Product and Period Costs

Product costs: Costs related to getting a product or service

ready for sale.
Appear above the line for gross margin in income statements
These costs can be inventoried
They flow through the inventory account in the balance sheet
Sometime called Inventoriable costs.

Period costs: Costs that are not product costs. Related to
marketing and administration
Appear below the line for gross margin
These costs are expensed in the period they are incurred.
These costs do not flow through inventory accounts
Period Costs
Product Costs
A Traditional Income Statement
Usefulness for Internal Decisions
The statement only considers expenses
Cost versus expense
An expense is a cost recognized in the income
statement

The gross margin income statement mingles
Relevant & non relevant costs
Variable and fixed costs
Direct and indirect costs
Service Firms
Products are not tangible or storable
Hotels, restaurants, consulting, airlines, gyms,
universities, museums,

Generally, there is no inventory of their final
product
Exceptions exist
We can inventory costs of software projects that go
across accounting periods
Flow of Costs: Service Settings
Merchandising Firms
Examples include Wal Mart, Big Bazaar etc.
These firms
Sell substantively the same product they
purchase.
Carry inventory to make goods available in the
quantities, varieties and delivery schedules
demanded by customers.
Inventory Equation
Need to flow costs via inventory account
Cost of purchase is NOT the cost of goods sold
We can capture flow as:
Cost of beginning inventory
+ Cost of goods purchased during the period
Cost of ending inventory
= Cost of goods sold (COGS) during the period
Make inventory cost flow assumption
First In First Out (FIFO)
Last In First Out (LIFO)
Cost of beginning inventory $3,450,200
+ Cost of goods purchased + 24,795,740
- Cost of ending inventory - 3,745,600
= Cost of goods sold = $24,500,340
Solution
Flow of Costs in Merchandising
Transportation
in, stocking
Manufacturing Firms
Use labor and equipment to transform raw materials
into finished goods
Have work-in-process
Need inventory accounts for all three kinds of
stages in the production process

Much variation in
Nature of production process
Relative amounts of different costs
Cost Terms in Manufacturing
Names for Groups of Costs
Cost Terms in Manufacturing Prime
Costs
Conversion
Costs
To verify the amounts specified above, THREE calculations need
to be made:
Calculate Raw Materials Used 1
Procedure Result
2
Calculate Cost of Goods Manufactured
3
Calculate Cost of Goods Sold
Beginning materials inventory $240,000
+ Purchases + 1,200,000
- Ending materials inventory - 320,000
= Raw materials used = $1,120,000
Beginning WIP inventory $50,000
+ Materials used + 1,120,000
+ Labor cost + 845,000
+ Manufacturing overhead + 760,500
- Ending WIP inventory - 100,000
= Cost of goods manufactured = 2,675,500
Beginning FG inventory $375,000
+ COGM + 2,675,500
- Ending FG inventory - 294,500
= Cost of goods sold = $2,765,000
Calculation
Cost Hierarchy
The cost hierarchy broadens the principle of
variability
Allows us to consider multiple activities

The cost hierarchy recognizes four types of costs
Unit-level costs
Batch-level costs
Product-level costs
Facility-level costs
Why the Cost Hierarchy?
Allows us to compute a more accurate estimate of
costs
Can extend concept to other levels
Customer level costs, channel level costs,

