CHAPTER: 3 – MARGINAL COSTING & COST VOLUME PROFIT

ANALYSIS
Methods of Costing:
The Methods of Costing are the one at the end of applying it what we get is the calculation of
cost. In short, the methods of costing gives cost calculation as the end result. These methods of
costing enable the management to determine the Total Cost of a Product, Contract, Process or
Services. There are different methods of costing. They are Unit costing, Job Costing, Batch
costing, Process costing, Contract costing and Operating / Service costing etc.

Techniques of Costing:
The various methods of costing are mainly useful for collection of cost data and determining
the total cost of a product.
The cost data obtained must be analysed further for assisting the management in taking various
managerial decisions. The costing techniques have hence been developed for the analysis of
cost data for different purposes. Techniques of Costing are the one which represents the cost
data in such a way so that it helps the management to perform three important managerial
function, namely planning, decision-making and control. The main costing techniques are
Standard Costing, Marginal Costing, Budgets and Budgetary Control and Absorption Costing
etc.

Introduction to Marginal Costing:

Marginal Costing is the most controversial and interesting subject in Cost Accounting.
Marginal Costing is not a method of cost ascertainment like job or process costing. It is a special
technique of presenting cost, where by it is possible to find out the effect of change in the
volume of output on the profitability of the firm. It presents management with information
enabling it to measure the profitability of an undertaking by considering the behaviour of costs.

Fixed and Variable Costs:

The classification of costs into fixed and variable is of very special importance in Marginal
Costing. These 2 types of costs behave differently with the changes in the volume of output.
Fixed Costs remain largely constant regardless of the actual level of production. However, per
unit fixed cost changes with the change in production level. On the other hand, Variable Costs
change in proportion to the volume of output. Semi Variable Costs are separated into fixed and
variable elements and added to their respective categories.

Product and Period Costs:

Under marginal costing, Fixed and Variable costs are kept separate. Fixed costs are not
considered for computing the cost of products or for valuation of inventory as they are mostly
concerned with the period, hence they are called Period Costs. Only variable costs are
considered for computing the cost of products and thus they are called Product Costs.

In Marginal Costing, fixed costs are not included in the cost of products or valuation of
inventory. Such costs are treated as “Period Costs” as they are incurred for a particular period.
It is transferred to Profit & Loss A/c. of the period in which it is incurred. Thus, the period
costs are those which do not vary with the changes in the volume of output but change with the
passage of time.
While in Marginal Costing, only variable costs are included in the cost of products produced
and thus are treated as “Product Costs”. Product Costs are those which are responsible for the
production during the period and vary with the changes in the volume of output. They satisfy
the following 2 conditions.

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1. Product Cost add directly to the product value in some tangible way.
2. Having once being incurred to produce the goods, they need not to be incurred again unless
more goods are produced.

Meaning of Marginal Cost:

➢ In Economics, marginal means one more or one extra. Hence, marginal costs mean the cost
of producing an extra unit.
➢ In simple words, Marginal Cost is the additional cost incurred for producing additional
units.
➢ According to C.I.M.A. London,
“Marginal Cost is the amount at any given volume of output by which the aggregate costs
are changed if volume of output is increased or decreased by one unit.”
The unit may be a single article, a batch of articles, a process or department, etc. Thus,
marginal cost is the additional cost producing one additional unit. In short term period,
marginal cost represents prime cost (i.e., Direct Material cost, Direct Labour cost and Direct
Expenses if any, plus all variable overheads).
➢ An important point is that marginal cost per unit remains unchanged irrespective of the
level of activity. Thus, marginal cost is nothing but variable costs.

Meaning of Marginal Costing:

➢ In Simple words, a system of determining the cost of production by excluding fixed
expenses from the total cost is known as Marginal Costing.
➢ According to C.I.M.A. London,
“Marginal Costing is the ascertainment of marginal cost, by differentiating between fixed
and variable costs, and of the effect on profit of changes in volume or type of output.”
➢ Thus, Marginal Costing goes beyond the ascertainment of costs. It is a technique concerned
with the effect on profit when the volume of type of output changes.

Characteristics of Marginal Costing:

1. Segregation of Costs into fixed and variable elements:
In Marginal Costing, all costs are classified into fixed and variable. Semi Variable costs are
segregated into fixed and variable elements.
2. Marginal Costs as Product Costs:
Only Marginal (Variable) costs are charged to products produced during the period.
3. Fixed Costs as Period Costs:
Fixed Costs are treated as period costs and are charged to Costing Profit & Loss Account
for the period in which they are incurred.
4. Valuation of Inventory:
The Work-in-progress and finished stocks are valued at marginal cost only.
5. Contribution:
Contribution is the difference between sales value and marginal cost of sales. The relative
profitability of product or departments is based on a study of “Contribution” made by each
of the products or departments.
6. Pricing:
In Marginal Costing, prices are based on marginal cost plus contribution.
7. Marginal Costing and Profit:
In Marginal Costing, profit is calculated by a two-stage approach. First of all, contribution
is determined of various products or departments are pooled together and such a total
contribution from all products is called fund. Then from this fund, the total fixed cost is
deducted to arrive at a profit or loss.

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Assumptions in Marginal Costing:

1. All the costs can be separated into fixed and variable components.
2. Variable cost per unit remains constant and total variable cost varies in direct proportion of
the volume of production.
3. The total fixed cost remains constant.
4. The selling price does not change as volume changes.
5. There is only one product or in the cast of multiple products, the sales mix does not change.
In other words, when several products are being sold, the sale of various products will
always be in some predetermined proportion.
6. The production and sales units are equal and no inventory exists.
7. The productivity per worker does not change.
8. There will be no change in general price level.

Advantages of Marginal Costing:

1. Helps in Managerial Decisions:
The most important advantage of Marginal Costing is that it assists the management in
taking many valuable decisions. Information regarding marginal cost and contributions
provided by marginal costing facilitates making policy decisions in problems like fixing
selling price below cost, make or buy, introduction of a new product line, utilisation of
spare plant capacity, selection of most profitable product mix, etc.
2. Cost Control:
Greater control over cost is possible. This is so because by classifying into fixed and
variable, the management can concentrate more on the control of variable costs which are
generally controllable and lay less attention to fixed costs which may be controlled only by
the top management and that too a limited extent.
3. Simple technique:
Marginal costing is comparatively simple to operate because it avoids the complications
involved in allocation, apportionment and absorption of fixed overheads, which is, in fact,
arbitrary division of indivisible fixed costs.
4. No Under and over absorption of Overheads:
In marginal costing, there is no problem of under and over absorption of overheads.
5. Constant Cost per Unit:
Marginal Costing takes into account only variable costs, which remain the same per unit of
product irrespective of the volume of output. Therefore, it avoids the effect of varying cost
per unit as it ignores fixed costs which are incurred on a time basis and have no relation
with the size of production.
6. Realistic Valuation of Stock:
In Marginal costing stock of work in progress and finished goods are valued only at variable
costs. Thus, no fictitious profits can arise due to fixed cost being absorbed and capitalised
in unsold stock. This is because marginal costing prevents the carry forward in stock
valuation of some portion of current years’ fixed costs. Stock valuation in marginal costing
therefore is more realistic and uniform.
7. Aid to Profit Planning:
To aid profit planning, marginal costing technique enables data to be presented to the
management in such a way as to shoe cost-volume-profit relationship. Graphic
presentations in the form of break-even charts and profit volume charts are also used to
facilitate planning future performance.
8. Valuable adjunct to other technique:
Marginal costing is a valuable adjunct to standard costing and budgetary control.

