Auto-Grow Ltd., an automobile manufacturing company, tracks its annual car sales (in thousand units) and average selling price per car (in ₹ lakh) over a period of five consecutive years from 2020 to 2024. The company uses a mixed graph where the bar chart represents the number of cars sold and the line graph represents the average selling price per car.
Additional information:
The manufacturing cost per car was constant at ₹2 lakh from 2020 to 2022 and increased by10% each year thereafter.
The company incurred fixed operational costs of ₹100 crore per year.
Profit (or loss) for a year = Total revenue − (Total variable cost + Fixed cost).
Ignore taxes and depreciation.
If Auto-Grow Ltd. plans to keep its 2025 profit at least equal to the average profit of the best two years from 2020-2024, and expects to sell 60,000 cars at ₹7.5 lakh each, what should be the maximum allowable fixed cost in 2025? (Assume manufacturing cost per car in 2025 remains the same as in 2024.)
Solution
Using the given data, we construct the following table where all the prices are in lakhs.
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In 2025, the minimum profits = average of profits in 2022 and 2023 = $$\frac{190000+196400}{2}=193200$$ lakhs.
Profits = Total revenue - (Fixed + Variable Costs).
Variable cost = 2.42 * 60000 = 145200 lakhs
Total revenue = 7.5 * 60000 = 450000 lakhs.
Putting these values in the equation, fixed cost comes out to e 111600 lakhs = 1116 crores.
