Determine Production Quantities

Total raw material = ₹4,80,000 ÷ ₹8 per litre = 60,000 litres processed in Dept-1.

Production quantities (Sales + Closing Inventory):
- Product X: 10,000 + 5,000 = 15,000 litres
- Product Y: 15,000 + 0 = 15,000 litres
- Product Z: 22,500 + 7,500 = 30,000 litres
- Total = 60,000 litres ✓

Step 2: Joint Cost (Dept-1)

Raw Material ₹4,80,000 + Direct Labour ₹70,000 + Manufacturing OH ₹48,000 = ₹5,98,000

Step 3: Allocation of Joint Costs using Net Realisable Value (NRV) Method

Since Products Y and Z require further processing, NRV method is applied. NRV is computed on total production quantities.

| Product | Final Sales Value | Less: Further Processing Cost | NRV |
|---------|-------------------|-------------------------------|-----|
| X | 15,000 × ₹30 = ₹4,50,000 | Nil (sold at split-off) | ₹4,50,000 |
| Y | 15,000 × ₹64 = ₹9,60,000 | Dept-2: ₹4,50,000 + ₹2,10,000 = ₹6,60,000 | ₹3,00,000 |
| Z | 30,000 × ₹50 = ₹15,00,000 | Dept-3: ₹6,50,000 + ₹4,50,000 = ₹11,00,000 | ₹4,00,000 |
| Total | | | ₹11,50,000 |

Allocation of Joint Cost ₹5,98,000 in ratio 4,50,000 : 3,00,000 : 4,00,000 (i.e., 9:6:8):
- Product X: 9/23 × ₹5,98,000 = ₹2,34,000
- Product Y: 6/23 × ₹5,98,000 = ₹1,56,000
- Product Z: 8/23 × ₹5,98,000 = ₹2,08,000

Step 4: Total Cost and Cost per Litre

| Product | Joint Cost | Further Processing Cost | Total Cost | Litres Produced | Cost per Litre |
|---------|-----------|------------------------|------------|-----------------|----------------|
| X | ₹2,34,000 | — | ₹2,34,000 | 15,000 | ₹15.60 |
| Y | ₹1,56,000 | ₹6,60,000 | ₹8,16,000 | 15,000 | ₹54.40 |
| Z | ₹2,08,000 | ₹11,00,000 | ₹13,08,000 | 30,000 | ₹43.60 |

Step 5: Product-wise Income Statement

| Particulars | Product X (₹) | Product Y (₹) | Product Z (₹) | Total (₹) |
|-------------|--------------|--------------|--------------|----------|
| Sales Revenue | 3,00,000 | 9,60,000 | 11,25,000 | 23,85,000 |
| Less: Cost of Goods Sold | 1,56,000 | 8,16,000 | 9,81,000 | 19,53,000 |
| Gross Profit | 1,44,000 | 1,44,000 | 1,44,000 | 4,32,000 |
| GP Ratio (on NRV) | 48% | 48% | 48% | — |

Closing Inventory Valuation:
- Product X: 5,000 litres × ₹15.60 = ₹78,000
- Product Z: 7,500 litres × ₹43.60 = ₹3,27,000

Under the NRV method, all three joint products yield an equal GP ratio of 48% on their respective NRVs, confirming correct allocation. Total gross profit for the year is ₹4,32,000.

Section 35AD Deduction — Warehousing Facility (Agricultural Produce), FY 2019-20

Under Section 35AD of the Income Tax Act, 1961, 100% deduction is allowed on capital expenditure (excluding cost of land, goodwill, and financial instruments) for specified businesses, including warehousing facilities for storage of agricultural produce (operations commencing on or after 01.04.2012). Since the capital expenditure was incurred after 01.04.2017, the deduction rate is 100% (enhanced 150% deduction was withdrawn by Finance Act 2016).

All pre-commencement expenditure (incurred in FY 2018-19, before warehouse became operational on 01.04.2019) is deductible in the previous year in which operations commence, i.e., FY 2019-20.

Eligible Capital Expenditure:
Total capital expenditure = ₹93,00,000
Less: Cost of land (specifically excluded) = ₹13,00,000
Section 35AD deduction = ₹80,00,000

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Computation of Total Income — AY 2020-21 (Mr. Xavier)

Profit from warehousing facility (before Section 35AD) = ₹1,10,00,000
Less: Deduction under Section 35AD = ₹80,00,000
Income from specified business = ₹30,00,000

Net Profit of SEZ (Mobile Phone) Unit = ₹50,00,000
Deduction under Section 10AA: Profit × (Export Sales / Total Turnover) = ₹50,00,000 × (₹90,00,000 / ₹1,50,00,000) = ₹30,00,000 (assuming 100% deduction in eligible years)

Gross Total Income = ₹30,00,000 + ₹50,00,000 = ₹80,00,000
Less: Section 10AA deduction = ₹30,00,000
Total Income = ₹50,00,000

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Computation of Regular Income Tax

Tax on ₹50,00,000 (Individual — slab rates AY 2020-21):
- Nil on ₹2,50,000
- 5% on ₹2,50,000 = ₹12,500
- 20% on ₹5,00,000 = ₹1,00,000
- 30% on ₹40,00,000 = ₹12,00,000
Total tax = ₹13,12,500
Add: Health & Education Cess @ 4% = ₹52,500
Regular Tax = ₹13,65,000

Total income = ₹50,00,000 (does not exceed ₹50,00,000), hence no surcharge.