However,
Difficult to assign many costs to hierarchy categories
Need finer data on operations
Wrong classification of levels introduces errors in cost
estimation
Example: Deluxe Checks
Variable and Fixed Cost Behavior
A variable cost
changes in direct
proportion to changes
in the cost-driver level.
A fixed cost is
not immediately
affected by changes
in the cost-driver.
Think of variable
costs on a per-unit basis.
The per-unit variable
cost remains unchanged
regardless of changes in
the cost-driver.
Think of fixed costs
on a total-cost basis.
Total fixed costs remain
unchanged regardless of
changes in the cost-driver.
Examples of Variable Costs
Direct material consumed.
Direct Labour
Direct Expenses/overheads
Selling commission based on number of units sold
Examples of Fixed Cost
Salary of factory manager
Factory Rent
Depreciation on machinery
Office & administrative costs
Selling & distribution costs if fixed
Committed Fixed Costs:
Those fixed costs which
cannot be reduced without
curtailing the organisations
operations substantially
Discretionary Fixed Costs:
Those fixed costs which
can be reduced in difficult
times
Relevant Range
The relevant range is the limit
of cost-driver activity level within which a
specific relationship between costs
and the cost driver is valid.
Even within the relevant range, a fixed
cost remains fixed only over a given
period of time Usually the budget period.
Fixed Costs and Relevant Range
20 40 60 80 100
$115,000
100,000
60,000
Total Cost-Driver Activity in Thousands
of Cases per Month
T
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M
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F
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C
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Relevant range
$115,000
100,000
60,000
20 40 60 80 100
CVP Scenario
Per Unit Percentage of Sales
Selling price $3.00 100%
Variable cost of each item 2.10 70
Selling price less variable cost $ .90 30%

Monthly fixed expenses:
Rent $10,000
Depreciation 20,000
Other fixed expenses 15,000
Total fixed expenses per month $ 45,000

Cost-volume-profit (CVP) analysis is the study of the effects of output
volume on revenue (sales), expenses (costs), and net income (net profit).
Break-Even Point
The break-even point is the level of sales at which
revenue equals expenses and net income is zero.
Sales
- Variable expenses
- Fixed expenses
Zero net income (break-even point)

Contribution Margin Method
$45,000 fixed costs $.90
= 50,000 units (break even)
Contribution margin
Per Unit
Selling price $3.00
Variable costs 2.10
Contribution margin $ .90
Contribution margin ratio
Per Unit %
Selling price 100
Variable costs 70
Contribution margin 30
Contribution Margin Method
$45,000 fixed costs
30% (contribution-margin percentage)
= $150,000 of sales to break even
50,000 units $3.00 = $150,000
in sales to break even
Equation Method
Sales variable expenses fixed expenses = net income
$3.00N $2.10N $45,000 = 0
$.90N = $45,000
N = $45,000 $.90
N = 50,000 Units
Let N = number of units
to be sold to break even.
Equation Method
S .70S $45,000 = 0
.30S = $45,000
S = $45,000 .30
S = $150,000
Let S = sales in dollars
needed to break even.
Shortcut formulas:
Break-even volume in units = fixed expenses
unit contribution margin

Break-even volume in sales = fixed expenses
contribution margin ratio
Target Net Profit
Managers use CVP analysis
to determine the total sales,
in units and dollars, needed
To reach a target net profit.
Target sales
variable expenses
fixed expenses
target net income
$9,000 per month
is the minimum
acceptable net income.
Target sales volume in units =
(Fixed expenses + Target net income)
Contribution margin per unit
($45,000 + $9,000) $.90 = 60,000 units
Target Net Profit
Selling price $3.00
Variable costs 2.10
Contribution margin per unit $ .90
Target sales dollars = sales price X sales volume in units
Target sales dollars = $3.00 X 60,000 units = $180,000.
Sales volume in dollars = 45,000 + $9,000 = $180,000
.30
Target Net Profit
Target sales volume in dollars = Fixed expenses + target net income
contribution margin ratio
Contribution margin ratio
Per Unit %
Selling price 100
Variable costs 70
Contribution margin 30
Margin of Safety
The excess of actual sales revenue over the break even sales revenue.

Margin of safety divided by actual sales revenue gives the Margin of
Safety Ratio.
Higher the Margin of Safety Ratio, better it is.

Example
A company had incurred fixed expenses of Rs.4,50,000 with sales of
Rs.15,00,000 and earned a profit of Rs.3,00,000 during the first half
of the year. In the Second half, it suffered a loss of Rs.1,50,000.

Compute:
i. The profit volume ratio, break even point and margin of safety
for the first half.
ii. Sales volume of second half assuming that the selling price and
fixed expenses remained unchanged.
iii. The margin of safety and breakeven point for the whole year.

Assumptions of CVP Analysis
Costs can be classified between Variable and Fixed cost
components.