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Limitations of Marginal Costing:

1. Difficult Analysis:
Marginal Costing assumes that all costs can be classified into fixed and variable elements.
In practice, however, it may be difficult to segregate all costs into fixed and variable
components. Certain costs are caused by management decisions and cannot be strictly
classified as fixed and variable. E.g. amenities to staff, bonus to workers etc.
2. Ignores time factor:
By ignoring fixed costs, time factor is also ignored. For instance marginal cost of two jobs
may be identical, but if one job takes twice as long to complete as the other, the true cost
of the job taking longer time is higher than that of the other. This is not disclosed by
marginal costing. Production can’t be achieved without incurring fixed costs but marginal
costing created an illusion that fixed costs have nothing to with the production.
3. Difficulty in Application:
It is difficult to apply marginal costing technique in industries where large stocks of work-
in-progress are locked up. Thus in ship-building or construction contracts, if fixed
overheads are not included in the valuation of work-in-progress, there may be losses in
each year, while on the completion of contracts, there may be huge profits. Such
fluctuations in profits can be avoided if total absorption costing is employed.
4. Less effective in Capital Intensive Industries:
In Capital Intensive industries, the proportion of fixed costs – depreciation, maintenance,
etc. – is large. The marginal costing technique which ignores fixed costs, thus proves less
effective in such industries. Therefore, with the increased automation in industries,
marginal costing is left with a limited scope.
5. Improper basis of Pricing:
Where prices are fixed by competition, marginal costing gives an impression so large as
the prices exceed marginal costs, production is profitable. It ignores the danger of too much
sales being made at marginal cost or marginal cost plus some contribution as it may result
in overall losses. Although in certain circumstances, product may be sold at less than total
cost, prices in the long run must cover total cost as otherwise profit can’t be earned.

Cost Volume Profit (CVP) Analysis:

➢ CVP analysis is a technique used to study the inter-relationship between costs, sales and
net profit. It shows the net effect that fluctuation in cost, price and volume has on profits.
The higher the volume of output, the lower will be the unit cost of production and vice-
versa as the fixed overhead cost in total cost does not change with changes in the volume
of output.
➢ The concept of CVP is relevant to virtually all decision making areas. The managers use
this technique extensively to determine BEP, Margin of safety, Profit/Losses at various
levels of output, etc.
➢ It is an important tool of short term planning and forecasting of business activities and is
useful in taking short-run decisions and formulating business policies. Basic questions of
interest to management decision making areas, e.g., what should be the volume for a desired
profit, what changes in selling price affect profit position, what should be the optimum
product-mix of the company, how variation of cost affects profit, etc. are answered by this
analysis. CVP analysis can be made with the help of equations, graphs, charts, etc.
➢ Profit depends on many factors of which the selling price of the product sold, its cost of
production and the volume of sales effected are most significant. Again, selling price

44
 depends on to some extent on costs if a certain profit is to be earned, and volume of sales
depends on volume of manufacture, which again is related to costs.
➢ Cost depends on various factors, e.g. (i) Product Mix, (ii) Volume of Manufacture, (iii)
Internal Efficiency or Inefficiency in Manufacture, (iv) Size of Order, (v) Variation of
Methods of production, (vi) Size of Plant and (vii) Cost Procedure Followed (e.g., pricing
of issues of materials, methods of recovery of overhead, method of wage payment, etc.)
➢ Of all the above factors, volume is the most significant factor. Volume often changes in
business. When such changes occur due to outside factor management finds it difficult to
control. CVP analysis gives complete picture of the profit structure which helps
management to distinguish between effect of sales, volume fluctuations and the result of
price or cost variations on profit. It is and extension of marginal costing and uses the
principles of marginal costing.

Key Terms in Marginal Costing

1. Marginal Cost Equation:

This equation explains that the total sale minus total variable cost is the contribution towards
fixed costs and profit. Marginal Cost equation can be developed as follows:
Sales – Variable Cost = Contribution
Contribution – Fixed Cost = Profit
Sales – Variable Cost = Fixed Cost + Profit
On the basis of this equation any unknown figure may be ascertained on the basis of other
known figures.

2. Contribution:
Contribution is the difference between sales and the marginal or variable cost of sales. It is the
excess of Sales over Variable Cost. Contribution shows how each unit contributes towards the
fixed cost and the profits. Thus, it helps in paying the fixed cost and whatever is left after
paying the fixed cost becomes the profit. For Example,
Particulars 5,000 Units Per Unit
Sales 50,000 10
(-) Variable cost (30,000) (6)
Contribution 20,000 4
(-) Fixed Cost 15,000 -
Profit 5,000
Computation of Contribution:
Contribution = Sales – Variable cost [C=SP-VC]
Contribution = Profit + Fixed Cost

3. Profits:
Profit is the excess of contribution over the fixed costs.
Profits = Total Contribution – Total Fixed Cost [P = TC – TFC]

4. P/V Ratio (Profit Volume Ratio) OR C/S Ratio (Contribution to Sales Ratio):
The Profit Volume Ratio, which is better known as Contribution to Sales Ratio, expresses the
relationship of Contribution to Sales. It shows the effect of change on profits due to change in
sales.
Contribution C
Profit Volume Ratio = ------------------ X 100 = --------- X 100
Sales S

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Other Formulas derived from P/V Ratio:
Contribution = Sales x P/V Ratio
Sales = Contribution / P/V Ratio

P/V Ratio may also be computed by comparing the change in contribution to change in sales
or by comparing the change in profits to change in the sales. This is because any increase in
profits will mean increase in contribution as fixed costs are assumed to remain constant at all
levels of output.
Change in Profits / Contribution
Profit Volume Ratio = ----------------------------------------- X 100
Change in Sales
Uses of P/V Ratio:
P/V Ratio is one of the most important ratios to watch in the business. It is an indictor of the
rate at which the profit is being earned. A high P/V Ratio indicates high profitability and a low
ratio indicates low profitability in the business. The profitability of different sections of the
business such as sales areas, classes of customers, product lines, methods of production, etc.
may also be compared with the help of profit volume ratio. The P/V Ratio is also used in
making the following types of calculations.
➢ Calculation of Break Even Point
➢ Calculation of Profits at given level of sales
➢ Calculation of the volume of sales required to earn a given profit
➢ Calculation of profit when margin of safety is given
➢ Calculation of the volume of sales required to maintain the present level of profit, if selling
price is reduced

Improvement in P/V Ratio:

As P/V Ratio indicates the rate of profitability, any improvement in this ratio without increase
in fixed cost would result in higher profits. As a note of caution, erroneous conclusions may be
drawn by mere reference to P/V Ratio. Therefore, this ratio should not be used in isolation.

