Cost management-final course 1

2. Cost Volume Profit Analysis ( C.V.P. )

Learning Objective
We already no! t"e basic definition # a$$lication of P%V ratio& '(P # '()
com$utation& a$$lication of *O)& etc. +ere !e are discussing some advance
met"ods of CVP
,. +o! to com$ute '(& *argin of safety & -e.. sale volume& etc
2. Com$utation '( !it" ste$ fi/ed cost
0. '( under 1C2 tec"ni.ue
3. '( in Process costing
4. 'e !it" O$$ortunity cost
5. Potential '(
6. '( 7nder multi $roduct !it" common fi/ed cost
8. '( for $eris"able $roduct
9. A$$lication of indifference $oint
:ntroduction;
Under Marginal costing the product price is determined on the basis of Variable cost of the
product. Such price is selected for the purpose of penetration pricing where the minimum sale
price = variable cost. As the sale price is very low management is always anxious about the
recovery of fixed overhead. So they want to calculate the volume of sales at which fixed cost will
be recovered , profit will arise the safety margin of the organi!ation , as well as different short"
term decision are to be ta#en by the management.
Marginal costing is not a distinct method of costing li#e $ob costing, process costing, operating
costing, etc. but a special techni%ue used for marginal decision ma#ing. Marginal costing is used
to provide a basis for the interpretation of cost data to measure the profitability of different
products, processes and cost centre in the course of decision ma#ing. &t can, therefore, be used
in con$unction with the different methods of costing such as $ob costing, process costing, etc., or
even with other techni%ue such as standard costing or budgetary control.
&n marginal costing, cost ascertainment in made on the basis of the nature of cost. &t gives
consideration to behaviour of costs. &n other words, the techni%ue has developed from a
particular concept and expression of the nature and behaviour of costs and their effect upon the
profitability of an underta#ing.
Cost<Volume $rofit analysis;
'ost"volume"profit analysis (as the name suggests) is the analysis of three variable vi!., cost,
volume and profit. Such an analysis explores the relationship existing amongst costs, revenue,
activity levels and the resulting profit. &t aims at measuring variations of cost with volume. &n the
profit planning of a business, cost"volume"profit ('"V"*) relationship is the most significant factor.
+he 'V* analysis is an extension of marginal costing. &t ma#es use of principles of marginal
costing. &t is an important tool of planning. &t is %uite useful in ma#ing short run decisions.
,or this purpose we apply the concept of Marginal 'osting. ,ollowing definitions are re%uired for
this purpose
Cost management-final course 2
,. Profit )tatement 7nder *arginal Costing
Statement of *rofit
-s. -s.
-evenue.Sales xxx
/ess0 Variable cost of production
Material xx
/abour xx
1. 2xpenses xx
Variable overhead 33xx
4x
Add0 5pening ,inished goods (at M') xx
/ess0 'losing ,inished goods (at M') 33xx
Variable cost of goods sold xxx
Add0 Variable Selling overhead 66
Variable cost of sales 66
'ontribution xx
/ess0 All types of ,ixed cost 3xx
( 'ommitted, 1iscretionary steps ) xx
2. )ales < Variable Cost = Contribution = 2i/ed Cost > Profit

0. P%V ratio (or C%) ratio) = Contribution )ales
= Contribution $er unit )elling $rice $er unit
= C"ange in Contribution C"ange in )ales
= Profit *argin of )afety
3. Profit = ()ales P%V ratio) < 2i/ed Cost = P%V ratio *argin of )afety sales(-s.)
= Contribution $.u. *argin of safety ( in units)
4. 'rea<even Point
a. 'rea (ven $oint (in units) = 2i/ed Cost Contribution $er unit
b. 'rea (ven )ales ( in sales value ) = 2i/ed Cost P%V ratio
c. !it" semi < variable cost ; a$$ly t"e conce$t of a$$arent '(P

d. Com$osite '(P i.e. more t"an one $roduct !it" common fi/ed costs
(i) Wit" out limiting factor ( non< attributable to a single $roduct )
'(P in units = 2i/ed cost Average contribution $.u.
( !"en sales mi/ in units are given )
'(P in -s. = 2i/ed cost com$osite $?v ratio
( when sales mix in rupee are given )
!"ere com$osite $?v ratio = @ )ales *i/ P?V -atio A
(ii) Wit" limiting factor ( attributable to a single $roduct )
2ind contribution $er limiting factor # give ran . 2ind total
contribution from ,
st
ran $roduct . Calculate t"e amount of fi/ed
Cost management-final course 3
cost still to recover. W"et"er it can be recovered by 2
nd
ran $roduct
or not B
(iii) 2or Peris"able $roduct a$$ly t"e same conce$t in case of o$ening
stoc !it" different variable cost.
e. '(P in case of $rocess costing is e/$ressed in terms of total ra! material in$ut
f. :n ca$ital budgeting & '(P is t"at sales volume !"ere discounted Cas" in flo! =
discounted Cas" out flo!. :n case of $er$etuity & t"e financing c"arge $.a.= C:2 $a
g. Potential '( ; On t"e basis of sales out of current $eriod $roduction only.
". *ulti$le '( ; 1ifferent '( due to c"ange in sales $rice& variable costs # fi/ed
costs for different $roduction level.
i. Cas" '(P = Cas" fi/ed cost contribution $.u. )o do not consider t"e sun cost.
j. '(P for decision maing $ur$ose ; Acce$t t"at $ro$osal !"ere '(P is lo!est
$rovided t"e $rofit can not be calculated.
7e already #now the basic definition application of *.V ratio, 82* 82S computation,
application of M5S. 9ere we are discussing some advance methods of 'V* i.e. mainly from
-ule :c
Problem ,
,rom the under mentioned figures calculate0
(i) *.V ratio and the total fixed expense;
(ii) *rofit or loss arising from the sales of -s. <=,>>>;
(iii) Sales re%uired to earn a profit of -s. =,>>>;
(iv) Sales re%uired to brea#"even.

Sales profit
-s. -s.
,irst period <?,?@@ @A:
Second period <A,=>@ <,<@B
)olution
(i) *.V ratio and total fixed expenses
,irst Second
*eriod period increase
-s. -s. -s.
Sales <?,?@@ <A,=>@ @,CC>
/ess0 profit 333@A: 3<,<@B 33C:?
+otal costs <?,>?A <C,>D? @,><D
Assuming the variable unit cost per unit and fixed expenses to be the same and that the prices
are stable in both the period, the increase in total cost of -s. @,><D consists of variable costs
only. ,or an increase in the sales of -s. @,CC> the variable cost is -s. @,><D. 9ence *.v ratio is
100
770 , 3 .
016 , 3 . 770 , 3 .
x
Rs
Rs Rs
= =>E
+a#ing the figures relating to period <.
Cost management-final course 4
-s.
Fross margin (-s. <?,?@@=>E) =,AAC
/ess0 *rofit for period < 33@A:
,ixed expenses =,:>=
(ii) *rofit or loss on sales of -s. <=,>>>
-s.
Fross margin on this sale (-s. <=,>>>=>E) =,?>>
/ess0 ,ixed expenses =,:>=
/oss 33<>=
(iii) Sales re%uired to earn a profit of -s. =,>>>.
'ontribution re%uired = fixed expenses G profit
= -s. =,:>= G -s. =,>>>
= -s. ?,:>=
+he sales, should produce a gross margin of -s. ?,:>=
9ence, sales value = 100
20
502 , 4 .
x
Rs
= -s. ==,:<>
(iv) Sales re%uired to brea#"even0
At 82* gross margin is e%ual to fixed expenses
So, gross margin re%uired = -s. =,:>=
Sales re%uired = """"""""""""""""""""""" = 100
20
502 , 2 .
x
Rs
33333333333333
Problem 2
*aramount ,ood products is a new entrant in the mar#et for chocolates. &t has introduced a new
product H Sweetee. +his is a small rectangular chocolate bar. +he bars are wrapped in
aluminum foil and pac#ed in attractive cartons containing :> bars. A carton is, therefore,
considered the basic sales unit. Although management had made detailed estimates of costs
and volumes prior to underta#ing this venture, new pro$ects based on actual cost experience are
now re%uired.
&ncome statements for the last two %uarters are each thought to be representative of the costs
and productive efficiency we can expect in the next few %uarters. +here were virtually no
inventories on hand at the end of each %uarter. +he income statements reveal the following0
,irst Iuarter Second Iuarter
Sales -s. -s.
:>,>>> -s. =? <=,>>,>>> <D,A>,>>>
C>,>>> -s. =? cost of Foods sold 333C,>>,>>> 33A,A>,>>>
Fross Margin :,>>,>>> A,>>,>>>
Selling and Administration 33D,:>,>>> 33D,B>,>>>
Jet income (loss) before taxes (<,:>,>>>) <,<>,>>>
+ax (negative) 333(D>,>>>) 333??,>>>
Jet income (/oss) 33(B>,>>>) 33DD,>>>
+he firmKs overall marginal and average income tax rate is ?>E. +his ?>E figures has been
used to estimate the tax liability arising from the chocolate operations.
-s. =,:>=
*.V ratio
Cost management-final course 5
-e%uired0
(a) Management would li#e to #now the brea# H even point in terms of %uarterly carton sales
for the chocolates.
(b) Management estimates that there is an investment of -s. @>,>>,>>> in this product line.
7hat %uarterly carton sales and total revenue are re%uired in each %uarter to earn an after
H tax return of =>E per annum on investmentL
(c) +he firmKs mar#eting people predict that if the selling price is reduced by -s. <.:> per
carton (-e. >.>@ off per chocolate bar) and a -s. <,:>,>>> advertising campaign among
school children is mounted, sales will increase by =>E over the second %uarter sales.
)olution
8asic calculations
(a) Variance Mfg. 'ost per carton = 'hange in cost. change in output
=
000 , 50 000 , 70
000 , 00 , 7 000 , 80 , 8