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Computation of Alternate Minimum Tax (AMT) under Section 115JC

AMT applies to individuals who claim deductions under Section 10AA or Section 35AD. AMT = 18.5% of Adjusted Total Income.

Adjusted Total Income (as per Section 115JC):
Total Income = ₹50,00,000
Add: Section 10AA deduction = ₹30,00,000
Add: Section 35AD deduction = ₹80,00,000
Less: Depreciation under Section 32 on warehouse assets (10% on ₹80,00,000, building rate, full year since operations from 01.04.2019) = (₹8,00,000)
Adjusted Total Income = ₹1,52,00,000

AMT = 18.5% × ₹1,52,00,000 = ₹28,12,000
Add: Health & Education Cess @ 4% = ₹1,12,480
Total AMT = ₹29,24,480

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Tax Payable Comparison:
Regular Tax = ₹13,65,000
AMT = ₹29,24,480

Since AMT > Regular Tax, Mr. Xavier is liable to pay AMT of ₹29,24,480 for AY 2020-21.

AMT credit available for carry forward to subsequent years = ₹29,24,480 − ₹13,65,000 = ₹15,59,480 (under Section 115JD).

Note: Depreciation rate of 10% on building has been assumed for AMT computation. If the asset mix differs, the depreciation and AMT will vary accordingly.

Computation of Value of Taxable Supply under Section 15 of the CGST Act, 2017

The value of a taxable supply is the transaction value, which includes certain additions and allows certain deductions as specified under Section 15(2) and Section 15(3) of the CGST Act, 2017.

Treatment of each item:

(1) List Price of Machine: ₹80,000 — This is the base transaction value and is fully includible.

(2) Tax levied by Local Authority — ₹6,000: As per Section 15(2)(a) of the CGST Act, 2017, any taxes, duties, cesses, fees and charges levied under any other law (other than CGST, SGST, IGST and UTGST) shall be included in the value of supply. Hence, local authority tax of ₹6,000 is added.

(3) Discount of 2% on List Price recorded in the Invoice: As per Section 15(3)(a) of the CGST Act, 2017, discounts given before or at the time of supply, if duly recorded in the invoice, are deductible from the transaction value. Discount = 2% × ₹80,000 = ₹1,600. This is excluded from the taxable value.

(4) Packing Expenses — ₹4,000: As per Section 15(2)(c) of the CGST Act, 2017, incidental expenses including packing charges charged by the supplier to the recipient are included in the value of supply.

Value of Taxable Supply = ₹88,400

Note: The case data (standard time, actual time, wage rate) appears to be missing from the question as provided. The solution below demonstrates the complete methodology using assumed figures consistent with typical ICAI exam problems. Students must substitute the actual given values.

Assumed Data for Z Ltd:
Standard time allowed = 20 hours, Actual time taken = 16 hours, Wage rate = ₹25 per hour.
Time saved = 20 – 16 = 4 hours.

(i) Effective Increase in Earnings under Halsey and Rowan Scheme

Halsey Scheme (50% bonus on time saved):
Normal wages (for actual time) = 16 × ₹25 = ₹400
Bonus = 50% × 4 hours × ₹25 = ₹50
Total earnings under Halsey = ₹400 + ₹50 = ₹450
Effective increase = (₹50 ÷ ₹400) × 100 = 12.5%

Rowan Scheme (bonus proportional to time saved / standard time):
Normal wages = 16 × ₹25 = ₹400
Bonus = (Time saved ÷ Standard time) × Actual time × Rate = (4 ÷ 20) × 16 × ₹25 = ₹80
Total earnings under Rowan = ₹400 + ₹80 = ₹480
Effective increase = (₹80 ÷ ₹400) × 100 = 20%

(ii) Savings to Z Ltd in Direct Labour Cost per Unit

Standard (time-based) labour cost per unit = 20 hours × ₹25 = ₹500

Saving under Halsey Scheme:
Direct labour cost per unit = ₹450
Saving = ₹500 – ₹450 = ₹50 per unit (i.e., 10% saving on standard cost)

Saving under Rowan Scheme:
Direct labour cost per unit = ₹480
Saving = ₹500 – ₹480 = ₹20 per unit (i.e., 4% saving on standard cost)

Thus, Halsey scheme saves more for the company (₹50 vs ₹20 per unit).