P/V Ratio is the function of sales and variable cost. Thus, it can be improved by widening the
gap between sales and variable cost. This can be achieved by the following.
➢ Increasing the Selling Price
➢ Reducing the Variable Cost
➢ Changing the sales mix, i.e. Selling more of those products which have larger P/V Ratio
and thereby improving the overall P/V Ratio.

5. Break-Even Point:
The Break Even Point is the volume of output or sales at which total cost (Variable plus Fixed
Cost) is exactly equal to total revenue. It is a point of no profit and loss. At this point, the total
contribution just covers the fixed costs. This is the minimum point of production at which total
cost is recovered and after this point the profit begins.
Fixed Cost FC FC
BEP (In Units) = ----------------------------- = ------------------- = ----------------
Contribution Per Unit CPU (SP-VC) 1 -V/S

Fixed Cost Fixed Costs

BEP (In ₹) = --------------------- = ------------------- X Sales
P/V Ratio Contribution

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6. Margin of Safety:
Margin of Safety may be defined as the difference between the actual sales and sales at Break-
even point. In other words, it is the amount by which actual volume of sales exceeds the break-
even point. Margin of safety may be expressed in absolute money terms or as a percentage of
sales.

Margin of Safety (M/S) (in units) = Actual Sales (in units) – Break-even Sales (in units)
Margin of Safety (M/S) (in units) = Profits / Contribution per unit

Margin of Safety (M/S) (in value) = Actual Sales (in value) – Break-even Sales (in value)

Margin of Safety (M/S) (in value) = Profits / P/V Ratio

Margin of Safety (M/S) (in value) = Profits

---------- x SPU
CPU

Actual Sales – Break-even Sales

Margin of Safety as a % of Sales (M/S) = ---------------------------------------------- X 100
Actual Sales

The size of the margin of safety indicates soundness of a business. When margin of safety is
large, it means the business can still make profits after a serious fall in sales. In such a situation,
the business stand better chance of survival in times of depression. A large margin of safety
usually indicates low fixed overheads. When margin of safety is low, any loss of sales may be
a matter of serious concern.

Margin of Safety is directly related to profits.

Profits = Margin of Safety x P/V Ratio

P = M/S x P/V Ratio
P
M/S = -------------
P/V Ratio

7. Desired Sales:
It is that level of sales which gives the desired profit level. At breakeven point fixed cost is
recovered, at margin of safety profit is earned but at desired sales level not only fixed cost is
covered but also desired profits are earned.
Computation of Desired sales:

𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭+𝐃𝐞𝐬𝐢𝐫𝐞𝐝 𝐏𝐫𝐨𝐟𝐢𝐭

Desired Sales (in units) = 𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐩𝐞𝐫 𝐮𝐧𝐢𝐭

𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭+𝐃𝐞𝐬𝐢𝐫𝐞𝐝 𝐏𝐫𝐨𝐟𝐢𝐭

Desired Sales (in value) = x Sales
𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧

𝐅𝐢𝐱𝐞𝐝 𝐂𝐨𝐬𝐭+𝐃𝐞𝐬𝐢𝐫𝐞𝐝 𝐏𝐫𝐨𝐟𝐢𝐭

Desired Sales (in value) = 𝐏𝐕 𝐑𝐚𝐭𝐢𝐨

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8. Angle of Incidence:
This angle is formed by the intersection of sales line and total cost line at the break-even point.
This angle shows the rate at which the profits are being earned once the break-even point has
reached. The wider the angle, the greater is the rate of earning profits. Therefore, the aim of
the management will be to have as large angle as possible.

The angle of incidence is of particular importance in boom period when sales are expanding.
Therefore, taken in conjunction with the margin of safety, a large angle of incidence with a
high margin of safety indicates an extremely favourable position.

PRACTICAL EXAMPLES

Sum: 1
The following information is available from the books of a company.
Production 15,000 units
Sales Price per unit ₹ 120
Variable Cost per unit ₹ 80
Fixed Expenses ₹ 4,00,000
Calculate: Break-even Point is Units and Value.

Sum: 2
From the following information, Calculate
1. BEP in Units and Value
2. Sales volume that will yield profit of ₹ 30,000
Sales Price per unit ₹ 20
Variable Cost per unit ₹ 14
Fixed Expenses ₹ 36,000

Sum: 3
The following information is available from the books of a company.
Material & Labour Cost per unit ₹ 55 Fixed Factory Overheads ₹ 27,00,000
Variable Overhead Cost per unit ₹ 15 Fixed Selling Overheads ₹ 12,60,000
Selling Price per unit ₹ 100
Find out:
1. Breakeven Point in units and value
2. Sales in units to earn profits of ₹ 3,00,000
3. New Breakeven Point if Selling Price per unit is reduced by 20%

Sum: 4
The following information is available from the books of a company.
Variable Cost per unit ₹ 20 Fixed Cost ₹ 3,00,000
Sales Price per unit ₹ 30
Calculate:
1. Contribution
2. P/V Ratio
3. Breakeven Point in units and rupees
4. New Selling Price if BEP is brought down to 25,000 Units

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Sum: 5
The following information is available from the books of a company.
Production 90,000 units Fixed Cost ₹ 6,00,000
Variable Cost per unit ₹ 10 Sales Price per unit ₹ 20
Calculate:
1. How many units should be produced and sold to reach Breakeven Point?
2. New Breakeven Point in units if Selling Price is reduced by 10%
3. Sales to earn profit of ₹ 4,00,000

Sum: 6
The following information is available from the books of a company.
Variable Cost per unit ₹ 5 Fixed Cost ₹ 1,80,000
Sales Price per unit ₹ 8 Output 70,000 Units
Calculate:
1. What should be Sales at Breakeven Point?
2. If Selling Price to be reduced to ₹ 7 per unit, how many units should be produced and
sold to yield the same amount of Profit?