= <,A>,>>> =>,>>> = -s. B per carton

(b) ,ixed Mfg. 'ost = ,ixed manufacturing cost G Variable manufacturing
cost
cost of goods sold = -s. C,>>,>>> H -s. ?,:>,>>>
= -s. =,:>,>>>
(c) Variable selling Admn. cost
per carton = 'hange in cost. change in output
=
000 , 50 000 , 70
000 , 50 , 6 000 , 90 , 6

= -s. ?>,>>> .-s. =>,>>> = -s. = per carton

(d) ,ixed selling and Admn. cost = D,:>,>>> H <,>>,>>> = -s. :,:>,>>>
(e) +otal ,ixed costs = -s. =,:>,>>> G -s. :,:>,>>> = -s. A,>>,>>>
(f) Iuarterly 8rea# H even point
(in cartons) = ,ixed costs. contribution per carton
= A,>>,>>> .<@ = D<,:@B cartons
(b) 1esired annual return after tax = -s. D,>>,>>>
(ii) 1esired %uarterly return after tax = D,>>,>>> .? = -s. <,:>,>>>
(iii) 1esired %uarterly return before tax
(+ax rate ?>E) = 000 , 50 , 2 .
60
100 000 , 50 , 1 .
Rs
x Rs

Iuarterly sales for 1esired return

&n cartons = """""""""""""""""""""""""""""""""""""""""
= cartons 769 , 80
13
000 , 50 , 2 000 , 00 , 8

+
Iuarterly sales revenue = A>,CDB -s. =? = -s. <B,@A,?:D
(c) Jew selling price per carton = -s. =? H -s. <.:> = -s. ==.:>
Jew contribution per unit = -s. ==.:> H -s. <@ = -s. <<.:>
Jew sales0 C>,>>> G <?,>>> = A?,>>> cartons
+otal new contribution = A?,>>> -s. <<.:> = -s. B,DD,>>>
/ess0 ,ixed costs (A,>>,>>> G <,:>,>>>) -s. B,:>,>>>
-s. <D,>>>>
,ixed 'osts G 1esired -eturn
'ontribution per carton
Cost management-final course 6
/ess0 +ax (?>E) 3333D,?>>
Jet income after tax 3333B,D>>
+he firm made a net income after tax of -s. DD,>>> at a selling price of -s. =?. +he reduction in
selling price increases in sales volume but decreases the net income after tax to -s. B,D>>.
9ence, the plant to reduce the selling price should not be implemented by the management.
3333333333333
Problem 0 ; '( !it" linear semi<variable cost
8ottom line ltd.. manufactures pressure coo#ers the selling price of which is -s. @>>." per unit.
'urrently the 'apacity utilisation is D>E with a sales turnover of -s <A la#hs. +he 'c. proposes
to reduce the selling price by =>E but desires to maintain the same profit position by increasing
the output. Assuming that the increased output could be made and sold, determine the level at
which the 'o. should operate, to achieve the desired ob$ective.
+he following further data are available 0
i) Variable cost per unit -s. D>.".
ii) Semi"variable cost (including a variable element of -s. <>." per unit) -s. <,A>,>>>.
iii),ixed cost -s.@,>>,>>> will remain same up to A>E level. 8eyond this an additional amount of
-s. D>,>>> will be incurred.
)olution
*resent *roposed
-s..unit -s. .unit
Selling price.unit @>> =?>
/ess0 Variable cost.unit" Variable D> D>
" Semi variable 3<> 3C> <> 3C>
(a) 'ontribution =@> <C>
(b) ,ixed cost0 (up to A>E)
,ixed cost @,>>,>>>
,ixed cost in semi variable <,=>,>>>
?,=>,>>>
(c) Sales volume D,>>> units
*rofit = D,>>>=@> H?,=>,>>>
= -s. B,D>,>>>
-e%uired contribution at present is <@,A>,>>>.
-e%uired sales = (<@,A>,>>><C>) = A,<<C = A<.<AE
8ut as it is A>E.
Additional fixed cost = D>,>>>
-e%uired contribution (-evised) = -s. <?,?>,>>>
-e%uired sales = <?,?>,>>><C> = A?C< = A?.C<E
Cost management-final course 7
'( in case of combination of business
)te$<,;
Calculate t"e sales& variable cost& contribution& 2i/ed cost and $rofit of t"e e/isting
com$anies at ,CCD ca$acity from t"e given data.
)te$<2;
2ind t"e above items for t"e ne! com$anies by adding t"e results of t"e e/isting com$any
(Pre$are one c"art for above t!o ste$s)
)te$<0;
2ind t"e P%V ratio of t"e ne! Co. and give ans!er of t"e corres$onding .uestion.
Problem 3;
& co. && co. have decided to merge into one company. +he operating details of two companies
are as follows0
'ompany & 'ompany &&
*ercentage of capacity utilisation B> D>
Sales (-s.) :,?>,>>,>>> @,>>,>>,>>>
Variable costs (-s.) @,BD,>>,>>> =,=:,>>,>>>
,ixed costs (-s.) A>,>>,>>> :>,>>,>>>
Assuming that these two companies merge into one, determine
a. +he brea#"even sales of the merged company 0
b. +he turnover of the merged company re%uired to earn a profit of -s. C:,>>,>>>, and
c. +he percentage increase in selling price necessary to sustain an increase in fixed overheads
by :E when the merged company is wor#ing at a capacity to earn a profit of -s. C:,>>,>>>.
)olution
(a) 5ld 'ompany Jew 'o.
'oK< 'oK= 'oK@
'apacity utili!ation <>>E <>>E <>>E
-s. -s. -s.
Sales D>> / :>> / <,<>> /
/ess0 Variable cost ?>> / @C: / A<: /
'ontribution <D> / <=: / =A: /
,ixed cost A> / :> / <@> /
*rofit A> / C: / <:: /
*.V ratio ('ontr.Sales) =D.DCE =:E =:.B<E
(a) 82S of merger 'o. = (,ixed cost *V ratio) = <@> =:.B<E = :,><C,@,DCA
(b) 'ontribution at A>E = =A:A>E = ==A /
/ess0 ,ixed cost 3<@> /
*rofit BA /
*rofitability =
100
% 80 100 , 1
98
x
x
L
= <<.<?E
(b) -s.
-e%uired profit C:,>>,>>>
Add0 ,ixed cost <,@>,>>,>>>
'ontribution =,>:,>>,>>>
-e%uired (=,>:,>>,>>>=:.B<E) = C,B<,=>,>@< or CB<.=> la#hs
Cost management-final course 8
'apacity utili!ation = (CB<.=<<,>>,>>,>>>) = C<.B@E
(c) &ncrease in ,ixed cost = :E of <,@>,>>,>>> (<@> la#hs)
= D.: la#hs
Jow the present capacity, sale volume ? profits will remain same at C<.B@E.
&ncrease in fixed cost = &ncrease in sales price
= -s. D,:>,>>>
E increase in sales = (D,:>,>>> C,B<,=>,>@<)<>> = >.A=E
*ulti $roduct '() !it" t"e "el$ of $rofit gra$"
Profit gra$"
*rofit graph is a special type of brea# H even chart which shows the profit or loss at different
levels of output.
&n the following example0
5A = +otal fixed expenses ' = 8rea# even point
M
8
*rofit
> c
/oss
x
Sales
A
,
)ingle $roduct $rofit gra$"
+he profit or loss can be calculated by using following
7hen sales are at !ero, the total loss is e%ual to fixed expenses which is e%ual to 5,. +he loss
diminishes as the output increases , the brea# H even point will occur first and then the firm starts
earning profits as the output increases beyond the brea# H even point.
7hen more than one products ( say @ products A, 8 ') are manufactured, the *rofit graph can
be so drawn as to show the cumulative effects of the profit and losses. &t helps to identify multi
product 82S 82* as shown below
Cost management-final course 9