(iii) Advice to Z Ltd on Selection of Scheme

Z Ltd has two objectives: (a) incentivise workers sufficiently, and (b) accommodate increased demand by increasing output.

Workers' perspective: Rowan scheme offers a higher effective increase in earnings (20%) compared to Halsey (12.5%). Workers are better rewarded under Rowan, fulfilling the incentive assurance.

Increased demand perspective: Under the Rowan scheme, the bonus increases proportionately up to the midpoint (50% time saved) and then starts decreasing. This prevents workers from cutting corners to save excessive time, thereby maintaining quality while motivating efficiency. Workers who complete tasks faster can take on additional units, helping Z Ltd meet increased demand without hiring additional labour.

Under the Halsey scheme, bonus rises linearly — workers may try to save time by compromising quality, which is undesirable when meeting demand surges.

Recommendation: Z Ltd should adopt the Rowan Scheme. It offers greater earnings incentive to workers (20% vs 12.5%), ensures quality is maintained (no incentive to over-rush beyond the optimum), and the released time capacity can be used to fulfill the incremental demand. The lower per-unit saving to the company (₹20 vs ₹50) is a justifiable trade-off given the dual objective of workforce motivation and demand management.

Cost Sheet of Q Ltd for the month of April 2020

Working back from given data:
Since Cost of Sales = ₹4,00,000 and Sales = ₹5,00,000, Profit = ₹1,00,000.

From Cost of Sales:
Cost of Goods Sold = Cost of Sales − Selling Expenses − General & Admin Expenses = 4,00,000 − 22,000 − 18,000 = ₹3,60,000

From Cost of Goods Sold:
Cost of Production = Cost of Goods Sold + Closing FG − Opening FG = 3,60,000 + 60,000 − 50,000 = ₹3,70,000

Gross Works Cost (before WIP adjustment):
= Cost of Production + Closing WIP − Opening WIP = 3,70,000 + 30,000 − 20,000 = ₹3,80,000

Factory Overheads: Since Direct Labour = 20% of Factory Overheads is internally inconsistent (yields negative prime cost), the operative relationship is Factory Overheads = 20% of Direct Labour = 20% × 1,20,000 = ₹24,000

Prime Cost = Works Cost (Gross) − Factory Overheads = 3,80,000 − 24,000 = ₹3,56,000

Direct Material Consumed = Prime Cost − Direct Labour = 3,56,000 − 1,20,000 = ₹2,36,000
(implying Raw Material Purchases = 2,36,000 + 25,000 − 20,000 = ₹2,41,000)

Summary of Results:
(i) Prime Cost = ₹3,56,000
(ii) Works Cost (Gross) = ₹3,80,000
(iii) Cost of Production = ₹3,70,000
(iv) Cost of Goods Sold = ₹3,60,000
(v) Cost of Sales = ₹4,00,000; Profit Earned = ₹1,00,000

Verification: Cost of Sales (₹4,00,000) = given ✓; Sales (₹5,00,000) = given ✓

Computation of Value of Taxable Supplies — Agro Services (February 2020)

Under the GST law, services relating to agriculture and rearing of animals are selectively exempt under Notification No. 12/2017-Central Tax (Rate) read with Section 11(1) of the CGST Act, 2017. The taxability of each service is determined as follows:

Services relating to rearing of sheep — ₹1,00,000: Under Entry 54 of Notification 12/2017-CT(Rate), services relating to rearing of all life forms of animals, except horses, for food, fibre, fuel or raw material are exempt. Since sheep are reared for food and wool, this service is exempt from GST.

Services by way of artificial insemination of horses — ₹4,00,000: The exemption for animal rearing and related services under Entry 54 specifically excludes horses. Artificial insemination of horses is not covered by any agricultural exemption entry. Therefore, this service is taxable.

Processing of sugarcane into jaggery — ₹6,00,000: Under Entry 55, only services by way of treatment or process that do not alter the essential characteristics of agricultural produce are exempt. The processing of sugarcane into jaggery involves physical and chemical transformation (extraction, boiling, solidification), clearly altering the essential characteristics of the agricultural produce. This service is therefore not covered by the exemption and is taxable.

Milling of paddy into rice — ₹3,00,000: Milling of paddy into rice merely removes the outer husk without altering the essential character of the grain. This falls squarely under Entry 55 as a treatment/process that makes agricultural produce marketable for the primary market without altering its essential characteristics. Hence, this service is exempt.

Services by way of fumigation in a warehouse of agricultural produce — ₹1,80,000: Fumigation in a warehouse of agricultural produce is specifically exempt under a dedicated entry in Notification 12/2017-CT(Rate). It is a preservation/protective service that maintains marketability of agricultural produce. Hence, this service is exempt.

Value of Taxable Supplies = ₹4,00,000 + ₹6,00,000 = ₹10,00,000

Part (1): Determination of Average Selling Price

Step 1 — Planned Production (Units)

The factory operates at different capacities across the year: 50% for 6 months, 75% for 3 months, and 100% for 3 months. Full capacity = 4,20,000 units p.a.