Sum: 7
The following information is available from the books of a company.
Variable Cost ₹ 2,70,000 Fixed Cost ₹ 1,80,000
Sales ₹ 4,00,000

Calculate:
1. P/V Ratio
2. Break-even Point in Rupees
3. How much Sales to be increased to reach Break-even Point

Sum: 8
The following information is available from the books of a company.
Sales (₹ 20,000 units at ₹ 250) ₹ 5,00,000
- Variable Cost ₹ 3,00,000
₹ 2,00,000
- Fixed Cost ₹ 1,62,000
₹ 38,000
Calculate:
1. Breakeven Point
2. New Breakeven Point if Selling Price reduced to ₹ 240
3. Sales to earn Profit of ₹ 58,000
4. New Breakeven Point if Fixed Cost increased by 10%

Sum: 9
The following information is available from the books of a company.
Sales ₹ 15,00,000
Total Fixed Cost ₹ 2,00,000
Selling Price ₹ 10
Variable Cost ₹ 8

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Calculate:
1. Breakeven Point in units and rupees
2. P/V Ratio
3. Present Profits of the company
4. Profit at the Sales of ₹ 27,00,000
5. Sales to earn Profit of ₹ 4,00,000
6. Margin of Safety in rupees and percentage

Sum: 10
The following information is available from the books of a company.
Year Profit Sales
2017 ₹ 32,000 ₹ 90,000
2018 ₹ 56,000 ₹ 1,50,000
Calculate:
1. P/V Ratio
2. Fixed Costs
3. Profit at the Sales of ₹ 1,20,000
4. Sales volume to earn Profit of ₹ 4,000

Sum: 11
The following information is available from the books of a company.
Year Sales Profits
2017 ₹ 20,00,000 ₹ -1,00,000
2018 ₹ 60,00,000 ₹ 7,00,000
Calculate:
1. Contribution to Sales Ratio
2. Margin of Safety in % terms on sales for the year 2018

Sum: 12
TY Ltd provides you the following information
Year 2015 Year 2016
Total Sales ₹ 20,000 ₹ 30,000
Total Cost ₹ 17,600 ₹ 21,600
Required: Calculate the following
1. The profit/volume ratio
2. Fixed cost
3. Break-even point
4. Margin of Safety
5. The amount of profit/loss when sales are Rs 50,000
6. The amount of sales required to earn a profit of ₹ 59,040
7. The amount of sales required to earn profit @ 10% on sales

Sum: 13
The following information is given by AU Limited.
Profit ₹ 12,000, Fixed cost ₹ 24,000, Margin of Safety ₹ 30,000
You are required to calculate:
1. Profit Volume Ratio
2. Break Even Sales and Actual Sales
3. Profit when sales are 10% above the breakeven sales
4. Sales to earn profit of ₹ 4,000

50
 5. Sales to earn profit @ 10% on sales
6. New B.E.P. if selling price is to be reduced by 10%
7. New B.E.P. if variable cost is to be increased by 25%
8. The amount of profit if the selling price is increased by 20%, variable cost and fixed
cost increase by 20% and 25% respectively with corresponding decrease in sales
volume by 10%

Sum: 14
The following data are obtained from the record of factory:
Sales (4,000 units) ₹ 1,00,000
Material consumed ₹ 40,000
Variable Overheads 10,000
Labour Charges 20,000
Fixed Overheads 18,000 88,000
Net Profit 12,000

Calculate:
1. The number of units by selling which the company will neither loss nor gain anything
2. The sales needed to earn a profit of 20% on sales
3. The extra units which should be sold to obtain the present profit if it is proposed to reduce
the selling price by 20% and 25%
4. The selling price to be fixed to bring down its break-even point to 500 units under present
conditions

Sum: 15
Consider the following data pertaining to AU Ltd. and DU Ltd.

Particulars AU Ltd. DU Ltd.

Annual Sales (Units) 50,000 50,000
Selling price per unit (₹) 30 30
Direct Material per unit (₹) 6 7
Direct labour per unit (₹) 3 2
Variable overhead per unit (₹) 5 3
Fixed Costs (₹) 2,00,000 2,50,000

Calculate the number of units, at which the profits of both the companies are equal.

Sum: 16
Three plants A, B and C are to be merged for better operations which are similar one. The
details are as under:

Plant A B C
Capacity 100% 70% 50%
₹ in Lacs
Turnover 300 280 150
Variable Costs 200 210 75
Fixed Costs 70 50 62

Calculate:
1. Capacity of merged plant for Break-even
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 2. Profit of merged plant at 75% capacity
3. Turnover of merged plant to give profits of ₹ 28 lacs

Sum: 17
TY shoes Co. sells 5 different types of chappals with identical purchase cost and selling price.
The company is trying to find out the profitability of opening another store, which will have
the following expenses and revenue (information per pair):
Particulars Amount (₹)
Selling price 30.00
Variable production cost 19.50
Salesman’s commission 1.50
Total variable cost 21.00
Annual fixed expenses are ₹3,60,000 made up as rent ₹60,000; Salaries ₹2,00,000;
Advertising ₹80,000 and other fixed costs ₹20,000.

Required (Consider each part of the question separately)

1. Calculate the annual BEP in units and in value. Compute profit or loss, if 35,000 pairs
of chappals are sold.
2. Sales commission is proposed to be discontinued, but instead a fixed amount of ₹
90,000 is to be incurred in fixed salaries. A reduction in selling price 5% is also
proposed. What will be the BEP in units?
3. It is proposed to pay the store manager ₹ 0.50 per pair as further commission. The
selling price is also proposed to increase by 5%. What would be the BEP in units?
4. Refer to the original data, if the store manager were to be paid ₹ 0.30 commission on
each pair of chappal sold in excess of the BEP, what would be the store’s net profit, if
50,000 pairs were sold?

Sum: 18
GU Limited has for the past several years produced boxing gloves which are sold at ₹28 per
pair. Higher costs in recent years have made management to consider about the adequacy of
this selling price.

The labour rate was increased from ₹ 1.75 per hour to ₹ 2.25 per hour and the cost of leather
has gone up from ₹ 1.10 to ₹ 2.15 per square foot during the last five years. Fixed expenses
have increased 25% from the level of ₹ 18,000 five years ago. Over the same period, variable
overhead has increased 30% or ₹ 3 per pair of gloves. Each glove requires 1.5 sq. ft. of leather
and one hour direct labour.
Required:
Calculate the selling price that the company has to charge under the new cost structure to break-
even at the same number of units as five year ago.

Sum: 19
Starstyle Ltd. is a retailer for small video disks. The projected net income for the current year
is ₹ 13,65,000 based on sales volume of 1,50,000 video disks. The sale price of the disks is ₹
105 each. Starstyle purchases the disks at a price of ₹ 76 per disk and incurs as additional
handling cost of ₹8 per disk. The annual fixed costs of Starstyle are ₹ 17,85,000.

a) Calculate Starstyle’s BEP in rupees and in units and MOS for the current year.
b) Calculate the company’s net income for the current year.

52
 c) Calculate company’s net income if the company expects a 10% increase in sales volume
(in units) in the next year.
d) Starstyle expects that the unit purchase price of the video disks will increase by 25% in
the next year. However the company does not want to change the sale price. Compute
the sales in rupees which will ensure the company the same net income as computed in
(b) above.
e) If the company wants to maintain the same contribution margin in the next year as in
the current year even after the increase in purchase price (as indicated in (d) above),
compute the selling price to be quoted by the company next year.