E C
Profit Line of eac" $roduct
'
Profit
O F
'(P )ales value
A
Average Profit Line
2
EG
*ulti $roduct $rofit gra$"
.
Ho dra! t"e above diagram & follo!ing ste$s are re.uired <<
)te$<,; Com$ute P%V ratio for eac" $roduct # give ran.
)te$<2; Calculate cumulative sales # cumulative $rofit on t"e basis of t"e above raning.
)te$<0; :dentify t"e $oints on t"e basis of cumulative sales (/) # cumulative $rofit (y). Ioin
t"e $oints !it" same line and identify t"e s$ecific '().
)te$<3; Ioin t"e start # end $oint !it" a single straig"t line to find arrange 'rea even
sales
Problem 4
+he following are the cost and the sales data manufacturer selling three products 4, M and N.
*roduct Selling price p.u. Variable cost p.u. E of Sales (-s.)
-s. -s.
4 ?>> @=: =>
M :>> @:> ?>
N A:> C?> ?>
'apacity of the manufacturer 0 -s. A> la#hs sales volume. Annual fixed cost 0 -s. :,:>,>>>.
i) ,ind the brea#"even point in rupees.
ii) 'alculate his profit or loss at B>E of capacity.
)olution
Jote"<0 computation of ran#s
(a) (b) a"b = c (c) (a)<>>
*roduct Sales.unit V'.unit contribution *V ratio -an#
4 ?>> @=: C: <A.@: &&
M :>> @:> <:> @> &
N A:> C?> <<> <=.B? &&&
Cost management-final course 10
Jote =; 'alculation of cumulative sales *rofit
-an# *roduct Sales Sales 'ontribution 'ontribution profit
-s. -s. -s. -s. -s.
& M A> /?>E @= / B.D B.D ?.<
@= /
&& 4 A>/ =>E ?A/ @ <=.D C.<
&&& N @= / A> / ?.<? <D.C? <<.=?
Average *V ratio = >.= <A.C:E G>.?@>E G>.?<=.B?
= =>.B=DE
82S = ,ixed costAvg. *.V ratio = :.: /a#hs=>.B=DE = =D,=A,@>B
Problem 5
(a) 'alcutta 'ompany /td. manufactures and sells four types of products under the
brand names, A'2, U+&/&+M, /U4U-M and SU*-2M2. +he sales mix in value
comprise of0H
8rand *ercentage
Ace @@.@@@@E
Utility ?<.DDDCE
/uxury <D.DDDCE
Supreme 33A.@@@@E
33<>>E
+he total budgeted Sales (<>>E) are -s. D,>>,>>> per month. +he operating costs
are 0H
A'2 D>E of selling price U+&/&+M DAE of selling price
/U4U-M A>E of selling price SU*-2M2 ?>E of selling price.
+he fixed costs are -s. <,:B,>>> per month. 'alculate the brea#"even point for the
products on an overall basis.
b) &t has been proposed to change the sales mix as follows, the total sales per month
remaining -s. D,>>,>>> 0O
8rand *ercentage
A'2 =:E
U+&/&+M ?>E
/U4U-M @>E
SU*-2M2 3333:E
33<>>E
Assuming that this proposal is implemented, calculate the new brea#"even point.
)olution
(a) 'omputation of the brea# even point on 5verall 8asis
A'2 U+&/&+M /U4U-M SU*-2M2 +otal
Sales Mix @@"<.@E ?<"=.@E <D"=.@E A"<.@E <>>E
-s. -s. -s. -s. -s.
Sales =,>>,>>> =,:>,>>> <,>>,>>> :>,>>> D,>>,>>>
/ess0 Variable cost (operating)<,=>,>>> <,C>,>>> 33A>,>>> 33=>,>>> @,B>,>>>
'ontribution A>,>>> A>,>>> =>,>>> @>,>>> =,<>,>>>
'ontribution
5verall *.V ratio = OOOOOOO <>>
Cost management-final course 11
Sales
-s. =,<>,>>>
= OOOOOOH <>>
-s. D,>>,>>>
= @:E
'rea<even Point (Sales Value)
+otal ,ixed costs
= OOOO"""""""""""""""""
'omposite *.V ratio
-s. <,:B,>>>
= OOOOOOH
@:E
= -s. ?,:?,=AD
(b) 'omputation of Jew 8rea#"even *oint
A'2 U+&/&+M /U4U-M SU*-2M2 +otal
Sales Mix =:E ?>E @>E :E <>>E
-s. -s. -s. -s. -s.
Sales mix <,:>,>>> =,?>,>>> <,A>,>>> @>,>>> D,>>,>>>
/ess Variable costs B>,>>> <,D@,=>> <,??,>>> <=,>>> ?,B>,>>>
OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOH""""
'ontribution D>,>>> CD,A>> @D,>>> <A,>>> <,B>,A>>
-s. <,B>,A>>
Jew *.V -atio = OOOOOOH <>> = @<.AE
-s. D,>>,>>>
Jet 8rea#"even point (Sales value)
-s. <,:B,>>>
= OOOOOOO = -s. :,>>,>>>
@<.CE
333333333333333
Problem 6
Ma$or /td. manufactures a single product 4 whose selling price is -s. ?> per unit and the variable
cost is -s. <D p.u. &f the ,ixed 'osts for this year are -s. ?,A>,>>> and the annual sales are at
:>E margin of safety, calculate the rate of net return on sales, assuming an income tax level of
?>E.
,or the next year, it is proposed to add another product line M whose selling price would be -s.
:> per unit and the variable cost -s. <> per unit. +he total fixed costs are estimated at
-s.D,DD,D>> . +he sales mix of 4 0 M would be C0 @ . At what level of sales next year, would the
co. brea# evenL Five separately for both 4 and M the brea# even sales in rupees and %uantities.
)olution
(a) *roduct 4 -s. p.u.
Sales ?>
/ess0 Variable cost 3<D
'ontribution =?
*.V ratio = P('ontribution.uSelling price.unit)<>>Q = (P=??>)<>>Q = D>E
82S = ?,A>,>>>D>E = -s. A,>>,>>>
Cost management-final course 12
Actual sales = <D,>>,>>> (there is :>E margin of sales)
82S GM5S = Actual Sales
*rofit = *.V ratio M5S (is -s.)
= D>E A,>>,>>> = ?,A>,>>>
Jet return on sales = P?,A>,>>><D,>>,>>><>> (<">.?)Q = <AE
Margin of safety = :>E of sales
*A+Sales = (M5SSales)*.V ratio (<"t)
= :>E of D>E (<">.?) = <AE
(b) M 4
-s. p.u. -s. p.u.
Selling price.unit :> ?>
/ess0 Variable cost.unit 3<> 3<D
'ontribution per unit ?> =?
*.V ratio A>E D>E
'ase"&0
Sales mix in -upee terms
Avg. *.V ratio = DDE (C.<> D>E G@.<>A>E)
82S = D,DD,D>>DDE = -s. <>,<>,>>>
82S -S. 82* (in units)
4 C>,C,>>> ?>= <C,DC:
M @>,@,>>> :> =3D,>D>
<>,<>,>>> =@,C@:
'ase"&&0
Sales mix in units C 0 @
Average contribution = P(C=? G@?>)<>Q ==A.A
82* = D,DD,D>>=A.A = =@,<?C
82S Sales
4 (C.<>) <D,=>@ D?,A,<=>
M (@.<>) 3D,B?? @?,C,=>>
=@,<?D BB,:,@=>
*issing 2igure $roblems;
Problem 8
A single product company furnishes the following data 0
Mear <. Mear =
Sales -s.=?,>>,>>> L
*V ratio @@ <.@E @>E
Margin of safety =:E ?>E
7hile there was no change in the volume of sales in year =, the selling price was reduced.
'alculate the sales, fixed costs and profit for year =.
Cost management-final course 13
)olution Eear , Eear 2
-s. -s.
(a) Sales =?,>>,>>> ==,A:,C<:
(b) Variable cost Ra(<"*.V)S <D,>>,>>> <D,>>,>>>
(c) 'ontribution A,>>,>>> D,A:,C<:
(d) ,ixed cost (8al fig.) D,>>,>>> ?,<<,?=:
*rofit =,>>,>>> =,C?,=AD
= SalesM5SE *V ==,A:,C<:@>E?>E
= =?,>>,>>>=:E @@TE = =,C?,=AD
= =,>>,>>>
&n year =
Variable costSales = C>E
<D,>>,>>>Sales = C>E
Sales = ==,A:,C<:.
Problem 9
+itan 2ngineering is operating at C>E capacity and presents the following information0
8rea# H even point -s. => crores
*.V ratio ?> per cent
Margin of safety -s. :> crores
+itan management has decided to increase production to B:E capacity level with the following
modifications0
(i) +he selling price will be reduced by A per cent.
(ii) +he variable cost will be reduced by : per cent on sales.
(iii) +he fixed cost will increase by -S. => crores, including depreciation on additions, but
excluding interest on additional capital.
(iv) Additional capital of -s. :> crores will be needed for capital expenditure and wor#ing
capital.
-e%uired0
(a) &ndicate the sales figure, with the wor#ing, that will be needed to earn -s. <> crores over
and above the represent profit and also meet =>E interest on the additional capital.
(b) 7hat will be the revised0
(i) 8rea# H even point; (ii) *.V ratio; and (iii) Margin of safetyL ('A final, Jov. <BB<)
)olution
Statement of revised profit sale
*resent 'hange *roposed
-s. (cr.) (-s. in la#hs)
(a) 82S =>> (fb) =??.??
(b) M5S 33:> (gd) DD.DC
(c) +otal sales =:> @<<.<<
(d) *.V ratio ( Jote< ) ?>E ?:E
(e) Variable costSales D>E reduce ::E
:E of sales
(f) ,ixed cost (ad) A> =>> 'r. G<> 'r. <<> F
(:> cr.=>E)
Cost management-final course 14
(g) *rofit (bd) -s. => cr. <> cr. @> cr.
7or#ing note " <
+otal sales = 8rea# H even sales G Margin of safety
= -s. =>> crores G -s. :> croes = -s. =:> crores.
*.V ratio = ?>E of sales
Variable cost ( *resent) = D>E of sales
( *roRosed) = ::E of sales
-evised *.V ratio = ( ?> G : ) E = ?:E of sales
(ffect of o$$ortunity cost in brea even analysis
7hen for a new proposal.alternative use current income will be lost or additional cost is to be
incurred then these are #nown as opportunity cost of the new proposal. &n other word the
minimum price for the new proposal = variable cost of the alternative G lost income under present
situation Gdiscretionary fixed cost (if any).
+he /ost income is generally loss of contribution.
Problem ,C
A newspaper presently sales <,>>,>>> copies of its morning daily. &t wants to publish evening
daily. *articulars are 0
Actual for Morning 2stimates for 2vening
Sale price -s.= per paper -e.>.:> per paper
Variable cost -s.<.=> per paper -e.>.== per paper
,ixed cost -s.=.? la#hs per wee# -s.<>,>>> per wee#
Sale of morning daily will fall U < copy for"every <> copies sold of evening daily. 'alculate
brea#"even sales for evening daily per wee#. 7hat should the minimum price for evening daily.
)olution
Sales price =.>>
/ess0 Variable cost <.=>