- First 6 months (50%): 4,20,000 × 50% × 6/12 = 1,05,000 units
- Next 3 months (75%): 4,20,000 × 75% × 3/12 = 78,750 units
- Last 3 months (100%): 4,20,000 × 100% × 3/12 = 1,05,000 units
- Total planned production = 2,88,750 units

Step 2 — Variable Cost

Variable cost per unit = Direct Material ₹60 + Direct Labour ₹30 + Variable Overhead ₹15 = ₹105 per unit

Total Variable Cost = 2,88,750 × ₹105 = ₹3,03,18,750

Step 3 — Fixed Overhead

Fixed overhead = ₹65,50,000 (unchanged regardless of capacity)

Step 4 — Semi-variable Overhead (prorated per period)

The semi-variable cost structure (annual basis at each capacity level):
- Up to 60% capacity: ₹5,00,000 p.a.
- 60% to 80%: add ₹50,000 per additional 5% (or part) → at 75%: ₹5,00,000 + 3 × ₹50,000 = ₹6,50,000 p.a.
- Beyond 80%: add ₹75,000 per 10% (or part) → at 100%: ₹7,00,000 + 2 × ₹75,000 = ₹8,50,000 p.a.

Prorated for actual operating periods:
- 6 months at 50%: ₹5,00,000 × 6/12 = ₹2,50,000
- 3 months at 75%: ₹6,50,000 × 3/12 = ₹1,62,500
- 3 months at 100%: ₹8,50,000 × 3/12 = ₹2,12,500
- Total Semi-variable = ₹6,25,000

Step 5 — Total Cost and Required Revenue

Total Cost = ₹3,03,18,750 + ₹65,50,000 + ₹6,25,000 = ₹3,74,93,750

Desired Profit = ₹25,00,000

Required Revenue = ₹3,74,93,750 + ₹25,00,000 = ₹3,99,93,750

Average Selling Price = ₹3,99,93,750 ÷ 2,88,750 = ₹138.51 per unit (approx.)

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Part (2): Evaluation of Offer Prices

The required average selling price is ₹138.51. Both offer prices are below this threshold.

(a) Offer at ₹130 per toy:

Total Revenue = 2,88,750 × ₹130 = ₹3,75,37,500
Total Cost = ₹3,74,93,750
Profit = ₹43,750

At ₹130, the company recovers all costs and earns a marginal profit of ₹43,750. However, this falls drastically short of the desired profit of ₹25,00,000. The offer at ₹130 should NOT be accepted if the company wishes to achieve its profit target. It may be considered only as a last resort to avoid idle capacity.

(b) Offer at ₹129 per toy:

Total Revenue = 2,88,750 × ₹129 = ₹3,72,48,750
Total Cost = ₹3,74,93,750
Loss = ₹2,45,000

At ₹129, the selling price does not even cover total cost — the company incurs a net loss of ₹2,45,000. The offer at ₹129 must be rejected outright. Accepting this price would be detrimental even from a break-even standpoint.

Consolidated Tax Invoice – Procedure under Section 31(3)(c) CGST Rules, 2017

ABC Cinemas can issue consolidated tax invoices for supplies of exhibition services under Section 31(3)(c) of the CGST Rules, 2017, subject to the following conditions and procedure as per recent notifications:

Conditions for Consolidated Invoice

A consolidated invoice may be issued for supplies of services of similar nature when supplies are made to the same or different recipients during a specified period. For exhibition services in multiple screens, daily consolidation is permitted. The consolidated invoice must contain particulars of all individual supplies being consolidated, including recipient details, service descriptions, and tax components.

Required Procedure

Step 1 – Supplementary Invoices at Point of Supply: At the time of each exhibition/supply of services, ABC Cinemas must issue a supplementary invoice containing details of the supply (screen number, date, time of exhibition, consideration, tax). These supplementary invoices serve as evidence of supply and form the basis for consolidation.

Step 2 – Consolidated Invoice Issuance: At the close of each day, ABC Cinemas must issue a consolidated tax invoice consolidating all supplementary invoices issued during that day. The consolidated invoice should contain: (i) serial number and date; (ii) details of all recipients with their GSTIN/registration details; (iii) summary of supplies with HSN/SAC codes; (iv) taxable value and tax amounts; (v) total invoice value; (vi) digital signature as per Section 35 of CGST Rules.

Step 3 – Maintenance of Records: Supplementary invoices and consolidated invoices must both be maintained with proper chronological sequence. The consolidated invoice must reference the supplementary invoices consolidated therein.

Key Requirements as per Recent Notification

Recent clarifications mandate that: (1) Supplementary invoices must be issued before or contemporaneously with the consolidated invoice; (2) Consolidated invoices must clearly identify it as such; (3) Recipients in the consolidated invoice may be multiple, with separate line items for each recipient/supply; (4) The consolidated invoice must be digitally signed and must comply with the prescribed JSON format for GSTR filing purposes.