Sum: 20
A company manufactures a single product with a capacity of 1, 50,000 units p.a. The
summarized profitability statement for the year is as under:
Amount (₹) Amount (₹)
Sales: 1,00,000 units @ ₹15 per unit 15,00,000
Cost of sales :
Direct materials 3,00,000
Direct labour 2,00,000
Production Overhead: Variable 60,000
: Fixed 3,00,000
Administrative Overhead: (Fixed) 1,50,000
Selling and Distribution Overhead : Variable 90,000
: Fixed 1,50,000 12,50,000
Profit 2,50,000

1. What will be the amount of sales required to earn a target profit of 25% on sales, if the
packing is improved at a cost of Re.1 per unit?
2. There is an offer from a large retailer for purchasing 30,000 units p.a. subject to
providing a packing with a different brand name at a cost of ₹2 per unit. However in
this case there will be no selling and distribution expenses. Also this will not, in any
way, affect the company’s existing business. What will be the breakeven price for this
additional offer?
3. If an expenditure of ₹3,00,000 is made on advertising the sales would increase from
present level of 1,00,000 units to 1,20,000 units at a price of ₹18 per unit. Will that
expenditure be justified?
4. If the selling price is reduced by ₹ 2 per unit, there will be 100% capacity utilization.
Will the reduction in selling price be justified?

53
 KEY FACTOR (LIMITING FACTOR)

The aim of the business is to achieve maximum profitability. Unfortunately, it is not always
easy to achieve because profit earning is affected by a variety of factors. E.g. an undertaking
may have sufficient orders on hand, ample skilled labour and production capacity, but may be
unable to obtain all the quantity of material it needs over a period for the manufacture of
maximum quantities which could be sold. Thus, material is the factor which limits the size of
output and prevents an undertaking from maximizing its profit. Similarly, sometimes a business
is unable to sell all that it can produce. In such case, sales is the limiting factor. Thus, a factor
in short supply is the key factor.

“A key factor in the activities of an undertaking, which at a particular point in time or over a
period of time will limit the volume of output.” Sales, material, labour of particular skill,
production capacity or machine hours, financial resources etc.
The purpose of the limiting factor technique is to indicate the most profitable course of action
in all such cases where alternatives are possible.

When no factor is in short supply, the choice will lie with accepting an order which yields the
highest contribution. If, however, e.g. a factor of production like material is in short supply,
the order which yields the largest contribution per unit of material consumed should be
accepted. Thus, when a key factor is operating, the best position is reached, when contribution
per unit of key factor is maximum.

Steps to be followed to solve the sums of key Factor:

1. Find out what is the key factor.
2. Find out Contribution per unit / total contribution for the products.
3. Find out contribution per unit of key factor on the basis of CPU / Total contribution.
4. Decide the preferences.
5. Allocate the scarce resources according to the preference and decide the product mix.
6. Find out the profitability of the product mix prepared in step no. 5.

Sum: 21
TY Limited manufactures 2 products X and Y for which the material used is in scarcity. The
total raw-material is available to the extent of only 22,000 kg. for production. Product X
consumes 20 kg. material per unit, while product Y consumes 16 kg. material per unit.
According to the established production capacity, 1,000 units of X and 500 units of Y can be
manufactured.
The selling price of X is ₹ 160 per unit and its variable cost is ₹ 110 per unit. The selling price
of Y is ₹ 120 per unit and its variable cost is ₹ 60 per unit. Total fixed costs is ₹ 15,000.
Determine how many units should be produced to get maximum profits?

Sum: 22
A company manufactures two products ‘Jars’ and ‘Kettles’. The following information relates
to the two products:

Particulars Jars Kettles

Sales Price ₹ 290 ₹ 196
Direct Material ₹ 100 ₹ 80
Direct Labour Hours (Wage rate ₹ 1/hr) 50 hours 20 hours
Variable Overhead 80% of Direct wages 80% of Direct wages

54
Fixed overheads amount to ₹ 10,000.
If labour is in short supply, then production of which product is profitable?
If production capacity of factory is 1,000 units of Jars and 2,000 units of Kettles and 80,000
labour hours are available, then how many of each product should be manufactured to get the
maximum profit?

Sum: 23
TY Limited produces 2 products A and B. The data is as follows.
Particulars Product A Product B
Sales Price ₹ 232 ₹ 392
Direct Material ₹ 78 ₹ 110
Direct Wages ₹ 70 (@ ₹ 2 per hour) ₹ 144 (@ ₹ 3 per hour)
Variable Overheads (% of wages) 70% 75%

The total FC is ₹ 18,000. If the labour is in short supply, then production of which type of
product is profitable? Production capacity of A is 1,200 units and of B is 1,500 units and labour
hours available are 99,984 hours. How much of each product to be produced to get maximum
profits?

Sum: 24
The following particulars are taken from the records of a company engaged in manufacturing
of products, A and B, from a certain material:
Product A (per unit) ₹ Product B (per unit) ₹
Sales 2,500 5,000
Material Cost (₹ 50 per kg) 500 1,250
Direct Labour(₹ 30 per hour) 750 1,500
Variable Overhead 250 500
The fixed overheads are ₹ 10,00,000. Total availability of raw materials is 20,000 kg and
maximum sales potential of each product is 1,000 units, find the product mix to yield maximum
profits.

55
Examples based on Accept or Reject decision:

Sum: 25
A manufacturer of plastic toys makes and average profit of Rs. 2.50 per piece on a selling price
of Rs. 14.50 It produces and sells 60,000 pieces of toys at 60% of potential capacity.

The cost of sales is as follows:

Particulars Price per piece Rs.
Direct materials 4.00
Direct wages 1.00
Factory overheads (Variable) 3.00
Selling overheads (Variable) 0.25
Total fixed cost 2,25,000

During the current year, the manufacturer intends to produce the same number of units, but
anticipates that –
a) Fixed cost will go up by 10%
b) Material and labour cost will go up by 5% each
Under these circumstances, he obtains a bulk order for a further 20% of his capacity.

Required:
What should be the minimum price that you would recommend to the manufacturer for
acceptance of this bulk order so that there is an overall profits of Rs. 1,60,000?

Sum: 26
Anglo-Dutch Company Limited has a capacity to produce 5,000 articles. At present, the
company actually produces only 2,000 articles for the domestic market at the following costs:
Particulars Amount Rs.
Materials 40,000
Wages 36,000
Factory overheads – Fixed 12,000
Variable 20,000
Administrative overheads – Fixed 18,000
Selling & distribution overheads – Fixed 10,000
Variable 16,000
Total Cost 1,52,000
The home market can consume only 2,000 articles at a Selling price of Rs. 80 per article.