'ontribution >.A>
Sales of morning daily fall U < company for <> copies sold in the evening.
'ontribution lost per copy of evening sales = (>.A<>) = >.>A
-evised Variable cost for evening paper = ==G>.>A = >.@.paper
-evised contribution = (>.:">.@) = >.=.paper.
*V ratio = 'ontribution.paperSales.paper = (>.=>.:)<>> = ?>E
,ixed cost *.V ratio
82S = <>,>>>?>E = -s. =:,>>>
5r
Morning daily contribution.unit = >.A
,or evening daily0
Selling price.unit >.:
Cost management-final course 15
Variable cost.unit >.==
5pportunity cost (A<>) >.>A
'ontribution >.=
*V ratio ?>E
,ixed cost <>,>>>
82S = (<>,>>>?>E) = -s. =:,>>>
Minimum price = Variable cost.unit G5pportunity cost G ,ixed cost
= (>.==G>.>A) p.u. G,ixed cost <>,>>> = @> *. per unit G <>,>>> (,ixed cost).
3333333333333
'rea (ven Analysis in )te$ 2i/ed Cost situation
1ue to presence of step cost more than one 82* can arise as shown below
-s. -evenue
Slab ?
82* =
82*"< Slab @
Slab =
Slab <
Sales volume (in units)
So in the above diagram the revenue line may cut the total cost line more than once. +his is
#nown as Multiple 82* situation, as <
st
82*, =
nd
82* etc. ,or this purpose we prepare 82
statement as below.
Problem ,C
Variable cost.unit = -s @>
,ixed cost = -s. @,>>>
Step fixed cost = -s. <,>>> for every :> units or part there of
Selling price p.u. = -s. B:
,ind a 82 statement find 82*
)olution
8rea#"even statement
(a) Step.slab < = @ ? :
(b) *rod. range >":> :<"<>> <><"<:> <:<"=>> =><"=:>
(c) ,ixed cost (-s.) @,>>> @,>>> @,>>> @,>>> @,>>>
(d) Slab fixed cost (-s.) <,>>> =,>>> @,>>> ?,>>> :,>>>
(e) +otal fixed cost (cG d) ?,>>> :,>>> D,>>> C,>>> A,>>>
(f) 'ontribution p.u D: D: D: D: D:
(S*"Vc p.u.)
(g) 82* (e.f) D= CC B@ <>A <=@
Cost management-final course 16
Jature of 82* ,ict. -eal ,ict. ,ict. ,ict.
*roduction range in >":> but 82* in D=. &it is a fictitious situation as 82* is outside the range.
W"en t"e amount of fi/ed cost is very "ig" t"en !e "ave to find t"e ,
st
slab no. !"ere rev
# total cost line !ill intersect. Ot"er!ise !e can solve it by statement met"od as a trial<
error met"od.
)te$s to be follo!ed to find t"e ,
st
slab no .
,. Pre$are an algebraic e.uation in t"e conce$t of '( and find t"e value of /.
2. find slab no !"ere )lab no. or ste$ no. = value of / from above ste$by units $er slab.
0. no! identify total fi/ed cost
3. '(P = Hotal fi/ed costContribution $er unit
Problem ,,
,ixed cost = -s. @,>>>
Step fixed cost = -s. <,>>> for every :> units or part there of
'ontribution p.u. = -s. :C
,ind 82*
)olution
/et 4 is the product volume which indicate slab in which <
st
82 occurs
So, total contribution = fixed cost G step or slab fixed cost
:Cx = @,>>>G P(<,>>>:>)xQ
:Cx = @,>>> G=>x
@C x = @,>>>
x = A<.>A
Slab no.step no = (A<.>A:>.slab) = <.D= i.e. =
nd
slab.
+otal fixed cost @,>>>G=<,>>> = -s. :,>>>
9ence 82* = :,>>>:C = AC.C< i.e. AA units
So, we can apply this techni%ue for any amount of fixed cost and once we get the <
st
brea# even
then we prepare the 82 statement identify the real and fictitious 82*.
Problem ,2
Jow assume fixed cost is -s. @>,>>,>>>.
Step cost <,>>> per :> units.
'ontribution p.u. is -s. :C.*repare a brea# even statement.
)olution
:Cx = @>,>>,>>> G P(<,>>>:>)xQ
@Cx = @>,>>,>>>
x = A<,>A<.>A
Slab no = (A<,>A<.>A:> units.slab) = <,D=<.D= i.e. <,D== slab.
,ixed cost = @>,>>,>>> G<,D==<,>>>
= ?D,==,>>>
82* = (+otal fixed cost'ontribution.unit) = ?D,==,>>>:C = A<,>AA units
Cost management-final course 17
82 statement
(a) Step.slab <,D=< <,D== <,D=@ <,D=? <,D=:
(b) *rod. range A<,>><"A<,>:> A<,>:<"A<,<>> A<,<><"A<,<:> A<,<:<"A<,=>> A<,=><"A<,=:>
(c) ,ixed cost (-s. in la#hs) @> @> @> @> @>
(d) step fixed cost (-s.) <D.=< <D.== <D.=@ <D.=? <D.=:
(e) +otal fixed cost (cG d) ?D.=< ?D.== ?D.=@ ?D.=? ?D.=:
(f) 'ontribution p.u :C :C :C :C
(S*"Vc.u)
(g) 82* (e.f) A<,>C< A<,>AA A<,<>D A<,<=@ A<,<?<
Jature of 82* ,ict. -eal -eal ,ict. ,ict.
Problem ,0
&f re%uired profit is -s. :,>>,>>> in the last case ( *roblem <=, ) find the re%uired sales volume.
/et volume = x for re%uired profit.
+otal contribution = +otal ,ixed cost G re%. profit
:Cx = @>,>>,>>>G P(<,>>>:>)xQ G:,>>,>>>
@Cx = @:,>>,>>>
x = B?,:B?.:B
Step no. = (B?,:B?.:B:>) = <,AB=
,ixed cost = @>,>>,>>>G <,AB=<,>>>
= ?A,B=,>>>
Add0 *rofit = :,>>,>>>
'ontribution = :@,B=,>>>
-e%uired sales = :@,B=,>>>:C = B?,:BC units.
Problem ,3
Valyan University conducts a special course on W'omputer ApplicationX for a month during
summer. ,or this purpose, it invites applications from graduates. An entrance test is given to the
candidates and based on the same, a final selection of a hundred candidates is made. +he
2ntrance +est consists of four ob$ective type examinations and is spread over four days, one
examination per day. 2ach candidate is charged a fee of -s. :>> for ta#ing up the entrance test.
+he following data was gathered for the past tow years.
Statement of Jet -evenue from the 2ntrance +est ,or the 'ourse of W'omputer ApplicationX
=>>? =>>:
Fross -evenue (,ees 'ollected) -s. <>,>>,>>> -s. <:,>>,>>>
'osts0 Valuation ?,>>,>>> D,>>,>>>
Iuestion 8oo#lets =,>>,>>> @,>>,>>>
9all -ent at -s. =>,>>> per day A>,>>> A>,>>>
Salary D>,>>> D>,>>>
Supervision 'harges (one supervisor for every
<>> candidates at the -ate of -s. :>> per day) ?>,>>> D>,>>>
Feneral Administration 2xpenses D>,>>> 3D>,>>>
+otal 'ost A,?>,>>> <<,D>,>>>
Jet -evenue <,D>,>>> @,?>,>>>
Cost management-final course 18
Mou are re%uired to compute0
(a) +he budgeted net revenue if ?,>>> candidates ta#e up the entrance test in =>>D.
(b) +he brea#"even number of candidates.
(c) +he number of candidates to be enrolled if the net income desired is -s. =>,>>>
)olution
(a) 8udgeted net revenue statement for ?,>>> candidates in Y>D
Fross revenue (,ees collected) (?,>>>:>>) =>,>>,>>>
'osts0 Valuation A,>>,>>>
Iuestion boo#lets ?,>>,>>>
9all rent U -s. =>,>>>.day A>,>>>
Salary D>,>>>
Supervision charges A>,>>>
(:>>?>?)
Feneral Admn. 2xp. D>,>>> <?,A>,>>>
Jet revenue 3:,=>,>>>
(b) +otal contribution = =>,>>,>>> H<=,A>,>>> = -s. C,=>,>>>
'ontribution per candidate = C,=>,>>>?,>>> = -s. <A>
82* (in units) = (,.'.'ontribution per unit) = =,>>,>>><A> = <,<<= units.
,or 82*
(:>>"@>>)x = =,>>,>>> GP(=,>>><>>) xQ
Slab no. = <,<<=<>> = <=
th
slab
,ixed cost = =,>>,>>>G <==,>>>
= =,=?,>>>
82* = =,=?,>>>=>> = <,<=> candidates
(c) -evised income = =>,>>>
=>>x = =,>>,>>> G (=,>>><>>) G=>,>>>
x = <,=@@
Slab no = <,=@@<>> = <@
th
slab.
+otal fixed cost = =,=>,>>> G <@=,>>>
= =,?D,>>>
-esale = =,?D,>>>=>> = <,=@> candidates.
Problem ,4
Satish 2nterprises are leading exporters of VidKs +oys. Z. /td. of U.S.A. have approached Satish
2nterprises for exporting a special named WZumping Mon#eyX. +he order will be valid for next
three years at @,>>> toys per month. +he export price of the toy will be [?.
'ost data per toy is as follows0
-s.
Materials D>
/abour =:
Variable overheads =>
*rimary pac#ing of the toy <:
+he toys will be pac#ed in lots of :> each. ,or this purpose a special box, which will contain the
:> toys will have to be purchased, cost being -s. ?>> per box.
Cost management-final course 19
Satish 2nterprises will also have to import a special machine for ma#ing the toys. +he cost of the
machine is -s. =?,>>,>>> and duty thereon will be at <=E. +he machine will have an effective
life of @ years and depreciation is to be charged on straight"line method. Apart from depreciation,
annual fixed overheads is estimated at -s. ?,>>,>>> for the first year with DE increase in the
second year. ,ixed overheads are incurred uniformly over the year.
Assuming the average conversion rate to be -s. :> per [, you are re%uired to0
(i) *repare monthly and yearly profitability statements for the first year and second year
assuming the production at @,>>> toys per month.
(ii) 'ompute a monthly and yearly brea#"even units in respect of the first year.
(iii) &n what contingency can there be a second brea#"even point for the month and for the year
as a wholeL
(iv) 9ave you any comments to offer on the aboveL
)olution
(i) *rofit Statement of Satish 2nterprise for first and second year on monthly and yearly basis
,irst year Second year
Monthly Mearly Monthly Mearly
-s. -s. -s. -s.
Sales revenue (A)0 D>> C,=>> D>> C,=>>
(@,>>> units-s. =>>)
Material cost <A> =,<D> <A> =,<D>
(@,>>> units-s. D>)
/abour cost C: B>> C: B>>
(@,>>> units-s. =:)
Variable overheads D> C=> D> C=>
(@,>>> units-s. =>)
*rimary pac#ing cost ?: :?> ?: :?>
(@,>>> units-s. <:)
8oxes costs =? =AA =? =AA