Recommendation for ABC Cinemas

ABC Cinemas should: (i) implement a system to generate supplementary invoices at each screening with unique identification; (ii) ensure consolidated invoices are generated automatically at day-end with proper grouping by recipient and service type; (iii) maintain digital copies of both supplementary and consolidated invoices as per data retention requirements; (iv) ensure proper GSTR-1 reporting showing consolidated invoices with linked supplementary invoice details; (v) obtain proper authorization for digital signatures on consolidated invoices.

E-Way Bill Validity — Rule 138(10) of the CGST Rules, 2017

As per Rule 138(10) of the CGST Rules, 2017, the validity period of an e-way bill depends on the type of cargo and the distance involved.

Case 1: Over Dimensional Cargo

For over dimensional cargo, the validity is 1 day for every 20 km or part thereof. For a distance of 368 km:

368 ÷ 20 = 18.4 → 19 parts (since part thereof is counted as a full unit)

Validity = 19 days

Case 2: Other than Over Dimensional Cargo (Normal Cargo)

For cargo other than over dimensional cargo transported by road, the validity is 1 day for every 200 km or part thereof. For a distance of 368 km:

368 ÷ 200 = 1.84 → 2 parts (since part thereof is counted as a full unit)

Validity = 2 days

The validity period is computed from the date and time of generation of the e-way bill. Agri Transport must ensure the goods reach the destination and the e-way bill is valid throughout the transit period.

Penal Provisions for Non-filing of GSTR-9

Mandatory Filing Obligation:
GSTR-9 is the annual return required to be filed by registered persons under Section 44(1) of the CGST Act, 2017, within the prescribed due date under Rule 61 of the CGST Rules, 2017.

Applicable Penal Provision:
Non-filing of GSTR-9 before the due date is a contravention under Section 122 of the CGST Act, 2017. The Commissioner may direct any person who fails to furnish any return required under the Act to pay a penalty not exceeding ₹25,000 or the amount of tax payable, whichever is higher.

Exemption Based on Aggregate Turnover:
However, a critical exemption applies: Persons with aggregate turnover not exceeding ₹2 crores during a financial year are not required to file GSTR-9. Such persons are fully exempted from the annual return filing obligation.

Application to Mr. Prithvi's Case:
Analyzing the facts:
- FY 2018-19: Aggregate turnover = ₹140 lakhs (₹1.40 crores)
- FY 2019-20: Aggregate turnover = ₹170 lakhs (₹1.70 crores)

Since Mr. Prithvi's aggregate turnover in both years is substantially below the ₹2 crores threshold, he is not required to file GSTR-9.

Conclusion:
No penalty is applicable to Mr. Prithvi. While Section 122 prescribes penalties for non-filing of GSTR-9, the penalty applies only to those persons who are mandated to file the return but fail to do so. Since Mr. Prithvi was not obligated to file GSTR-9 due to his turnover being below ₹2 crores, the question of penalty does not arise.

Forward Charge Option for Authors on Copyright Services under GST

Normally, services supplied by an author by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary works to a publisher are taxable under Reverse Charge Mechanism (RCM) as per Notification No. 13/2017-Central Tax (Rate) dated 28th June 2017. Under RCM, the recipient (i.e., the publisher) is liable to pay GST.

However, as per Notification No. 22/2019-Central Tax (Rate) dated 30th September 2019, an author like Mr. Anirag can opt to pay GST under forward charge (i.e., the author himself pays GST instead of the publisher) subject to fulfillment of the following conditions:

Condition 1 — Registration: The author must be a registered person under the Central Goods and Services Tax Act, 2017. An unregistered author cannot exercise this option.

Condition 2 — Exercise of Option by Declaration: The author must file a declaration with the jurisdictional officer (Commissioner) stating that he exercises the option to pay GST on such copyright services under forward charge. The option is not automatic and must be affirmatively chosen.

Condition 3 — Timing of Declaration: The declaration must be filed before the commencement of the financial year in which the author wishes to avail this option. The option cannot be exercised mid-year.

Condition 4 — Validity for Entire Financial Year: Once the option is exercised, it shall be valid for the entire financial year in which it is exercised. The author cannot withdraw this option during the said financial year.

Consequence for Publisher: Once Mr. Anirag opts to pay GST under forward charge, the publisher is no longer liable to pay tax under RCM on such services. The author will charge GST in his invoice and deposit the same to the Government.

Conclusion: Mr. Anirag can choose to pay tax under forward charge by fulfilling all four conditions stated above — being registered, filing the required declaration before the financial year commences, and maintaining the option for the entire financial year without withdrawal.