The company has received an additional offer for the supply of 3,000 articles from a foreign
country at the price of Rs. 65 per article. The execution of export order entails an additional
packing cost of Rs. 5,000.

Should this order be accepted or not? Advice the company with necessary workings.

Sum: 27
A company currently operating at 80% capacity has the following particulars:
Particulars ₹
Sales 32,00,000
Direct material 10,00,000

56
 Direct labour 4,00,000
Variable overheads 2,00,000
Fixed overheads 13,00,000

An export order has been received that would utilize half the capacity of the factory. The
order cannot be split, i.e., it has either to be taken in full executed at 10% below the
normal domestic prices, or rejected totally. The alternatives available to the management
are:
1. Reject the order and continue with the domestic sales only. Or;
2. Accept the order, split the capacity between overseas and domestic sales and turn away
excess domestic demand. Or;

Prepare a comparative statement of profitability and suggest the best alternative.

Examples based on Make or Buy decision:

Sum: 28
Spare Parts Limited has an annual production of 90,000 units for a vehicle component. The
component cost structure is as follows:
Particulars Amount Rs. Per Unit
Materials 270
Labour (25% Fixed) 180
Expenses:
Variable 90
Fixed 135
Total 675
a) The purchase manager has an offer from a supplier who is willing to supply the component
at Rs. 540. Should the component be purchased and production be stopped?
b) Assume the resources now used for this component’s manufacture are to be used to produce
another new product for which the Selling Price is Rs. 485.

In the latter case, the material price will be Rs. 200 per unit. 90,000 units of this product can
be produced at the same cost basis as above for labour and expenses.

You are required to advice the company whether to divert the resources to manufacture that
new product, on the footing that the component presently being produced would, instead of
being produced, be purchased from the market.

Sum: 29
XYZ Limited manufactures auto parts. The following costs are incurred for processing
1,00,000 units of a component:
Particulars Amount Rs.
Direct material 5,00,000
Direct labour 8,00,000
Variable factory overheads 6,00,000
Fixed factory overheads 5,00,000
Total 24,00,000

57
The purchase price of the component is Rs. 22. The fixed overheads would continue to be
incurred even when the component is bought from outside although there would be reduction
to the extent of Rs. 2,00,000.
Required:
1. Should the part be made or bought, considering that the present facility when released
following a buying decision would remain idle?
2. In case the released capacity, can be rented out to another company for Rs. 1,50,000, what
would be the decision?

*********

58
 TERMS IN DECISION MAKING

1. Relevant Costs:
When cost information is to be used for decision-making purpose, it is to be seen which costs
are relevant and should be considered. Those costs, which would be incurred or would change,
if a particular course of action were taken, are called relevant costs. Hence, a relevant costs is
a cost whose magnitude will affected by a decision being made. In decision making, the
management should consider only future costs and revenues that will differ under each
alternative. Thus, relevant costs are those future costs which differ between alternatives.
Relevant costs may also be defined as the cost which are affected and changed by a decision.
On the contrary, irrelevant costs are those costs which remain the same and not affected by the
decision whatever alternative is chosen. Relevant costs have the following 2 features.
1. Relevant costs are only future costs, that is, those costs which are expected to be incurred
in future. Relevant costs therefore, are not historic (sunk) costs which have already been
incurred and cannot be changed by a decision.
2. Relevant costs are only incremental (additional) or avoidable costs. Incremental costs refer
to an increase in cost between two alternatives. Avoidable costs are those which are not
incurred from one alternative to another.
Example:
Assume a business firm purchased a plant for ₹ 10,00,000 and has now a book-value of ₹
1,00,000. The plant had become obsolete and can not be sold in its present conditions.
However, the plant can be sold for ₹ 1,50,000 if some modification is done on it which will
cost ₹ 60,000. In this example, ₹ 60,000 (modification cost) and ₹ 1,50,000 (sales value) both
are relevant as they reflect future, incremental costs and future revenues respectively. The firm
will have incremental benefit of ₹ 90,000 (₹ 1,50,000- ₹ 60,000) on sale of the plant. ₹
10,00,000 has already been incurred and being a sunk cost is not relevant to the decision, that
is, whether modification should be done. Similarly, the book value of ₹ 1,00,000 which has to
be written off, whatever alternative future action is chosen, is also not relevant because it can’t
be changed by any future decision.

It should also be noted that all relevant costs are future costs and all future costs are no relevant.
For example, consider that a company is thinking of manufacturing a new product, as it has
some idle capacity. However, the product requires an imported raw-material and two skilled
workers to handle the material and manufacture the product. Other costs like supervisor’s
salary, power expenses are expected to remain constant. This means that in deciding whether
to manufacture the product or not, the cost of importing the raw material and the cost of two
skilled workers is the only relevant costs. This is so because all other costs, i.e. existing costs
would remain unchanged whether the company decided in favour or in against producing the
new product.

Whether a cost is relevant or not depends upon the circumstances. In one case, a cost may be
relevant and in another case the same cost may not be relevant. It is thus, not possible to prepare
a list of relevant costs to be used in all types of decisions. It should be noted that only relevant
costs are to be taken into consideration for the management decision making process.

Irrelevant Costs:
These are the costs that will not be affected by a particular decision.
To take an example from day to day life, one may have to decide about making a journey by
own car or by a particular transport bus. In this decision, insurance cost of the car is irrelevant

59
because it will not change, whatever alternative is chosen. However, cost of petrol and other
operating costs of a car will differ under each alternative and thus are relevant for this decision.

Some authors refer to relevant and irrelevant costs as avoidable and unavoidable costs. As the
name indicates, avoidable costs are those which will undergo a change as a result of choosing
a particular alternative whereas unavoidable costs are those which will be incurred irrespective
of the choice of action. Thus unavoidable costs are irrelevant and avoidable costs are relevant
costs.

2. Incremental (Differential) Costs:

When the manager chooses a particular alternative over the many other available, the amount
by which the costs increase over their existing levels are called incremental or differential costs.
Incremental or differential costs are to be considered in a decision-making situation. The
existing costs, being already incurred, irrespective of the course of action selected by the
manager are treated as sunk costs and only the incremental costs are relevant. For example,
when the production manager faces a replacement decision where the existing machine is to be
replaced by a new and technically more advanced machine, only the incremental operating
expenses, incremental labour costs, incremental depreciation etc. are to be considered.

Differential cost is the difference in total costs between any two alternatives. Differential costs
are equal to the additional variable expenses incurred in respect of the additional output, plus
the increase in fixed costs, if any. This cost may be calculated by taking the total cost of
production without additional contemplated output and comparing it with the total costs
incurred if the extra output is undertaken.

In short, this cost may be regarded as the difference in total cost resulting from a contemplated
change. In other words, differential cost is the increase or decrease in total cost that result from
an alternative course on action. It is ascertained by subtracting the cost of one alternative from
the cost of another alternative. The alternative choice may arise because of change in method
pf production, change in sales volume, change in product-mix, make or buy decision, take or
refuse decision etc.