The relationship of revenues and variable costs with output
is linear.

No changes in efficiency or productivity.

Sales mix remains constant.

Inventory level does not change significantly.
Operating Leverage
Operating leverage: a firms ratio of fixed costs to variable costs.
Margin of safety = planned unit sales break-even sales
How far can sales fall below the planned level before losses occur?
Highly leveraged firms have high fixed costs and low variable costs.
A small change in sales volume = a large change in net income.
Low leveraged firms have lower fixed costs and higher variable costs.
Changes in sales volume will have a smaller effect on net income.
Sales Mix Analysis
Sales mix is the relative proportions or
combinations of quantities of products
that comprise total sales.
Sales Mix Analysis
Ramos Company Example
Sales in units 300,000 75,000 375,000
Sales @ $8 and $5 $2,400,000 $375,000 $2,775,000
Variable expenses
@ $7 and $3 2,100,000 225,000 2,325,000
Contribution margins
@ $1 and $2 $ 300,000 $150,000 $ 450,000
Fixed expenses 180,000
Net income $ 270,000
Wallets
(W)
Key Cases
(K) Total
How much units of Wallets and Key Cases should the company sell to break even?
Sales Mix Analysis
Break-even point for a constant sales mix
of 4 units of W for every unit of K.
sales variable expenses - fixed expenses = zero net income
[$8(4K) + $5(K)] [$7(4K) + $3(K)] $180,000 = 0
32K + 5K - 28K - 3K - 180,000 = 0
6K = 180,000
K = 30,000
W = 4K = 120,000
Let K = number of units of K to break even, and
4K = number of units of W to break even.
Sales Mix Analysis
If the company sells only key cases:
break-even point = fixed expenses
contribution margin per unit
= $180,000
$2
= 90,000 key cases
If the company sells only wallets:
break-even point = fixed expenses
contribution margin per unit
= $180,000
$1
= 180,000 wallets
Sales Mix Analysis
Suppose total sales were equal to the
budget of 375,000 units.
However, Ramos sold only 50,000 key cases
And 325,000 wallets.
What is net income?
Sales Mix Analysis
Ramos Company Example
Sales in units 325,000 50,000 375,000
Sales @ $8 and $5 $2,600,000 $250,000 $2,850,000
Variable expenses
@ $7 and $3 2,275,000 150,000 2,425,000
Contribution margins
@ $1 and $2 $ 325,000 $100,000 $ 425,000
Fixed expenses 180,000
Net income $ 245,000
Wallets
(W)
Key Cases
(K) Total
Example
The Garware Paints Ltd. presents you the following income statement for the
first quarter
Product Total
X Y Z
Sales 100,000 60,000 40,000 200,000
Variable Costs 80,000 42,000 24,000 146,000
Contribution 20,000 18,000 16,000 54,000
Fixed costs 27,000
Net Income 27,000
P/V ratio 0.27
Break Even sales 100,000
Sales mix percent 0.50 0.30 0.20 1.00
If Rs.40,000 of the sales shown for the product X could be shifted to product Y
and Z equally, how would the net income, P/V ratio and BEP change.
Impact of Income Taxes
Suppose that a company earns $480 before taxes
and pays income tax at a rate of 40%.
What is the after-tax income?
Impact of Income Taxes
Target income before taxes = Target after-tax net income
1 tax rate
Target income before taxes = $ 288 = $480
1 0.40
Suppose the target net income
after taxes was $288.
Impact of Income Taxes
Target sales Variable expenses Fixed expenses
= Target after-tax net income (1 tax rate)
$.50N $.40N $6,000 = $288 (1 0.40)
$.10N = $6,000 + ($288/.6)
$.06N = $3,600 + $288 = $3,888
N = $3,888/$.06
N = 64,800 units
Impact of Income Taxes
Suppose target net income after taxes was $480
$.50N $.40N $6,000 = $480 (1 0.40)
$.10N = $6,000 + ($480/.6)
$.06N = $3,600 + $480 = $4080
N = $4,080 $.06
N = 68,000 units
Q. State whether P/V ratio will increase or decrease or remain unchanged in the
following situations (Consider all situations independently keeping other things
constant):

An increase in physical sales volume
No Change

An increase in fixed costs
No Change

A decrease in variable cost per unit
Increase.