Suspension of Registration upon Application for Cancellation — Section 29(1) r/w Rule 21A of CGST Rules, 2017

Background: When a registered person applies for cancellation of registration under Section 29(1) of the Central Goods and Services Tax Act, 2017, his registration does not cease immediately. Instead, the law provides for a period of suspension during which the application is being processed by the proper officer.

Period of Suspension:

As per Rule 21A(1) of the CGST Rules, 2017, where a registered person has applied for cancellation of registration under Rule 20, the registration shall be deemed to be suspended with effect from:

(i) the date of submission of application for cancellation, OR

(ii) the date from which cancellation of registration is sought by the applicant,

whichever is later.

The suspension shall continue and remain in force until the application for cancellation is finally disposed of (i.e., until the proper officer either grants or rejects the cancellation).

Manner of Suspension — Restrictions during Suspension Period:

During the period of suspension, the registered person is subject to the following restrictions:

(i) The registered person shall not make any taxable supply — this means he cannot supply taxable goods or services for which GST is collected from recipients.

(ii) The registered person shall not be required to furnish any return under Section 39 of the CGST Act, 2017, except for the period prior to the date of suspension (arrear returns, if any, must still be filed).

(iii) However, the registered person remains liable to pay tax on reverse charge basis under Section 9(3)/(4) wherever applicable.

(iv) If the proper officer is satisfied that the application for cancellation is in order, he shall cancel the registration and the registered person shall then be required to file a Final Return in GSTR-10 within three months from the date of cancellation or furnishing of cancellation order, whichever is later.

(v) If the application for cancellation is rejected (e.g., dues are pending or grounds are not established), the suspension is lifted and the registration is restored. The person must then file all pending returns and comply with obligations as if registration was never suspended.

Consequence of Non-Compliance during Suspension:

If the registered person makes taxable supply during the period of suspension, he shall be liable to pay tax along with interest under Section 50 and penalty under Section 122 of the CGST Act, 2017. The act of making supplies during suspension is treated as a contravention.

Summary Table:

| Aspect | Position |
|---|---|
| Trigger | Application for cancellation filed under Rule 20 |
| Effective date of suspension | Later of: date of application OR date sought for cancellation |
| Duration | Till final disposal of cancellation application |
| Taxable supply allowed? | No |
| Return filing required? | No (for current period during suspension) |
| Reverse charge obligations | Continue to apply |
| Post-cancellation compliance | File GSTR-10 (final return) within 3 months |

Nature of Receipt — Royalty: The amount of ₹1,14,000 received by Mr. Pratham (a non-resident) from Mr. Rakesh represents consideration for the transfer of the right to use a manufacturing process. As per Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961, the term 'royalty' includes consideration for the transfer of all or any rights in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property. Transfer of right to use a manufacturing process clearly falls within this definition. Hence, the receipt of ₹1,14,000 is royalty income in the hands of Mr. Pratham.

Taxability in India — General Rule under Section 9(1)(vi): As per Section 9(1)(vi), income by way of royalty payable by a person who is a resident (Mr. Rakesh) is deemed to accrue or arise in India and is therefore ordinarily taxable in India, irrespective of where the payer or payee is located.

Exception — Business Carried on Outside India: However, Section 9(1)(vi) provides a crucial exception. The royalty income shall NOT be deemed to accrue or arise in India if the royalty is payable in respect of any right, property or information used for the purposes of a business or profession carried on by such person (the payer) outside India, or for the purposes of making or earning any income from any source outside India.

In the present case, Mr. Rakesh (the payer, who is a resident) uses the manufacturing process exclusively for his business carried on in Dubai, which is outside India. The process, though paid for by a resident, is utilised entirely for a business operated outside India. This squarely attracts the exception under Section 9(1)(vi).

Conclusion: Since the manufacturing process is used by Mr. Rakesh for his business in Dubai (outside India), the royalty of ₹1,14,000 paid to Mr. Pratham shall NOT be deemed to accrue or arise in India. Accordingly, the sum of ₹1,14,000 is not taxable in India in the hands of Mr. Pratham. The fact that the process was developed in Singapore further supports the absence of any territorial nexus with India. No tax is chargeable on this income under the Income Tax Act, 1961.

Assessment of Mr. Netram's Claim under Section 2(1A) of the Income Tax Act, 1961

Definition of Agricultural Income: Under Section 2(1A)(b)(ii) of the Income Tax Act, 1961, agricultural income includes income derived from any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce fit to be taken to market. The critical phrase is "ordinarily employed by a cultivator" — the process must not go beyond what a cultivator would ordinarily do to make the produce marketable.

Analysis of Operations Performed by Mr. Netram:

Mr. Netram performs the following operations after harvesting paddy:
1. Removing hay and chaff (threshing/winnowing) — This is a basic post-harvest operation universally and ordinarily employed by every cultivator. It does not change the nature of the produce. This qualifies as part of agricultural operations.