Sometimes, differential costs are also known as incremental costs, although technically an
incremental cost should refer only to an increase in cost from one alternative to another. Any
decrease in cost should be referred as decremental cost. Differential costs in a broader term,
encompassing both cost increases (incremental costs) and cost decrease (decremental costs)
between alternatives.

3. Sunk Costs:
Sunk costs are those costs that have already been incurred as a result of decisions taken in the
past and are not going to change as a result of decisions taken in future. In short, the
management no longer has control on such costs. Generally it is also known as an unavoidable
costs as it refers to all past costs since these amounts can’t be changed once the cost is incurred.
It is also known as irrelevant costs. Sunk costs are the costs which have been created by the
past decision and can not be altered by the future decision.

For example, a construction firm had purchased a piece of land for ₹ 50 lakhs 2 years ago.
Now, the firm is thinking of constructing a multiplex or a hotel on that land, Irrespective of
what the firm ultimately decides, the cost of purchase of ₹ 50 lakhs is not going to change and,
hence, is a sunk cost and is not relevant in deciding which course of action the firm should

60
choose. In other words, the examples of sunk costs are the book vale of existing assets, such as
plant and machinery, inventory, investment in securities etc. Except the possible gains or losses
on sales of any of such assets, the book value is not relevant for decisions regarding whether
to use them or dispose them off. Despite the sunk costs, which are historical costs, are irrelevant
for making decisions, they are frequently analysed in detail before decision about future courts
of action is made. E.g. historical costs may affect future tax payments which will differ
depending on the course of action selected by the management.
One should understand the difference between sunk costs and irrelevant costs. Not all irrelevant
costs are sunk costs but all sunk costs are irrelevant. E.g. in choosing from the two alternative
methods of production if direct material cost is the same under the two alternatives, it is an
irrelevant costs. But direct material cost is a sunk cost because it will be incurred in future and
is a future cost. In the opinion of Horngren, a well known authority in the subject of cost
accounting, sunk cost has the same meaning as the past cost and all past costs are irrelevant.

4. Opportunity Costs:
Opportunity costs are again relevant in management accounting. Though these costs do not
represent any outflow of resources to an outside party, they are to be considered in decision-
making situation. Opportunity cost is the cost of opportunity lost. Opportunity cost represents
the benefits forgone by choosing the next best alternative. It is the sacrifice involved in
accepting an alternative under consideration. In other words, it is a cost that measures the
benefits that is lost or sacrificed when the choice of one course of action requires that other
best competing alternative course action be given up. The benefit lost is usually the net earnings
or profits that might have been earned from the rejected alternative.
For example-
(i) A company has deposited ₹ 1 lakh in bank at 10% p.a. interest. Now, it is
considering a proposal to invest this amount in debentures where the yield is 17%
p.a. If the company decides to invest in debentures, it will have to forego bank
interest of ₹ 10,000 p.a. which is the opportunity cost.
(ii) If the company leases out “a” part of the factory premises to some other
manufacturer, it forgoes the benefits of using that part of the premises for its own
business purposes and the profits that would have resulted from doing so. These
profits forgone represent the opportunity costs of letting out the premises.
(iii) Assume that a manufacturer can sell a semi-finished product to a customer for ₹
5,00,000. He decides, however, to keep it and finish it. The opportunity costs of
semi-finished product is ₹ 5,00,000 because this is the amount of economic
resources forgone by the manufacturer to complete the product.

Opportunity costs are important in decision-making and evaluating alternatives. Decision

making is selecting the best alternative which is facilitated by the help of the opportunity
costs. Thus it is a pure decision-making cost. It is an imputed cost that dose not require cash
outlay. Opportunity costs are not recorded in an accounting system as they relate to
opportunity lost.

5. Avoidable / Unavoidable Costs:

The avoidable cost is the cost which should not have been incurred under given conditions of
performance. These costs are incurred but should have been avoided. For example, standard
loss in manufacturing process is specified and if actual loss is higher than the cost of the
additional loss is known as avoidable costs. Excessive spending on advertisement is also
avoidable as it can be avoided through management decision. Thus, generally avoidable costs

61
are controllable in nature at a particular management level. Many people recognise avoidable
cost as variable as it is incurred when an activity is undertaken and it stops when activity stops.

On the other hand, unavoidable costs are such costs which can not be avoided within the norms
provided. Such costs are to be incurred under given circumstances. Hence, it is sometimes
recognised as uncontrollable costs. Generally, fixed costs are not avoidable for a particular time
period or under given conditions, hence they are recognised as unavoidable costs. For example,
the rent of premises decided for a specific time period can not be altered for that time period.
Hence, it is called unavoidable or uncontrollable or fixed costs.

6. Imputed or Notional Costs:

These are hypothetical costs which are specially computed outside the accounting system, for
the purpose of decision-making. Imputed costs are costs not actually incurred in some
transaction but which are relevant to the decision as they pertain to a particular situation. These
costs do not enter into traditional accounting system.

For example, interest on internally generated funds, rental value of the company-owned
property and salaries of owners of a single proprietorship or partnership are some examples of
imputed costs. Costs paid or incurred are not imputed costs. E.g. if ₹ 5,00,000 is paid for the
purchase of raw-materials, it is an outlay cost but not an imputed cost, because it would enter
into ordinary accounting system. When a company uses internally generated funds, no actual
interest payment is required. But if the internally generated funds are invested in some projects,
interest would have been earned. The revenue forgone (loss of interest) represents an
opportunity costs, and thus, imputed costs are opportunity costs.

7. Discretionary Costs:
Discretionary costs and committed costs are the classification of the fixed costs. Discretionary
costs are those which can be avoided by management decisions. Such costs are not permanent.
They are dependent upon the decision of the management. Advertising, research &
development costs, salaries of low level managers are examples of discretionary costs because
these costs may be avoided or reduced in the short run if so desired by the management.

On the other hand, committed costs are those that are incurred in maintaining physical facilities
and managerial set-up. Such costs are committed in the sense that once the decision to incur
them has been made, they are unavoidable and invariant in the short run.

8. Common Costs:
Common costs are those which are incurred for more than one product, job, territory or any
other specific costing object. Common costs are not easily identifiable with individual products
and, therefore, are generally apportioned.

Common costs are not only common to products, but they may be common to processes,
functions, responsibilities, customers, sales territories, periods of time and similar costing units.

For example, the salary of a manager of a production department which is manufacturing three
products is an example of common cost with respect to the products. But his salary is direct
cost to the departments located in the factory. The basic point is that a particular (common)
cost may be direct to one object and common as far as other objects are concerned.
Although both the terms, “common costs” and “joint costs” are sometime used
interchangeably, they differ from each other. Joint costs emerge when multiple products are

62
manufactured in a common process and when common inputs are used. Common costs are the
result of any manufacturing compulsions of the use of any single raw material. Besides
Common costs can be apportioned to costing objects like products, job, department, etc.
without much difficulty. But the apportionment of joint costs involves many difficulties in cost
accounting.