,
_

units
units
50
000 , 3
-s. ?>>
+otal fixed overhead <>A <,=BD <<> <,@=>
(-efer to wor#ing note <)
,
_

months
Rs
12
296 , 1 .

,
_

months
Rs
12
320 , 1 .
+otal cost (8) ?B= :,B>? ?B? :,B=A
*rofit0 ' = P(A H8)Q <>A <,=BD <>D <,=C=
7or#ing note0
<. ,ixed overhead0 ,irst year0 (-s.) Second year0 (-s.)
1epreciation A,BD,>>> A,BD,>>>

'
+
years
duty Rs Rs
3
000 , 88 , 2 . 000 , 00 , 24 .
5ther fixed overheads ?,>>,>>> ?,=?,>>>
+otal fixed overheads <=,BD,>>> <@,=>,>>>
Cost management-final course 20
(ii) Statement of monthly brea#"even units of the first year
/evels"no. of units <@:<"<,?>> <?><"<,?:> <,?:<"<,:>> <:>< H<::>
(-efer to wor#ing note) -s. -s. -s. -s.

,ixed costs0 (A)
+otal fixed overheads p.m. <,>A,>>> <,>A,>>> <,>A,>>> <,>A,>>>
(-efer to wor#ing note)
Semi"variable costs0
(Special boxes cost) (8) <<,=>> <<,D>> <=,>>> <=,?>>
(=A boxes (=B boxes (@> boxes (@< boxes
-s. ?>>) -s. ?>>) -s. ?>>) -s. ?>>)
+otal fixed semi"variable <,<B,=>> <,<B,D>> <,=>,>>> <,=>,?>>
'ost0 (A G8)
8rea#"even level of units0 <,?B> <,?B: <,:>> <,:>:
(+otal fixed semi variable cost.
'ontribution per unit) (-s. <,<B,=>>. (<,<B,D>>. (<,=>,>>>. (<,=>,?>>.
-s. A>) -s. A>) -s. A>) -s. A>)
+he first and second brea#"even level of units vi!. <,?B> and <,?B: units falls outside the range
of <,@:< H<,?>> and <,?>< H<,?:> units respectively. 9ere a monthly brea#"even level of units is
<,:>> units which lies in the range of <,?:< H<,:>> units.
Statement of yearly brea#"even points of the first year
/evels"no. of units <CA:<"<CB>> <CB><"<CB:> <CB:<"<A>>> <A>><"<A>:>
-s. -s. -s. -s.
,ixed costs0 (A) <=,BD,>>> <=,BD,>>> <=,BD,>>> <=,BD,>>>
Semi"variable costs0 <,?@,=>> <,?@,D>> <,??,>>> <,??,?>>
(Special boxes cost) 0 (8) (@:A boxes (@:B boxes (@D> boxes (@D< boxes
?>>) ?>>) ?>>) ?>>)
+otal fixed semi"variable
'osts0 (A G8) <?,@B,=>> <?,@B,D>> <?,?>,>>> <?,?>,?>>
8rea#"even level units0 <C,BB> <C,BB: <A,>>> <A,>>:
(<?,@B,=>>. (<?,@B,D>>. (<?,?>,>>>. (<?,?>,>>>.
-s. A>) -s. A>) -s, A>) -s. A>)
9ere the brea#"even level of units (on yearly basis) is <A,>>> units, which lies in the range of
<CB:<"<A,>>> units as well. +he other two figures do not lie in the respective range, so they are
re$ected.
Woring Jotes;
-s.
<. ,ixed overheads in the first year <=,BD,>>>
,ixed overhead per month <,>A,>>>
'ontribution per unit (S.*. per unit HV.'. per unit)
(-s. =>> H -s. <=>) A>
9ence the brea#"even no. of units will be above <,@:> units
,
_

