Marginal Costing

Prof. N C Srivatsan
• FCA and FCMA with over 30 years of experience including 6 years of
independent Chartered Accountancy practice.
• Diploma in Systems Management from NIIT in 1992
• Chartered Accountancy from The Institute of Chartered Accountants of India in
1988
• ICWA from The Institute of Cost Accountants of India in 1988
• All India 8th rank in ICWA Final Exam.
• B.Com. from University of Madras in 1985
• Visiting faculty in leading colleges for MBA programs.
• Examiner for professional bodies.
• Mail-id : srivats_nc@yahoo.co.in
• Phone : 91-9962022580
 Break-even analysis
• BEP (units) = Fixed costs / Contribution per unit

• BEP (amount) = Fixed costs / Profit volume ratio

• Profit volume ratio (P/V ratio )

= Contribution margin per unit / Selling price
per unit

• Cost to volume ratio (V/V ratio)

= 1 – P/V ratio

• Margin of safety = Actual sales revenue – Break even sales

revenue
 Problem - 1
• How many ice-creams, having a unit cost of Rs. 2 and a selling price
of Rs. 3, must a vendor sell in a fair to recover the Rs. 800 fees paid
by him for getting a selling stall and additional cost of Rs. 400 to
install the stall?
 Solution - 1
• BEP (units) = Fixed cost (Entry fees + Stall expenses) / (Sales price –
unit variable cost)
= (800 + 400) / (3 – 2)
= 1,200 units
 Problem - 2
• How many ice-creams, having a unit cost of Rs. 2 and a selling price
of Rs. 3, must a vendor sell in a fair to recover the Rs. 800 fees paid
by him for getting a selling stall and additional cost of Rs. 400 to
install the stall?

• Find the P/V ratio and the margin of safety.

 Solution - 2
• P/V ratio = Contribution margin per unit / Selling price per unit
=1/3
= 33.33%

• BEP (amount) = Fixed Costs / P/V ratio

= 1,200 / 33.33%
= Rs. 3,600
 Problem - 3
• SV Ltd, a multi-product company, furnishes you the following
information relating to the current year :
Particulars First half of the year Second half of the year
Sales in Rs. 45,000 50,000
Total costs in Rs. 40,000 43,000

Assuming that there is no change in prices and variable costs and

that the fixed costs are incurred equally in the two half-year
periods, calculate for the year :
a. The P/V ratio
b. Fixed expenses
c. Break-even sales
d. Margin of safety percentage
 Solution - 3
• We know that only VC changes with a change in sales volume.

• Difference in sales revenue = 50,000 – 45,000

= Rs. 5,000
Difference in costs = 43,000 – 40,000
= Rs. 3,000

• Since only variable costs change with revenues, the entire change of Rs.
3,000 is variable costs.

• Additional sales of Rs. 5,000 has earned a contribution of Rs. 2,000 (Rs.
5,000 – Rs. 3,000)

• P / V ratio = Contribution / Sales

= 2,000 / 5,000
= 40%
 Solution - 3
• V/V ratio = 100% - P/V ratio
= 100% - 40%
= 60%

• Accordingly 60% of salesare made up of variable costs and the

balance 40% represents the fixed costs (FC) + profit

• Sales revenue = Fixed costs + Variable costs + Profit

95,000 = FC + (0.60 * 95,000) + 12,000
95,000 = FC + 57,000 + 12,000
FC = 95,000 – 57,000 – 12,000
= Rs. 26,000
 Solution - 3
• BEP (amount) = FC / P/V ratio
= 26,000 / 0.40
= Rs. 65,000

• Margin of safety = (Actual sales revenue – BEP sales) / Actual sales

revenue
= (95,000 – 65,000) / 95,000
= 30,000 / 95,000
= 31.58%
 Problem - 4
• SV Ltd, a multi-product company, furnishes you the following
information relating to the current year :
Particulars First half of the year Second half of the year
Sales in Rs. 45,000 50,000
Total costs in Rs. 40,000 43,000

Find out the required sales to get a desired operating profit of Rs.
14,000
 Solution - 4
• BEP (Rs. 14,000) = (FC + Rs. 14,000) / P/V ratio
= (26,000 + 14,000) / 40%
= Rs. 1,00,000
 Problem - 5
• SV Ltd, a multi-product company, furnishes you the following
information relating to the current year :
Particulars First half of the year Second half of the year
Sales in Rs. 45,000 50,000
Total costs in Rs. 40,000 43,000