9. Traceable Costs:
Traceable costs are the costs which can be easily identified with a cost centre, cost unit, job or
process and can be directly charged to that cost center or cost unit. Direct material, direct labour
and other direct expense can be easily identified or traced to a particular cost unit, cost centre
or job and can be directly charged to that cost centre or cost unit. In fact, it is also called direct
cost which forms the prime cost of the product or the job.

10. Joint Costs:

Joint costs arise where the processing of a single raw material or production resources results
into two or more different products simultaneously. Joint costs relate to two or more products
produced from a common production process or element-material, labour, or overhead or any
combination thereof, or so locked together that one can not be produced without producing the
other(s).

Thus, joint cost is the cost of two or more products that are not identifiable as individual types
of products until a certain stage of production known as the split-off point (point of separation)
is reached.

For example, kerosene, fuel oil, gasoline and other oil products are derived from crude oil.
Joint costs are total costs incurred up to the point of separation. Joint costs can be apportioned
to different products only by means of some suitable bases of apportionment.

11. Step Costs:

Step cost is a cost that remains constant in total over small ranges of activity. Step cost is that
part of total cost which is fixed in nature only within a small segment of the total range of
activity.

For example, Block supervision costs and hire charges of bus etc. are the examples of joint
costs.
In case of Block supervision, if for every 30 students one supervisor is required and in total
there are 37 students then for 7 students also one block is to be created for which one additional
supervisor is required. Consisting a small range in the form of “a block”, supervision cost is
not variable in nature as it is not linked with the number of candidates in the block. Once an
addition block is created the total supervision cost will increase irrespective of actual
candidates to be accommodated in the extra block.
Bus hire charges are also example of the step cost in the same manner.

It is wrong to assume step cost as a part of semi variable costs. Step cost is different than semi-
variable costs in a way that in can’t be divided into variable and fixed costs. No part of step
cost is variable in nature.

63
 PRACTICE SUMS
Sum: 1
The following information is available from the books of a company.
Variable Manufacturing Cost/unit ₹ 22 Fixed Factory Overhead ₹ 1,60,000
Variable Selling Cost/Unit ₹3 Fixed Selling Overhead ₹ 20,000
Sales Price per unit ₹ 40
Calculate
1. Breakeven Point in units and rupees
2. Units to be sold to earn Profit of ₹ 1,20,000
3. New Breakeven Point in rupees if Variable Cost is increased by 8%

Sum: 2
The following information is available from the books of a company.
Variable Cost ₹ 3,75,000 Fixed Cost ₹ 1,80,000
Sales ₹ 6,00,000
Calculate:
1. P/V Ratio
2. Breakeven Point
3. Sales to earn profit of ₹ 1,20,000

Sum: 3
The following information is available from the books of a company.
Sales (₹ 15,000 units at ₹ 30) ₹ 4,50,000
- Variable Cost ₹ 2,70,000
₹ 1,80,000
- Fixed Cost ₹ 1,44,000
₹ 36,000
Calculate:
1. Breakeven Point
2. Sales to earn Profit of ₹ 60,000
3. New Breakeven Point if Selling Price is ₹ 28
4. New Breakeven Point if Fixed Cost increased by 25%

Sum: 4
The following information is available from the books of a company.
Selling Price ₹ 540
Variable Cost ₹ 432
Total Fixed Cost ₹ 3,45,600
Calculate:
1. Breakeven Point in units and rupees
2. P/V Ratio
3. Profit when Sales are ₹ 20,10,800
4. Sales to earn Profit of ₹ 28,080

Sum: 5
The following information is available from the books of a company.
Fixed Cost ₹ 1,20,000
Selling Price ₹ 36
Variable Cost ₹ 24

64
Calculate:
1. Breakeven Point in units and rupees
2. P/V Ratio
3. Profit at the Sales of ₹ 3,60,000
4. Sales to earn Profit of ₹ 24,000

Sum: 6
The following information is available from the books of a company.
Fixed Cost ₹ 3,60,000
Selling Price ₹ 108
Variable Cost ₹ 81
Calculate:
1. Breakeven Point in units and rupees
2. P/V Ratio
3. Profit at the Sales of ₹ 10,80,000
4. Sales to earn Profit of ₹ 72,000

Sum: 7
The following information is available from the books of a company.
Year Profit Sales
2012 ₹ 16,000 ₹ 45,000
2013 ₹ 28,000 ₹ 75,000
Calculate:
1. P/V Ratio
2. Fixed Costs
3. Profit at the Sales of ₹ 20,000
4. Profit when Sales is ₹ 60,000

Sum: 8
The following information is available from the books of a company.
Year Profit Sales
2014 ₹ 1,68,000 ₹ 2,00,000
2015 ₹ 3,48,000 ₹ 4,00,000
Calculate:
1. P/V Ratio
2. Fixed Costs
3. Profit when the Sales is ₹ 3,00,000
4. Sales volume to earn Profit of ₹ 24,000

Sum: 9
From the following information, you are required to:
1. Calculate the marginal product cost and contribution per unit.
2. State which of the alternatives sales mixes you would recommend to management and
Why?

Per Unit X Per Unit Y

Selling Price ₹ 25 ₹ 20
Direct Materials ₹ 08 ₹ 06
Direct Wages 24 hours at 25 paise per hour 16 hours at 25 paise per hour

65
Fixed overheads - ₹ 750
Variable overheads – 150% of direct wages
Alternative sales mix:
(i) 250 units of X and 250 units of Y
(ii) Nil units of X and 400 units of Y
(iii)400 units of X and 100 units of Y

Sum: 10
SKP Ltd. has planned its level of production at 50% of his plant capacity of 30,000 units. At
50% of the capacity his expenses are as follows:
₹
Direct Material 8,280
Direct Labour 11,160
Variable manufacturing expenses 3,960
Fixed manufacturing expenses 6,000
The home selling price is ₹ 2 per unit. Now the company has received a trade enquiry from
overseas for 6,000 units at a price of ₹ 1.45 per unit. If you are the manager of the company,
would you accept or reject the offer. Support your answer with suitable cost and profit details.

Sum: 11
The AYS Company finds that while it costs ₹ 6.25 to make component X the same is available
in the market at ₹ 5.75 each, with an assurance of continued supply. The break-down of the
cost is:
Materials ₹ 2.75 each
Labour ₹ 1.75 each
Other variables ₹ 0.50 each
Depreciation and other fixed cost ₹ 1.25 each
₹ 6.25 each

(i) Should you make or buy?

(ii) What would be your decision, if supplier offered the component at ₹ 4.85 each?

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