80 .
000 , 108 .
Rs
Rs
Cost management-final course 21
=. &f the no. of toys goes beyond <,:>> number, one more box will be re%uired to accommodate
each :> additional units of toys. &n that case the additional cost of a box will be -s. ?>>.".
+his amount can be recovered by the additional contribution of : toys. 9ence, the second
brea#"even point in such a contingency is <,:>: toys. (-efer to <(b) (ii) last column of first
statement).
&f the number of toys goes beyond <A,>>> number, one more box will be re%uired. +he
additional cost of this box will be -s. ?>>; which can be recovered by the additional
contribution of : toys. 9ence the second brea#"even point is <A,>>: toys (-efer to <(b) (ii)
last column of =
nd
statement).
@. 'omments0 Mearly brea#"even point of <A,>>> units of toys in the first instance is e%ual to <=
times the monthly brea#"even point of <,:>> units, because the monthly and yearly figure of
brea#"even point fell on the upper limit of the respective range.
33333333333333333
Problem ,5 ( !it" o$$. cost # sun cost )
Mou have been approached by a friend who is see#ing your advice as to whether he should give
up his $ob as an engineer, with a current salary of -s. <:,>>> per month and go into business on
his own, assembling and selling a component which he has invented. 9e can procure the parts
re%uired to manufacture the component from a supplier.
&t is very difficult to forecast the sales potential of the component, but after some research, your
friend has estimated the sales as follows0
(i) 8etween D>> to B>> components per month at a selling price of -s. =:> per component.
(ii) 8etween B>< to <,=:> components per month at a selling price of -s. ==> components for
the entire lot.
+he costs of the parts re%uired would be -s. <?> for each completed component. 9owever if
more than <,>>> components are produced in each month, a discount of :E would be received
from the supplier of parts on all purchases.
Assembly costs would be -s. D>,>>> per month up to C:> components. 8eyond this level of
activity assembly costs would increase to -s. C>,>>> per month.
Mour friend has already spent -s. @>,>>> on development, which he would written"off over the
first five years of the venture.
-e%uired0
(i) 'alculate for each of the possible sales levels at which your friend could expect to benefit by
going into the venture on his own.
(ii) 'alculate the brea#"even point of the venture for each of the selling price.
(iii) Advise your friend as to the viability of the venture.
)olution
7or#ing note"<0 identification of range of production
(a) Selling price.unit -s =:> ==>
Volume D>>"B>> B><"<,=:>
(b) Variable cost.unit -s <?> <@@
Volume D>>"<,>>> <,>><"<,=:>
Cost management-final course 22
(c) ,ixed cost -s C:,>>> A:,>>>
(D>,>>>G<:,>>>) D>>"C:> <,>><"<,=:>
Statement of 8rea# even
(a) *rod. range.unit D>>"C:> C:<"B>> B><"<,>>> <,>><"<,=:>
-s. -s. -s. -s.
(b) Selling price.unit =:> =:> ==> =>>
(c) /ess0 V'.unit <?> <?> <?> <@@
(d) 'ontribution.unit <<> <<> A> AC
(e) ,ixed cost C:,>>> A:,>>> A:,>>> A:,>>>
(f) 82* DA= CC@ <,>D@ BCA
Jature of 82* -eal -eal ,ictitious. ,ictitious.
Max *rofit (<<>C:>"C:,>>>) C,:>> <?,>>> "" =@,C:>
+he product should be launched and production volume should set at <,=:> units. +his type of
82* is called cash 82* as the non cash items are already eliminated.
Jote ; -s. @>,>>> spent on development""" sun# cost
'urrent salary of -s. <:,>>> H opp. cost
Problem ,6
Javbharat 'ommerce college, 8ombay has six sections of 8. 'om, and two sections of M. 'om
with ?> and @> students per section respectively. +he college plans one day pleasure trip around
the city for the students once in an academic session during winter brea# to visits part, Noo,
planetarium and a%uarium.
A transporter used to provide the re%uired number of buses at a flat rate of -s. C>> per bus for
the aforesaid purpose. &n addition, a special permit fee of -s. :> per bus is re%uired to be
deposited with city Municipal 'orporation. 2ach bus is := setters. +wo seats are reserved for
teachers who accompany in each bus. 2ach teacher is paid daily allowance of -s. <>> for the
day. Jo other costs in respect of teachers are relevant to the trip.
+he approved caterers of the college supply brea#fast, lunch and afternoon tea respectively at
-s. C, -s. @> and -s. @ per student.
Jo entrance fee is charged at the par#. 2ntrance fees come to -s. : per student both for the !oo
and the a%uarium. As regards planetarium the authorities charges bloc# entrance fees as under
for group of students of educational institutions depending upon the number of students is group0