Suppose SV Ltd, forecasts a 10% increase in sales next year, what

would be the projected profit?
 Solution - 5
• Existing sales = Rs. 95,000
• 10% increase = Rs. 9,500
• Revised sales = Rs. 1,04,500
• P/V ratio = 40%
• Contribution = Rs. 41,800
• FC = Rs. 26,000
• Revised profit = Rs. 15,800
 Problem - 6
• Suppose that SV Ltd reduces its selling price from Rs. 10 a unit to
Rs. 9. What sales volume is needed to maintain the present
operating profit of Rs. 12,000?
 Solution - 6
• BEP (Rs. 12,000) = (FC + 12,000) / Revised P /V ratio
= (26,000 + 12,000) / [(9 – 6)/9]
= 38,000 / 33.33%
= Rs. 1,14,000
 Problem - 7
• Suppose that SV Ltd increases the selling price from Rs. 10 a unit to
Rs. 12. What sales volume is needed to maintain the present
operating profit of Rs. 12,000?
 Solution - 7
• BEP (Rs. 12,000) = (FC + 12,000) / Revised P /V ratio
= (26,000 + 12,000) / [(12 – 6)/12]
= 38,000 / 50%
= Rs. 76,000
 Problem - 8
• ABC Ltd presents to you the following income statement in a
condensed form for the first quarter ended 31st March :
Particulars Product Total
X Y Z
Sales in Rs. 1,00,000 60,000 40,000 2,00,000
Variable costs in Rs. 80,000 42,000 24,000 1,46,000
Contribution in Rs. 20,000 18,000 16,000 54,000
Fixed costs in Rs. 27,000
Net income in Rs. 27,000
P/V ratio 0.20 0.30 0.40 0.27
BEP sales in Rs. 1,00,000
Sales-mix % 0.50 0.30 0.20 1.00

• If Rs. 40,000 of the sales shown for Product X could be shifted

equally to products Y and Z, find the profit and change in BEP.
 Solution - 8
•
Particulars Product Total
X Y Z
Sales 60,000 80,000 60,000 2,00,000
Less : VC 48,000 56,000 36,000 1,40,000
Contribution 12,000 24,000 24,000 60,000
Less : FC 27,000
Net Profit 33,000
P/V ratio 30%
BEP (sales) 90,000
Sales mix 30% 40% 30% 100%
 Problem - 9
• From the following data, calculate the :
1. BEP expressed in terms of sale amount/revenue
2. Number of units that must be sold to earn a profit of Rs. 60,000
per year.
Sale price per unit Rs. 20
Variable manufacturing cost per unit Rs. 11
Variable selling cost per unit Rs. 3
Fixed factory overheads (per year) Rs. 5,40,000
Fixed selling costs (per year) Rs. 2,52,000
 Solution - 9
• BEP (amount) = FC / P/V ratio
= (5,40,000 + 2,52,000) / [(20 – 14)/20]
= 7,92,000 / 30%
= Rs. 26,40,000

• BEP (Rs. 60,000) = (FC + 60,000) / Contribution per unit

= (7,92,000 + 60,000) / 6
= 1,42,000 units
 Problem - 10
• Two businesses, AB Ltd and CD Ltd, sell the same type of product in
the same type of market. Their budgeted profit and loss accounts
for the current year ending 31st March are as follows :
Particulars AB Ltd CD Ltd
Sales in Rs. 1,50,000 1,50,000
Less : Variable costs in Rs. 1,20,000 1,00,000
Fixed costs in Rs. 15,000 1,35,000 35,000 1,35,000
Net budgeted profit in Rs. 15,000 15,000

You are required to :

1. calculate the BEP of each business
2. state which business is likely to earn greater profits in
conditions of :
(i). Heavy demand for the product
(ii). Low demand for the product.
 Solution - 10
• BEP (amount) = FC / P/V ratio
BEP (AB Ltd) = 15,000 / 20%
= Rs. 75,000
BEP (CD Ltd) = 35,000 / 33%
= Rs. 1,05,000

• Heavy demand – CD Ltd

• Low demand – AB Ltd