A decrease in contribution margin per unit
Decrease

An increase in Selling price
Increase
A decrease in fixed costs
No change

A 10% increase in both variable costs and selling price
No Change

A 10% increase in selling price and 10% decrease in physical sales volume
Increase

A 50% increase in variable cost and 50% decrease in fixed costs
Decrease

An increase in angle of incidence
Increase
Example

S Ltd. furnishes the following data relating to the year 2012:
Ist Half of the year
IInd Half of
the year
Sales 45,000 50,000
Total Cost 40,000 43,000
Assuming that there is no change in prices and variable costs per unit and that the fixed
expenses are incurred equally in the two half year periods, calculate for the entire year:

i. The profit volume ratio
ii. Fixed expenses
iii. Break even sales
iv. Margin of safety ratio
Example
M Ltd. manufactures three products P, Q and R. The unit selling price of these products are
Rs.100, Rs.80 and Rs.50 respectively. The corresponding unit variable costs are Rs.50, Rs.40
and Rs.20. The proportions (quantity wise) in which these products are manufactured and
sold are 20%, 30% and 50% respectively. The total fixed costs are Rs.14,80,000.

Given the above information you are required to work out overall break even quantity and
product wise break up of such quantity.
Example

Two competing companies HERO Ltd. and ZERO Ltd. sell same type of product in the same
market. Their forecasted Profit and Loss A/c for the year ending Mar 2011 are as follows:
HERO ZERO
Sales 500,000 500,000
Less: Variable Costs 400,000 300,000
Fixed costs 50,000 150,000
Forecasted net profit 50,000 50,000
You are required to state which company is likely greater profits in the conditions of:
a. Low demand
b. High Demand.
Example

A Japanese soft drink is planning to establish a subsidiary company in India to produce
mineral water.
Based on the estimated annual sales of 40,000 bottles of mineral water, cost studies
produced the following estimates for Indian Subsidiary:
Total Annual Costs
Percent of total annual
cost which is variable
Material 210,000 100%
Labour 150,000 80%
Factory overheads 92,000 60%
Administration expenses 40,000 35%
The Indian production will be sold by the manufacturer's representatives who will
receive a commission of 8% of the sale price.
i. What should be the selling price per bottle to earn a net profit of 10% on sales.
ii. What will be the break even point in units and in Rupee sales at the above
computed selling price.
Example
Suppose a Holiday Inn Hotel has annual fixed costs applicable to its rooms of
$1.2 million for its 300-room hotel, average daily room rents of $50, and average
variable costs of $10 for each room rented. It operates 365 days per year.

What is the amount of net income on rooms that will be generated if the hotel is
half full throughout the entire year?

What is the break even point in number of room days?

What is the percentage of occupancy needed to break even?

Ans: $990,000,
30,000 room days
27.4%
Example
General Hospital has total variable costs of 90% of total revenues and fixed
costs of $5 million per year. There are 50,000 patient-days estimated for next
year. What is the average daily revenue per patient necessary to breakeven?

Ans: $1,000 average daily revenue per patient necessary to breakeven
Example
Berea Company currently sells 19,000 units. Total fixed costs are $84,000, and the
contribution margin per unit is $6.00. Bereas tax rate is 40%. What is the margin of safety
in units?

Ans: 5,000 units
Eaxmple
Muy Mal Company, a producer of salsa, has the following information:

Income tax rate 30%
Selling price per unit $5.00
Variable cost per unit $3.00
Total fixed costs $90,000.00

How many number of units must be sold to obtain a targeted after-tax income of $14,000?

Ans: 55,000 units

Example
Bonnie and Clyde started the BC Restaurant in 20X0. They rented a building, bought
equipment, and hired two employees to work full time at a fixed monthly salary. Utilities
and other operating charges remain fairly constant during each month.