Jo. of students in a group 8loc# entrance fee
-s.
Up to <>> =>>
<>< H =>> @>>
=>< above ?:>
'ost of pri!es to be awarded to the winners in different games being arranged in the par#
depend up on the strength of students in a trip. 'ost of pri!es to be distributed are0
Jumber of students in a trip cost of *ri!es
-s.
Up to :> B>>
:<"<=: <,>:>
<=D H<:> <,=>>
Cost management-final course 23
<:< H=>> <,@>>
=>< H=:> <,?>>
=:< above <,:>>
+o meet the above costs the college collects -s. D: from each student who wish to $oin the trip.
+he college releases subsidy of -s. <> per student in the trip towards it.
Mou are re%uired to0
(a) *repare a tabulated Statement showing total costs at the levels of D>, <=>, <A>, =?> and @>>
students indicating each item of cost.
(a) 'ompute average cost per student at each of the above levels.
(b) 'alculate the number of students to brea# even for the trip as the college suffered loss during
the previous year despite C=E of the students having $oined the trip.
)olution
(a) Statement showing total costs indicating each item of cost
Jo. of students D> <=> <A> =?> @>>
-s. -s. -s. -s. -s.
Variable costs0
8rea#fast ?=> A?> <,=D> <,DA> =,<>>
/unch <,A>> @,D>> :,?>> C,=>> B,>>>
+ea <A> @D> :?> C=> B>>
2ntrance fee for Noo a%uarium @>> D>> B>> <,=>> <,:>>
+otal0 (A) =,C>> :,?>> A,<>> <>,A>> <@,:>>
Semi variable costs0
-ent of buses <,?>> =,<>> =,A>> @,:>> ?,=>>
(-ef. +o wor#ing note <)
Special permit fee <>> <:> =>> =:> @>>
(-ef. +o wor#ing note =)
1aily allowance paid to teachers ?>> D>> A>> <,>>> <,=>>
(-ef. +o wor#ing note @)
8loc# entrance fee =>> @>> @>> ?:> ?:>
(-ef. +o given table)
'ost of pri!es <,>:> <,>:> <,@>> <,?>> <,:>>
(-ef. +o given table) 33333333
+otal0 (8) 3333@,<:> ?,=>> :,?>> D,D>> C,D:>
Frand +otal 0 (A) G (8) 3333:,A:> B,D>> <@,:>> <C,?>> =<,<:>
(b) Average cost per student at each of the above levels
Jo. of students0 (A) D> <=> <A> =?> @>>
+otal costs (-s.) 0 (8) :,A:> B,D>> <@,:>> <C,?>> =<,<:>
R-efer to (a) partS
Average cost (-s.)0 (8).(A) BC.:> A> C: C=.:> C>.:>
(c) Statement showing number of students to brea#"even
Jo. of students in the trip :<"<>> <><"<=: <=D"<:> <:<"=>> =><"=:> =:<"@>>
Jo. of buses = @ @ ? : D
Semi"variable costs
8us rent (-s.) <,?>> =,<>> =,<>> =,A>> @,:>> ?,=>>
*ermit fee (-s.) <>> <:> <:> =>> =:> @>>
8loc# entrance fee (-s.) =>> @>> @>> @>> ?:> ?:>
1aily allowance
*aid to teachers (-s.) ?>> D>> D>> A>> <,>>> <,=>>
'ost of pri!es 333<,>:> <,>:> <,=>> <,@>> <,?>> <,:>>
Cost management-final course 24
+otal cost (-s.) @,<:> ?,=>> ?,@:> :,?>> D,D>> C,D:>
Jo. of students to brea#"even0 <>: <?> <?: <A> ==> =::
(+otal semi"variable cost. (@,<:>. (?,=>>. (?,@:>. (:,?>>. (D,D>>. (C,D:>.
contribution per student) @>) @>) @>) @>) @>) @>)
(-efer to wor#ing note ?)
As the figure of <>: and <?> students fall outside the limits (Jo. of students in the trip.), therefore
there are four brea#"even points in this case vi!., <?:, <A>, ==> and =:: students. +he college
authorities should #eep these figures in mind while hiring @, ?, : and D buses respectively to
avoid losses.
+he college incurred loss during the previous year as they hired : buses and C=E of total
students (=<D out of @>> students) $oined the trip. +he brea#"even in case college authorities
hires : buses for the trip comes to ==> students.
7or#ing notes0
<. Jo. of buses re%uired and rent of buses U -s. C>>." per bus
Jo. of students D> <=> <A> =?> @>>
Jo. of buses = @ ? : D
-ent of buses (-s.) <,?>> =,<>> =,A>> @,:>> ?,=>>
(Jo. of buses-s. C>>)
=. Special permit fee0
(Jo. of buses-s. :>) <>> <:> =>> =:> @>>
@. Allowance paid to teachers (-s.) ?>> D>> A>> <,>>> <,=>>
(Jo. of buses -s. =>>)
?. 'ontribution per student towards semi"variable costs -s.
'ollection from each student D:
Subsidy provided by the college 3<>
C:
/ess0 Variable cost per student 3?:
'ontribution per student 3@>
'(P in $rocess costing .
:n t"is case t"e '(P is com$uted on t"e basis on in$ut in $rocess ,
Problem ,8
&n an oil"mill three processes are re%uired to convert the raw material to chaff , oil meal. &n the
first process (cleaning) the chaff is separated. &n the second process (pressing) oil and ca#es are
produced.
+he oil is transferred to finished stoc# and the ca#e is transferred to third process
(grinding)where it is dried and ground into meal. ,or an input of <>>> #g. raw material, output are
?:> litres of oil, :> #g. chaff and ?>> #g. meals.
-aw materials purchase prices is -s. <= per #g. +he Selling price of oil is -s. A> per litre. Selling
prices of the chaff and meals are -s. => and -s. =>> per #g. respectively.
+he processing costs are as follows 0"
Variable costs +otal fixed costs per month
-s.
*rocess A -s. <>,>>> per <,>>> #g. <,@=,>>>
*rocess 8 -s. =:,>>> per <,>>> #g. cleaned material
transferred to this process @,>>,>>>
Cost management-final course 25
*rocess ' -s. @=,>>> per <,>>> #g. of meal ?,>>,>>>
+here is no opening and closing stoc#s in any process. 9ow many #g. of raw material input per
month must be processed in order to brea#"even L
)olution B:> #g. 'a#e
-aw Material
<,>>> #g.
'haff sold U -s. =>.#g. 5il sold U -s. A>.litre meal sold U =>>.#g.
:> chaff ?:> liter ?>> #g.
'ontribution statement
-evenue0
*< i.e. chaff (:>=>) <,>>>
*= i.e. oil (?:>A>) @D,>>>
*@ meal (?>>=>>) A,>>,>>> <,<C,>>>
/es Variable cost
*< <>,>>>
*= P(=:,>>><>>>)B:>Q =@,C:>
*@ P(@=,>>><,>>>)?>>Q <=,A>>
-aw material <<,::> :A,<>>
'ontribution :A,B>>
'ontribution per unit of raw material = -s :A.B>
So 82 input A,@=,>>> \ :A.B = <?,<=:.D@ #g
'rea<even $oint follo!ing 1C2 tec"ni.ue
Case<,;
At brea even ( Life of $roject s"ould be no!n)
1iscounted cas" outflo! = 1iscounted cas" inflo!.
Or :nvestment of E
C
= @()$%u< VC%u) no of units K2i/ed cost (only cas" nature)A
:f t"e sales volume& VC%u # 2i/ed cost are e.ual $.a. t"en<<
investment at E
C
= @()P<VC) units K2i/ed costA Annuity value.
Jo. of units at '( = @ (:nv. at y
C
Annuity value)>2i/ed costA Contribution $er unit.
Case<2;
W"en life of t"e $roject is unno!n (not given in t"e $roblems). H"en a$$ly t"e conce$t of
$er$etuity. :.e.
Cas" inflo! $.a. must e.ual to financial c"arges to brea even.
:nvestment at y
C
-ate of return = ()P < VC) units K 2i/ed cost (cas")
Jo of units at '( = <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
P1
P3
!
P2
:nvestment at y
C
rate of return >2i/ed cost
Contribution $er unit
Cost management-final course 26
Jote; :nvestment at y
C
= Hotal investment at E
C
> interest on investment $aid during
construction $eriod.
Problem ,9
+he investment for a pro$ect is -s. => cr. +he sale price p.u. -s.?>> variable cost is -s.=?>.
the fixed cost p.a. is -s. =@,>>,>>>. +he re%uired rate of return is <=E.
,ind 82* for an life of D yrs.
&f the pro$ect building period is = years with D>E of capital will be invested in <
st
year, what is the
pro$ect 82* production sale volumeL
)olution
(a) &nvestment = -s. => crores
-s.
Selling price.units ?>>
Variable cost.unit =?>
'ontribution p.u. <D>
,ixed cost = =@ la#hs; /ife H D years; -ate of return = <=E
82* = P(=> cr.?.<<?)G =@ la#hsQ <D> = @,<A,?>A units
(b) All cash flow are occur at the end of the year (assumption of 1', techni%ue)
&nterest at y
>
= => 'r. G<= 'r.6 <=E
= -s. =<.?? 'r.
82* = P(=<.?? cr. ?.<<<?)G =@ la#hs)Q<D>
= @,?>, =BB units
Problem 2C
A public company responsible for the supply of domestic gas has been approached by several
prospective customers in a rural area ad$acent to a high"pressure main. As a condition of its
license to operate as a utility, the company is obliged to respond positively to current needs
provided the financial viability of the company is not put at ris#. Jew customers are charged -s.
=:> each for connection to the system.
5nce a meter is installed, a standing charge of -s.<> per %uarter is billed. 'harges for gas are
levied at -s.?>> per <,>>> metered units.
A postal survey of the area containing, according to the rating authority, :,>>> domestic units,
elicited a ?>E response rate. B:E of those who responded confirmed that they wished to
become gas users and expressed their willingness to pay the connection charge.
Although it is recogni!ed that a small percentage of those willing to pay for connection may not
actually choose to use gas, it is expected that the average household will burn :> metered units
per month. +here will be some seasonal differences.
+he companyKs marginal cost of capital is <CE pa and supplies of bul# gas cost the company
-s.>.>D: per metered unit. 7astage of <:E has to be allowed for determine what the maximum
capital pro$ect cost can be to allow the company to provide the service re%uired.
)olution
Jote<,;
Jo. of customer :,>>>?>E B:E = <,B>>
Cost management-final course 27
Jote<2 0
'onsumption of gas<,B>>:><= mt. = <<,?>,>>> mt.
Fas supply <<,?>,>>>(<>>A:) = <@,?<,<CD mt
Jote<0;
'ash inflow0
5ne time (y
>
) = =:><,B>> ?,C:,>>>
'ash p.a. (in last year) -s.
-ent <,B>>?<>.I CD,>>>
'onsumption charge <<,?>,>>>>.? ?,:D,>>>
:,@=,>>>
/ess0 'ost of company (<@,?<,<CD>.>D:) AC,<CD
'ash inflow *.a. ?,??,A=?
8y following the concept of perpetuity
(&nvestment"?,C:,>>>)<CE = ?,??,A=?
&nvestment -s. @>,B<,D<=
'(P for a $eris"able $roduct
,
st
Calculate t"e contribution from t"e sale of o$ening stoc t"en com$are it !it" t"e fi/ed
cost.
:f t"e fi/ed cost is not yet recovered t"en it !ill recovered from current year $roduction #
sales.
Problem 2,
A 'ompany produces formulations having a shelf life of one year. +he company has an opening
stoc# of <:,>>> boxes on <.<.=>>D and expects to produce C:,>>> boxes as was in the $ust
ended year of =>>:. 2xpected Sale would be CA,>>> boxes. 'osting department has wor#ed
out escalation in cost by =:E on variable cost and <=E on fixed cost for the year =>>D.
,ixed costs are estimated at -s.<D,A>,>>>. Jew price for =>>D is -s.C>." per box while the sale
price in =>>: was -s. D>. Variable cost of the opening stoc# is -s. => per box.
,ind actual 82*.
)olution
/ast year 'urrent year
=>>: =>>D
5pening stoc# "" <:,>>>
*roduction C:,>>> C:,>>>
Sales "" CA,>>>
'losing stoc# <:,>>> <=,>>>
-s. -s.
Sales price.unit D> C>
/ess0 Variable cost.unit 3=> 33=:
'ontribution ?> ?:
,ixed cost (<D,A>,>>><<=)<>> <D,A>,>>>
= <:,>>,>>>
Cost management-final course 28
'ontribution from the sale of opening stoc# (C>"=>) = -s. :> &n =>>D
-s
,ixed cost <D,A>,>>>
/ess0 'ontribution from opening stoc# sales 3C,:>,>>>
-est. ,ix B,@>,>>>
-e%uired production sales = B,@>,>>> ?: = =>,DDC units
82* (Actual) = <:,>>> G=>,DDC = @:,DDC units.
Potential 'rea<even $oint
W"en 'rea even is e/$ressed only out of current year $roduction or sales t"en it is
no!n as $otential 'rea even. :n t"is case sale of o$ening stoc s"ould not be consider
'(P = <<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<
)te$<,; Calculate $otential sale value of current year $roduction i.e. if current year
$roduction is fully sold out t"en !"at s"ould be t"e revenue generation.
)te$<,; Potential sales = ()alesCOL)) COP MM
Less; Variable cost of $roduction # sale MM
Potential contribution MM
Calculate PV ratio= $otential contribution N $otential )ale
Potential '() = total fi/ed cost N PV ratio
Problem 20
J.-.& /td. produces an uni%ue product, the potential demand for which would diminish with any
prolonged period of business recession. A review of the price product over the past six months
has become necessary in order to determine future mar#et strategy. A cost and profit statement
has been prepared for this purpose.
Mou are re%uired to calculate the 8rea# even point for total sales, actual and potential. 7hy
should the above procedure be adopted instead of the usual way of finding the 8. 2. *oint L
'ost and *rofit statement for the six months Zanuary " Zune =>>C
-s. -s.
Jet Sales =?,:>,>>>
Stoc# <
st
Zanuary =>>? ?,>>,>>>
1irect /abour A,B:,>>>
1irect Material C,?:,A>>
&ndirect expenses 0
Variable =,@A,C>>
,ixed @,:A,>>>
=D,@C,:>>
/ess stoc# @>
th
Zune =>>: A,>>,>>>
2i/ed cost of current years
Contribution $.u. in current year $roduction # sales
Cost management-final course 29
'ost of Foods Sold <A,@C,:>>
Fross profit D,<=,:>>
Selling 1istribution 2xpenses 0
Variable <,>>,>>>
,ixed =,>>,>>> @,>>,>>>
*rofit before +ax @,<=,:>>
+ax provision <,=D,=>>
Jet *rofit for D months <,AD,@>>
&ncrease in stoc# should be assumed as potential sales within the period.
)olution
'ost of production = (A,B:,>>>GC,?:,A>> G=,@A,C>> G @,:A,>>>)
= -s. ==,@C,:>>
*otential sales = P(Sales'5FS)'5*Q -s.
= (=?,:>,>>><A,@C,:>>)==,@C,:>> = =B,A@,@@?
/ess0 +otal variable cost (A,B:,>>>GC,?:,A>> G=,@A,C>>) (") <A,CB,:>>
/ess0 Selling distribution overhead P(<,>>,>>>=?,:>,>>>)=B,A@,@@?Q (") <,=<,CDB
'ontribution B,A=,>D:
*otential *.V ratio = P(B,A=,>D:=B,A@,@@?)<>>Q = @=.B=E
*otential 82S = ,ixed cost*.V ratio = :,:A,>>>@=.B=E
= -s.<,DB,:,><B
Cost :ndifference Points '(P on basis of costs only
7here there are difference production facility available for a single $ob we always select that
production facility where the total cost is minimi!ed.
:ndifference $roduction volume = c"ange in fi/ed cost N save in variable cost $.u.
Problem 23
Machine x Machine y
Variable cost.unit -s ?> @:
,ixed cost -s. <>,>>> <=,:>>
-s +otal 'ost of x
*
+otal 'ost y
<=,:>>
<>,>>>
units
indifference production volume
At *, +'x = +cy
Cost management-final course 30
?>% G<>,>>> = @:% G<=,:>>
7here % is the re%uired volume
% = (=,:>>:) = ('harge in ,ixed cost gain in variable cost) = :>> units
Problem 24
M companyKs services department is evaluating new copying machines to replace the firmKs
current copier, which is worn out. +he analysis of alternative machines has been narrowed to
three and the estimated costs of operating them are shown below0
33333333 'ost per <>> copies
Machine A Machine 8 Machine '
-s. -s. -s.
Materials costs D> ?> =>
/abour cost A> @> =>
Annual /ease cost @>,>>> :A,>>> <,>>,>>>
-e%uired0
(i) 'ompute the cost indifference points for the three alternatives.
(ii) 7hat do the cost indifference points suggest as a course of action in this regardL
(iii) &f the management expects to need AC,>>> copies next year, which copier would be most
economicalL
)olution
(i) 'omputation of cost indifference points for the three alternatives0
'ost indifference point for two machines vi!.
A 8 = """""""""""""""""""""""""""""""""""""""""""""
=
" 30 40 .# " 80 60 .#
000 , 30 . 000 , 58 .
+ +