2. Illessing/Dressing the grain (milling paddy into rice) — This involves mechanical operations that go beyond the ordinary processes employed by a cultivator. The conversion of paddy into rice through mechanical milling transforms the produce from one commodity (paddy) into a different commercial commodity (rice). This is essentially a manufacturing/processing operation and cannot be regarded as an operation ordinarily employed by a cultivator.

3. Packing in gunny bags — Packing as a standalone step done for commercial sale purposes is a trade/business activity and not an ordinary agricultural process.

Conclusion — Mr. Netram's Claim is NOT Correct:

Mr. Netram's contention that the entire income is agricultural income is not tenable. The fact that paddy in its raw form may not be directly saleable does not mean that all processing carried out to convert it into rice is automatically an "ordinary agricultural process" within the meaning of Section 2(1A). The test is not merely marketability but whether the process is ordinarily employed by a cultivator.

The milling/mechanical processing operations elevate the activity to the level of manufacturing/business, breaking the chain of purely agricultural character.

Correct Tax Treatment:
- Income attributable to growing paddy on land = Agricultural income — exempt from income tax under Section 10(1) of the Income Tax Act, 1961.
- Income attributable to mechanical processing operations (milling, dressing, packing) = Business income (non-agricultural) — chargeable to income tax under the head "Profits and Gains of Business or Profession."

The total income from sale of rice thus represents composite income — partly agricultural and partly non-agricultural. An appropriate apportionment is required between the agricultural and non-agricultural components, and only the non-agricultural portion is subject to income tax. Mr. Netram cannot claim the entire income as exempt agricultural income.

Activity Based Costing (ABC) vs Absorption Costing

Current Method - Absorption Costing:
The company currently allocates all production overheads using a single cost driver (direct labour hour rate of ₹4 per hour). This method assumes all products consume overhead resources proportionally to direct labour hours, which is often inaccurate for diverse product portfolios.

Proposed Method - Activity Based Costing:
ABC recognizes that overhead costs are driven by different activities and allocates costs based on multiple cost drivers that reflect actual resource consumption. Each overhead category is grouped into a cost pool with an appropriate cost driver.

ABC Cost Driver Analysis for Given Scenario:

1. Material Procurement Activity
Budgeted Overhead: ₹50,000
Cost Driver: Number of Orders (25 orders per product; assuming 3 products = 75 total orders)
Cost Rate = ₹50,000 ÷ 75 orders = ₹666.67 per order
Products with higher order frequencies bear proportionally higher procurement costs.

2. Set-up Activity
Budgeted Overhead: ₹40,000
Cost Driver: Number of Production Runs (production runs of 48 units)
Cost Rate = ₹40,000 ÷ Total production runs
Products requiring more frequent set-ups will incur higher set-up costs.

3. Quality Control Activity
Budgeted Overhead: ₹28,240
Cost Driver: Number of Inspections (one per production run)
Cost Rate = ₹28,240 ÷ Total production runs
This directly links quality control costs to production frequency.

4. Maintenance Activity
Budgeted Overhead: ₹1,28,000
Cost Driver: Maintenance Hours (6,400 total hours)
Cost Rate = ₹1,28,000 ÷ 6,400 hours = ₹20 per hour
Allocation between Products X, Y, Z in ratio 1:1:2:
- Product X: 1,600 hours × ₹20 = ₹32,000
- Product Y: 1,600 hours × ₹20 = ₹32,000
- Product Z: 3,200 hours × ₹20 = ₹64,000

Key Advantages of ABC over Absorption Costing:

Accuracy: ABC provides more precise product costs by tracing overheads to actual activities. Products consuming more orders, set-ups, or inspections bear proportionally higher costs, reflecting reality.

Diverse Product Costing: For companies with heterogeneous product mixes, ABC prevents cross-subsidization where high-volume simple products subsidize low-volume complex products under single-rate absorption methods.

Better Strategic Decisions: Accurate cost information enables management to make informed pricing, product mix, outsourcing, and discontinuation decisions. Unprofitable products may be identified.

Cost Driver Visibility: ABC highlights which activities drive costs, facilitating cost reduction initiatives and operational improvements. Non-value-adding activities become apparent.

Activity-Based Management: Beyond costing, ABC supports process improvement by analyzing and optimizing each activity.

Limitations of ABC:

Complexity and Implementation Cost: ABC requires detailed cost tracking and sophisticated information systems, involving significant implementation expenses.

Data Collection Intensity: Accurate identification and measurement of cost drivers demands substantial data gathering and maintenance efforts.

Assumption Risk: ABC's accuracy depends on correctly identifying and measuring cost drivers; incorrect assumptions can produce misleading costs.

Conclusion:
ABC is superior to absorption costing for companies with diverse operations and multiple revenue-generating products. The company should adopt ABC if the benefits of improved cost information justify implementation costs. ABC will provide better insights for pricing, product profitability analysis, and strategic planning.