During the past two years, the business has grown with average sales increasing 1% a
month. This situation pleases both Bonnie and Clyde, but they do not understand how
sales can grow by one percent a month while profits are increasing at an even faster pace.
They are afraid that one day they will wake up to increasing sales but decreasing profits.

Required:

Explain why the profits have increased at a faster rate than sales.

Linear-cost Behavior
Costs are assumed to be fixed or variable within
the relevant range of activity
Step Cost Behavior Patterns
Step costs change abruptly at intervals
of activity because the resources and
their costs come in indivisible chunks.
Step Cost Behavior Patterns
Mixed-Cost Behavior Patterns
Mixed costs contain elements of both
fixed- and variable-cost behavior.
The fixed-cost element is unchanged
over a range of cost-driver activity.
The variable-cost element varies
proportionately with cost-driver activity.
Mixed-Cost Behavior Patterns
Parkview Medical Center
Predicted costs = fixed + variable costs (patient-days)
Predicted costs = $10,000 + $5(4,000)
Predicted costs = $30,000
Distribution channels
Choice of process and product design
Quality levels
Product features
Managements Influence on Cost Behavior
Capacity Decisions
They are the fixed costs of being able
to achieve a desired level of production or
to provide a desired level of service while
maintaining product or service attributes.
Committed Fixed Costs
Salaries of key personnel
Committed fixed costs arise
from the possession of facilities,
equipment, and a basic organization.
Lease payments
Property taxes
Discretionary Fixed Costs
Discretionary fixed costs are costs fixed at certain levels
only because management decided that these levels of cost
should be incurred to meet the organizations goals.
These discretionary fixed costs have no obvious
relationship to levels of output activity but
are determined as part of the periodic planning process.
Each planning period, management will determine
how much to spend on discretionary items. These costs
then become fixed until the next planning period.
Examples of Discretionary
Fixed Costs
Advertising
and promotion
Research and
development
Management
salaries
Technology Decisions
Choice of technology (e-commerce versus
in-store or mail-order sales) positions the
organization to meet its current goals and
to respond to changes in the environment.

Cost Functions
Planning and controlling the activities
of an organization require accurate
and useful estimates of future
fixed and variable costs.
Cost Functions
Understanding relationships between costs
and their cost drivers allows managers to...
Make better operating, marketing,
And production decisions
Plan and evaluate actions
Determine appropriate costs for
short-run and long-run decisions.
Cost Functions
The first step in estimating or predicting
costs is measuring cost behavior as a
function of appropriate cost drivers.
The second step is to use these cost
measures to estimate future costs at
expected levels of cost-driver activity.
Cost Function Equation
Let:
Y = Total cost
F = Fixed cost
V = Variable cost per unit
X = Cost-driver activity in number of units
Mixed-cost function:
Y = F + VX
Y = $10,000 + $5.00X
The mixed-cost function is called a linear-cost function.
Developing Cost Functions
A cost functions estimates of costs
at actual levels of activity must reliably
conform with actually observed costs.
The cost function must be believable.
Choice of Cost Drivers: Activity Analysis
Choosing a cost function starts
with choosing cost drivers.
Managers use activity analysis to
identify appropriate cost drivers.
Activity analysis directs management
accountants to the appropriate
cost drivers for each cost.
Methods of Measuring Cost
Functions
1. Engineering analysis
2. Account analysis
3. High-low analysis
4. Visual-fit analysis
5. Least-squares regression analysis
Engineering Analysis
Engineering analysis measures cost behavior
according to what costs should be,
not by what costs have been.
Engineering analysis entails a systematic
review of materials, supplies, labor,
support services, and facilities
needed for products and services.
Account Analysis
The simplest method of account analysis selects a plausible
cost driver and classifies each account as a variable or fixed cost.
Supervisors salary and benefits $ 3,800 $3,800
Hourly workers wages and benefits 14,674 $14,674
Equipment depreciation and rentals 5,873 5,873
Equipment repairs 5,604 5,604
Cleaning supplies 7,472 7,472
Total maintenance costs $37,423 $9,673 $27,750
Monthly cost Amount Fixed Variable
Parkview Medical Center
Account Analysis Example
Fixed cost per month = $9,673
Variable cost per patient-day
= $27,750 3,700
= $7.50 per patient-day
3,700 patient-days
Y = $9,673 + ($7.50 patient-days)
High-Low Method
Focus on the highest- and lowest-activity points.
Plot historical data points on a graph.
High month: April
Maintenance cost: $47,000
Number of patient-days: 4,900
Low month: September
Maintenance cost: $17,000
Number of patient-days: 1,200
High-Low Method Example
The point at which the line intersects the Y axis is the intercept,
F, or estimate of Fixed Costs, and the slope of the line
measures the variable cost.
High-Low Method Example
Variable costs = Change in costs
change in activity