Rs Rs
Rs Rs
=
" 100 # 70 .
000 , 28 .
copies perunitof Rs
Rs
'ost indifference point for two machines vi!.
8 ' =
" 20 20 .# " 30 40 .#
000 , 58 . 000 , 00 , 1 .
+ +

Rs Rs
Rs Rs
=
" 100 # 30 .
000 , 42 .
copies perunitof Rs
Rs
= <,?>> Jos. (Multiple of <>> copies)
' A =
" 20 20 .# " 80 60 .#
000 , 30 . 000 , 00 , 1 .
+ +

Rs Rs
Rs Rs
=
" 100 # 100 .
000 , 70 .
copies perunitof Rs
Rs
= C>> nos. (Multiple of <>> copies)
(ii) ,rom the above computations, it is clear that at activity level below the indifference point the
alternative (machine) with lower fixed cost and higher variable costs should be used. &n case the
activity level exceeds the indifference point, a machine with lower variable cost per unit (or higher
1ifference in fixed cost
1ifference in variable cost per unit
Cost management-final course 31
contribution per unit) and higher fixed cost, is more profitable to operate. At the activity level
e%ual to the indifference point both machines are on e%ual footing.
9ence, from the above we conclude as follows0
,rom > to ?>> Jos. (multiple of <>> copies) use machine A
,rom ?>> to <,?>> Jos. (Multiple of <>> copies) use machine 8
Above <,?>> Jos. (multiple of <>> copies) use Machine '.
(iii) if the management needs AC,>>> copies next year, i.e., AC> Jos. (Multiple of <>> copies) it is
clear that machine 8 would be most economical.
333333333333333333
Problem 25
Standard *umps /td. is manufacturing *etrol and 1iesel operated pumps . +he company wants
to have a customer survey before mar#eting the pumps . Mou are as#ed to wor#out the
economics of choice between the two types of pumps . +he company provides you the following
data .
*etrol 5perated *ump Y4K 1iesel 5perated *ump YMK
Selling *rice -s. A>,>>> <,=?,>>>
'ost of fuel per /iter -s. ?>.>> =:.>>
5perating 9ours per /iter =>.>> ?>.>>
Using above data answer following %uestions 0"""""
a. 9ow many hours the pumps should run so that the customer willing to buy is indifferent in
choice between 4 and M L Assume that fuel cost has linear function with respect to time .
b. Assuming the price of 4 remains unchanged , and the customer wants to run the pump
for <=,A>> hours , how much he will be willing to pay for M L
c. &f Standard *ump /td. offers to convert a *etrol operated *ump to 1iesel operated one
after <A,>>> hrs. of operation of the former , how much customer will be willing to pay for
this modification of the pumpL
d. &f there is a saving of -s.@@,:>> in operating cost of M over its life , how many hours the
customer should expect to run the pumps so as to be indifferent in choice L
e. &f there is a restriction on the fuel supply to the extent of C:> litres for both *etrol and
1iesel , what will be customerKs preference either for *etrol operated or 1iesel operated
one L
f. 1o you suggest any other point that should be considered for choice between alternatives
apart from above L
)olution O ( HC = total cost )
(a)
*etrol0 4 1iesel0 M Fain
*urchase price -s. A>,>>> <,=?,>>> ( ??,>>>)
,uel cost -s..lt. -s. ?> =:
9r..lt. => ?>
,uel cost.hr. -s. ?>=> == =:?> = >.D=: <.@C:
&n. pt = ??,>>> \ <.@C: = @=,>>> hrs
(b) 4 M
*urchase price A>,>>> <,=?,>>>
Cost management-final course 32
,uel cost -s..lt. ?> =:
9rs. <,=A,>>> <=,A>>
*urchase <,??,>>> L
&ndifference point = <=,A>>
+'x =+'y at <=,A>>
A>,>>> G=<=,A>> = ** of M G >.D=: <=,A>>
*urchase *rice of M = -s. BC,D>>
(c) *ump x is already purchased so, the customerKs expectation to run the pump at most @,=>> hrs.
*umps has already run for <A,>>> hrs. following this conversion, the user has a gain of at the rate
of <.@C: for <?,>>> hrs. of rest life. Maximum opportunity gain.
<?,>>><.@C: = <B,=:>.
9ence, maximum discretionary cost for conversion = -s. <B,=:>.
(d) Saving of -s. @@,:>> of y
+'x H+'y = @@,:>>
5r, &ndifference point @=,>>> hrs. then y have again of -s. <.@C:.hr.
9rs. to run = @@,:>><.@C: = =?,@D@.D above @=,>>> hrs.
-e%uired hrs. = @=,>>> G=?,@D@.D = :D,@D@.D hrs.
(e) &f a problem of fuel indifference, so we have to calculate cost.hr. as at same volume of fuel, pump
will run for difference hour.
4 y
(a) ,uel C:> lt. C:> lt.
(b) 'ost.lt. -s. ?> =:
(c) ,uel cost -s. @>,>>> <A,C:>
(d) purchase price -s. A>,>>> <,=?,>>>
(e) +otal cost -s. <,<>,>>> <,?=,C:>
(f) 9rs. C:>=> =<:,>>> C:>?> = @>,>>>
'ost.hr. -s. C.@@ ?.C:
So, y is to two selected.
(f) 5ther points is to be considered.
(a) Availability of spare parts AM'.
(b) -esale value
(c) /ife of the assets
(d) *restige value or esteem value
(e) *ollution factor
Points to remember before e/amination
,. Analysis t"e $roblem very carefully
2. analysis of given data into its fi/ed # variable com$onent
0. a$$lication of $ro$er '( rule