Preliminary Calculations — Budgeted Hours and Standard Rates

Total gross hours = 52 workers × 25 days × 8 hours = 10,400 hours. Normal down time = 15% × 10,400 = 1,560 hours. Therefore, Budgeted (Normal) hours = 10,400 − 1,560 = 8,840 hours.

Standard Variable Overhead Rate = ₹1,06,080 ÷ 8,840 hrs = ₹12 per hour
Standard Fixed Overhead Rate = ₹2,21,000 ÷ 8,840 hrs = ₹25 per hour

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(i) Variable Overhead Variances

(a) Variable Overhead Expenditure Variance measures the difference between what variable overheads should have cost for actual hours worked and what was actually spent.

VO Expenditure Variance = (Actual Hours Worked × Std VO Rate) − Actual VO
= (8,100 × ₹12) − ₹1,02,000 = ₹97,200 − ₹1,02,000 = ₹4,800 (Adverse)

(b) Variable Overhead Efficiency Variance reflects the saving or excess due to efficient or inefficient use of labour hours.

VO Efficiency Variance = (Std Hours for Actual Output − Actual Hours Worked) × Std VO Rate
= (8,800 − 8,100) × ₹12 = 700 × ₹12 = ₹8,400 (Favourable)

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(ii) Fixed Overhead Variances

(a) Fixed Overhead Budget Variance (Expenditure Variance) compares budgeted fixed overheads with actual fixed overheads incurred.

FO Budget Variance = Budgeted Fixed OH − Actual Fixed OH
= ₹2,21,000 − ₹2,00,000 = ₹21,000 (Favourable)

(b) Fixed Overhead Capacity Variance shows the effect of actual hours worked being different from budgeted hours.

FO Capacity Variance = (Actual Hours Worked − Budgeted Hours) × Std Fixed OH Rate
= (8,100 − 8,840) × ₹25 = (−740) × ₹25 = ₹18,500 (Adverse)

(c) Fixed Overhead Efficiency Variance reflects the effect of efficient/inefficient use of hours on fixed overhead absorption.

FO Efficiency Variance = (Std Hours for Actual Output − Actual Hours Worked) × Std Fixed OH Rate
= (8,800 − 8,100) × ₹25 = 700 × ₹25 = ₹17,500 (Favourable)

(Volume Variance = −₹18,500 + ₹17,500 = ₹1,000 Adverse; Total FO Variance = ₹21,000 F + ₹1,000 A = ₹20,000 Favourable)

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(iii) Control Ratios

(a) Capacity Ratio = (Actual Hours Worked ÷ Budgeted Hours) × 100
= (8,100 ÷ 8,840) × 100 = 91.63%
This being below 100% indicates the factory operated at less than normal capacity.

(b) Efficiency Ratio = (Standard Hours for Actual Output ÷ Actual Hours Worked) × 100
= (8,800 ÷ 8,100) × 100 = 108.64%
Above 100% — workers produced more than expected in the hours worked, indicating efficient performance.

(c) Activity Ratio = (Standard Hours for Actual Output ÷ Budgeted Hours) × 100
= (8,800 ÷ 8,840) × 100 = 99.55%
Also verified as: Capacity Ratio × Efficiency Ratio ÷ 100 = 91.63% × 108.64% ÷ 100 ≈ 99.55% ✓

Break-Even Analysis — Patient-Days Calculation

The break-even point represents the level of activity at which total revenue equals total costs, resulting in neither profit nor loss. For a medical/hospital unit, activity is measured in patient-days (one patient occupying a bed for one day).

Formula:

Break-Even Patient-Days = Fixed Costs (per annum) ÷ Contribution per Patient-Day

Where: Contribution per Patient-Day = Revenue per Patient-Day − Variable Cost per Patient-Day

Step-by-step approach (to be applied with given data):

Step 1: Identify total Fixed Costs — costs that do not vary with the number of patient-days (e.g., salaries of permanent staff, depreciation, rent, insurance, administrative overheads).

Step 2: Identify Revenue per Patient-Day — total receipts (consultation charges, bed charges, nursing charges, etc.) divided by total patient-days.

Step 3: Identify Variable Cost per Patient-Day — costs that vary directly with patient-days (medicines, food, laundry, casual labour, etc.) divided by total patient-days.

Step 4: Compute Contribution per Patient-Day = Revenue per Patient-Day − Variable Cost per Patient-Day.

Step 5: Break-Even Patient-Days = Fixed Costs ÷ Contribution per Patient-Day.

Note on this question: The question states "same revenue and expenses prevail in 2021" — meaning the cost and revenue structure from the earlier part of the problem (data table not reproduced here) carries forward. The figures from that data must be substituted into the formula above to arrive at the numerical break-even point. Once computed, the result gives the minimum number of patient-days the unit must achieve in 2021 to cover all its costs with zero profit or loss.

Conclusion: The Break-Even Patient-Days = Total Fixed Costs (₹) ÷ Contribution per Patient-Day (₹). The unit must ensure actual patient-days exceed this figure to operate profitably.