V = ($47,000 $17,000) (4,900 1,200)
= $30,000 3,700 = $8.1081
What is the variable cost (V)?
Using algebra to solve for variable and fixed costs.
High-Low Method Example
F = Total mixed cost total variable cost
At X (high) F = $47,000 - ($8.1081 4,900 patient days)
= $47,000 $39,730
= $7,270 a month
At X (low) F = $17,000 = ($8.1081 1,200 patient days)
= $17,000 $9,730
= $7,270 a month
Cost function measured by high-low method:
Y = $7,270 per month + ($8.1081 patient-days)
What is the fixed cost (F)?
Visual-Fit Method
In the visual-fit method, the cost analyst
visually fits a straight line through a plot
of all of the available data, not just
between the high point and the
low point, making it more reliable
than the high-low method.
Least-Squares Regression Method
Regression analysis measures
a cost function more objectively
by using statistics to fit a cost
function to all the data.
Regression analysis measures
cost behavior more reliably than
other cost measurement methods.
Coefficient of Determination
One measure of reliability,
or goodness of fit, is the
coefficient of determination,
R (or R-squared).
The coefficient of determination
measures how much of the
fluctuation of a cost is explained
by changes in the cost driver.
Example
Presented below is the production data for the first six months of the year showing the
mixed costs incurred by Euclid Company.

Month Cost Units

January $7,500 4,000
February 13,000 7,500
March 11,500 9,000
April 11,700 11,500
May 13,500 12,000
June 11,850 6,000

Euclid Company uses the high-low method to analyze mixed costs.

What shall be cost function?
Example
The Reynolds Company used regression analysis to predict the annual cost of utilities.
The results were as follows:

Utilities Cost
Explained by Direct Labor Hours

Constant $7,650
Standard error of Y estimate $245.20
R - squared 0.8650
No. of observations 30
Degrees of freedom 28

X coefficient(s) 8.437
Standard error of coefficient(s) 0.917

What shall be the estimated total cost for 1,000 units?
Example:
The cost of the maintenance department at Forest Manufacturing has always been charged
to the production departments based upon number of employees. Recently, an activity
analysis of possible cost drivers was performed which indicated that the square feet of
space may also be a predictor of costs to be assigned to each department. Given the
following data, compare the different amounts of maintenance department cost that would
be allocated to each of the production departments if the cost driver used is (a) number of
employees, and (b) the square feet of space.

Dept. X Dept. Y Dept. Z
Number of employees 300 250 50
Square feet of space 15,000 25,000 10,000

Total production department cost: $ 1,000,000


Example

Two manufacturing companies which have the following operating details decided to merge:

Company 1 Company 2
Capacity Utiliation (%) 90 60
Sales (Rs. Lakhs) 540 300
Variable Costs (Rs.Lakhs) 396 225
Fixed Costs 80 50
Assuming that the proposal is implemented, calculate:

i. Break even sales for the merged plant and the capacity utilization at that stage.
ii. Profitability of the merged plant at 80% capacity utilization.
iii. Sales turnover of the merged plant to earn a profit of Rs.75 Lakh
iv. When the merged plant is working at a capacity to earn a profit of Rs.75 lakhs, what
percentage increase in selling price is required to sustain an increase of 5% in fixed
overheads.
Example
ABC Ltd. has installed capacity of 1,20,000 units per annum. The cost structure of the
product manufactured is as under:

Variable Cost:
Materials Rs.8
Labour Rs.8
Overheads Rs.3

Fixed overheads Rs.168750 per annum
Semi variable overheads Rs.48,000 at 60% capacity and Rs.60,000 at 80% capacity.

