PRACTICE

QUESTIONS ON COST VOLUME PROFIT ANALYSIS:

1. A Company has sales of 7000 units and 9000 units in 2015 and 2016
respectively. Loss in 2015 was Rs 10,000 and profit in 2016 was Rs
10,000. Selling price per unit is Rs 100.
Calculate Fixed cost, Break even units and number of units to be sold to
generate a profit of Rs 40,000.

Answer:

Sales:
2015 = 7,00,000
2016 = 9,00,000
Difference = 200,000

Profit or loss:
2015 = -10,000
2016 = 10,000
Difference = 20,000

PV ratio = difference in profit * 100 / difference in sales = 10%

Contribution in 2015 = 10% of 700,000 = 70,000
Loss in 2015 = 10,000
Therefore, fixed cost = 70,000 + 10,000 = 80,000

Break even point = fixed cost / PV ratio = 80,000/ 10% = Rs 800,000

Required sales for profit of Rs 40,000 = fixed cost + desired profit / PV
ratio = 80,000 + 40,000 / 10% = 1200,000 or 12000 units


2. A company has annual fixed cost of Rs 14,00,000. In 2004, sales amounted
to Rs 60,00,000 and in 2003, it was 45,00,000. Profit in 2004 was Rs
4,20,000 higher than 2003. Find out the following:
• Break even sales
• Profit or loss at sales of Rs 80,00,000

Answer:
PV ratio = change in profit / change in sales = 28%
Break even point = fixed cost / PV ratio = 14,00,000 / 28% = 50,00,000

When sales = 80,00,000; contribution = 28% of 80,00,000 = 22,40,000
Fixed cost is given as 14,00,000.
Profit = 2240,000 – 14,00,000 = 8,40,000

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3. Profit is given as Rs 30,000. Variable cost and selling price is given as Rs 8

and Rs 10 respectively. Find out the amount of margin of safety.

Answer:

PV ratio = S-V/ S = 20%

Margin of safety = profit/ PV ratio = 30,000 / 20% = 1,50,000


4. When output is 3000 units, the average cost per unit (fixed + variable) is
Rs 4. When output is increased to 4000 units, the average cost per unit is
Rs 3.50 per unit. The break even point is 5000 units. Find the PV ratio?
(IMPORTANT QUESTION)

Answer:

Total cost at 3000 units = 12000
Total cost at 4000 units = 14000

Cost of additional 1000 units (additional cost is always only variable cost
since fixed cost remains the same) = Rs 2000

Variable cost per unit = 2000/ 1000 = Rs 2 per unit

Fixed cost = 3000 * 4 – 3000*2 = 6000 rupees

At break even point, total cost = 5000 * 2 +6000 = 16,000

Selling price = 16000/ 5000 = 3.20 per unit

PV ratio = 3.2 – 2/ 3.2 = 37.5%

5. Fixed costs = Rs 1,80,000
Variable cost = Rs 2 per unit
Selling price per unit = Rs 20

Calculate the break even point and turnover required to earn a profit of
Rs 36,000.

Break even point = fixed costs / contribution per unit = 1,80,000/ 18 =
10,000 units

Turnover for a profit of 36000?

Fixed cost + desired profit / PV ratio = 180,000 + 36000/ 90% = 2,40,000

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6. Variable cost per unit is given as Rs 15; fixed cost is Rs 54000; selling
price per unit is Rs 20. Find out the break even point. What should be the
selling price if the break even point is to be brought down to 6000 units?

Answer:

BEP = fixed cost/ contribution margin per unit

BEP = 54000/ 5 = 10800 units

Now, BEP is to be brought down to 6000 units, so applying the formula
we get:

6000 = 54000/ contribution per unit

Contribution = 9 per unit.

Selling price = 15 + 9 = Rs 24 per unit


7.
Year Sales Profits
2002 5,40,000 12000
2003 6,00,000 30,000

Find out:
• PV ratio
• Fixed costs
• Break even sales

Answer:

PV ratio = change in profit/ change in sales = 18000 * 100/ 60,000 = 30%

Fixed cost = Contribution – profit
Contribution at sale of 600,000 = 180,000

Therefore, fixed cost = 180,000 – 30,000 = 1,50,000

Break even sales = Fixed cost / PV ratio = 150,000/ 30% = 500,000


8. Sales price per unit = Rs 20
Variable cost per unit = Rs 14
Fixed cost = Rs 792,000

Find out:
• Break even sales
• Number of units that must be sold for a profit of Rs 60,000

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Answer:

Break even sales = fixed cost / PV ratio = 792000*20/ 6 = 26,40,000

Number of units for profit of Rs 60,000:

Fixed cost + desired profit / PV ratio = 852000 *20/ 6 = Rs 2840,000

Since selling price per unit is given as Rs 20, number of units = 142,000


9. Fixed cost is given as Rs 4000
Break Even Sales is Rs 20,000
Profit is Rs 1000
Selling price per unit is Rs 20

Find out sales for a profit of Rs 1000
New Break-even point if selling price is reduced by 10%

Answer:

Sales for a desired profit = fixed cost + desired profit / PV ratio

PV ratio = 4000/ 20,000 = 20%

Sales = 4000 + 1000 / 20% = 25000

If SP is reduced by 10%, SP becomes Rs 18 per unit. But VC per unit will
remain the same at 16 per unit. Thus, contribution per unit = Rs 2

Break even point = fixed cost/ contribution per unit = 4000/ 2 = 2000
units

Break even sales = 2000 * 18 = Rs 36000


10. Break even sales = Rs 1,60,000
Fixed cost = Rs 40,000
Ascertain profit when sales is Rs 200,000

Answer:

PV ratio = 40,000/ 160,000 = 25%

At sales of 200,000; contribution = 25% of 200,000 = 50,000

Therefore, profit = 50,000 – 40,000 = 10,000

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