The capacity utilization for next year is estimated at 60% for first two months , 70% for next
six months and 80% for rest of the year. Company is planning to have a profit of 25% on
sales.

Compute the selling price per unit and break even point in units at the computed selling
price.

Example:
XYZ School has a total of 150 students. The school plans a picnic to places like Zoo,
Planetarium etc. A private bus operator has come forward to lease out the bus(es). Each bus
will have 50 seats for students besides 2 seats reserved for teachers. There will be two
teachers per bus and each teacher will be paid an allowance of Rs.50. The following are
other cost estimates:

Cost per Student
Break fast Rs.5
Lunch Rs.10
Tea Rs.3
Entrance at Zoo Rs.2

Rent per bus is Rs.650. Special permit of Rs.50 per bus is also required to be paid. Block
entrance fees at planetarium is Rs.250. Prizes to students for games Rs.250.

School charges Rs.45 per student. Compute the break even point.
Example

6000 pen drives of 2GB to be sold in a perfectly competitive market to earn Rs.1,06,000 of
profit, whereas in monopoly only 1200 units are required to be sold to earn the same
profit. The fixed costs for the period are Rs.74,000. The contribution per unit in monopoly
market is as high as three fourth of it variable costs. Determine the target selling price per
unit under each market condition.
Example

Paints Ltd. manufactures 2,00,000 tins of paints annually at normal capacity. It incurs the
following manufacturing cost per unit:

Direct material Rs.7.80
Direct Labour Rs.2.10
Variable overhead Rs.2.50
Fixed overhead Rs.4.00

Each unit is sold for Rs.21 with an additional variable selling overhead incurred at Rs.0.60
per unit.
During the next quarter only 10,000 units can be produced and sold. Management plans to
shut down the plant estimating that the fixed manufacturing costs can be reduced to
Rs.74,000 for the quarter.
When the plant is operating, the fixed overheads are incurred at uniform rate through out
the year. Additional costs plant shut down for the quarter are estimated at Rs.14,000.

You are required to advise whether it is more economical to shut down the plant during
the quarter rather than operate the plant.
Example
Entertain U Ltd hires an air conditioned theatre to stage plays on weekend evenings. One
play is staged per evening. The following are the seating arrangements:
VIP Rows First 3 rows of 10 seats per row, priced at Rs 320 per seat.
Middle Level The next 18 rows of 20 seats per row, priced at Rs 220 per seat.
Last Level 6 rows of 30 seats per row, priced at Rs 120 per seat.
For each evening, a drama troupe has to be hired at Rs 71,000, rent has to be paid to
theatre at Rs 14,000 per evening and air conditioning and other stage arrangement charges
work out to Rs 7,400 per evening. Every time a play is staged, the drama troupes friends
and guests occupy the first row of the VIP class, free of charge by virtue of passes granted
to these guests. The troupe ensures that 50% of the remaining seats in the VIP class and
50% of the seats of the other two classes are sold to outsiders in advance and the money is
passed on to Entertain U. The troupe also finds for every evening, a sponsor who puts up
his advertisement banner near the stage and pays Entertain U a sum of Rs 9,000 per
evening. Entertain U supplies snacks during the interval, free of charge to all guests in the
hall, including the VIP free guests. The snacks cost Entertain U Rs 20 per person. Entertain U
sells the remaining tickets and observes that for every one seat demanded from the last
level, there are 3 seats demanded from middle level and 1 seat demanded from the VIP
level. You may assume that in case any level is filled, the visitor buys the next higher or
lower level, subject to availability.
You are required to calculate the number of seats that Entertain U has to sell in order to
break-even and give the category wise total seat occupancy at BEP.

CVP Analysis and Environmental Factors:


Economy-Industry relationship

Industry-Company relationship


Controllable factors affecting Sales-Profit Analysis:

Advertising outlays

Market research expenditures

New product development

Extension of marketing territories