CHAPTER – 5 MARGINAL COSTING

PROBLEMS ON B.E.P.

P1. Two companies, ABC Ltd. and XYZ Ltd. sell the same type of
product. Their budgeted profit and loss accounts for the
year shows the following:
ABC Ltd. XYZ Ltd
(Rs'000) (Rs'000)
Sales 150 150
Less: Variable cost 120 100
Fixed cost 15 135 35 135
Budgeted profit 15 15
You are required to calculate the breakeven point of each
company.

E1. Two companies, PQR Ltd. and STU Ltd. sell the same type of
product. Their budgeted profit and loss accounts for the
year shows the following:
PQR Ltd. STU Ltd.
Sales 2,25,000 2,25,000
Less: Variable cost 1,80,000 1,50,000
Fixed cost 22,500 2,02,500 52,500 2,02,500
Budgeted profit 22,500 22,500
You are required to calculate the break even point of each
company.

P2. From the following data, compute break even sales

Sales 10,00,000
Fixed cost 3,00,000
Profit 2,00,000

E2. Given the following calculate P\V and profit when sales are
Rs.20,000 i) Fixed Cost Rs 4,000 ii) Break even point Rs
10,000.
P3. (i) Ascertain profit, when sales = Rs.2,00,000
Fixed Cost = Rs. 40,000
BEP = Rs.1,60,000
(ii) Ascertain sales, when fixed cost = Rs. 20,000
Profit = Rs. 10,000
BEP = Rs. 40,000

E3. (i) Ascertain profit, when sales = Rs.1,20,000

Fixed Cost = Rs. 24,000
BEP = Rs. 96,000
(ii) Ascertain sales, when fixed cost = Rs.1,20,000
Profit = Rs. 60,000
BEP = Rs.2,40,000

P4. The following figures are extracted from the books of a manufacturing concern
for the year 1990-91:
Rs.
Direct Material 2,05,000
Direct labour 75,000
Fixed overheads 60,000
Variable overheads 1,00,000
Sales 5,00,000
Calculate the break even point. What will be the effect on
B.E.P of an increase of 10% in fixed expenses.

E4. The following figures are extracted from the books of a

manufacturing concern for the year 2000-01
Rs.
Direct Material 1,02,500
Direct labour 37,500
Fixed overheads 30,000
Variable overheads 50,000

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Sales 2,50,000
Calculate the break even point. What will be the effect on
B.E.P of an increase of 15% in fixed expenses.

P5. S Ltd. furnishes you the following information relating in the half year ending
30th June 1980:
Rs.
Fixed expenses 50,000
Sales value 2,00,000
profit 50,000
During the second half of the same year the company has
projected a loss of Rs 10,000
Calculate:
i) The P\V ratio, break even point and margin of safety for 6
months ending 30th June 1980.
ii) Expected sales volume for second half of the year assuming
that selling price and fixed expenses remain unchanged in
the second half year also.
iii) The break even point and margin of safety for the whole year
1980.

E5. 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 year. In the second half, it suffered
a loss of Rs 1,50,000.
Calculate:
i) The profit volume ratio, break even point and margin of
safety for the first half year.
ii) Expected sales volume for the second half year assuming that
selling price and fixed expenses remained unchanged during
the second half year.
iii) The break even point and margin of safety for the whole
year.

P6. From the following data, find out (i) sales, and (ii) new break even sales, if selling
price is reduced by 10%
Rs
Fixed Cost 4,000
Break even sales 20,000
Profit 1,000
Selling price per unit 20

E6. From the following data, calculate break even point (BEP)
Selling price per unit 4.0
Variable cost per unit 3.0
Fixed overheads 20,000
If sales are 20% above BEP, determine the net profit.

P7. The ratio of variable cost to sales is 70%. The break even
point occurs at 60% of the capacity sales. Find the capacity
sales, if fixed costs are Rs 90,000 Also compute profit at
75% of the capacity sales.

E7. The ratio of variable cost to sales is 60%. The break even
point occurs at 75% of the capacity sales. Find the capacity
sales, if fixed costs are Rs.1,20,000. Also compute profit
at 90% of the capacity sales.

P8 Mr. X has Rs 2,00,000 investments in his business firm. He

wants a 15% return on his money. From an analysis of percent
cost figures he finds that his variable cost of operating is
60% of sales, his fixed costs are Rs 80,000 per year. Show
computations to answer the following question:
i) What sales volume must be obtained to break even ?

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ii) What sale volume must be obtained to get 15% return on

investment?
Mr. X estimates that even if he closed that doors of his
business he would incurs Rs 25,000 as expenses per year. As
what sales would he be better off by locking his business
up.

E8. Mr. Bapat has Rs.3,50,000 investments in his business firm.

He wants a 15% return on his money. From an analysis of
percent cost figures he finds that his variable cost of
operating is 60% of sales, his fixed costs are Rs.1,40,000
per year. Show computations to answer the following
question:
i) What sales volume must be obtained to break even?
ii) What sale volume must be obtained to get 15% return on
investment?
Mr. Bapat estimates that even if he closed that doors of his
business he would incurs Rs.43,750 as expenses per year. As
what sales would he be better off by locking his business
up.

P9. You are given the following information for the next year.
Sales (10,000 units) Rs.1,20,000
Variables Cost Rs.48,000
Fixed Cost Rs.60,000
(1) Find out the P/V ratio, Break-even point and the margin of
safety.
(2) Evaluate the effect of following on P/V ratio, Break-even
point and the Margin of safety.
(a) 10% increase in Variables Cost
(b) 10% decrease in Variable Cost
(c) 10% increase in Fixed Cost
(d) 10% decrease in Fixed Cost
(e) 10% increase in Physical Sales Volume
(f) 10% decrease in Physical Sales Volume
(g) 5% increase in Selling Price
(h) 5% decrease in Selling Price
(i) 10% increase in Selling Price and 10% decrease in Physical
Sales Volume
(j) 5% decrease in Selling Price and 10% increase in Physical
Sales Volume.

E9. You are given the following information for the next year.
Sales (15,000 units) Rs.3,60,000
Variables Cost Rs.1,40,000
Fixed Cost Rs.1,80,000
(1) Find out the P/V ratio, Break-even point and the margin of
safety.
(2) Evaluate the effect of following on P/V ratio, Break-even
point and the Margin of safety.
(a) 10% increase in Variables Cost
(b) 10% decrease in Variable Cost
(c) 10% increase in Fixed Cost
(d) 10% decrease in Fixed Cost
(e) 10% increase in Physical Sales Volume
(f) 10% decrease in Physical Sales Volume
(g) 5% increase in Selling Price
(h) 5% decrease in Selling Price
(i) 10% increase in Selling Price and 10% decrease in Physical
Sales Volume
(j) 5% decrease in Selling Price and 10% increase in Physical
Sales Volume.

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PROBLEMS ON MARGIN OF SAFETY

P10. X Ltd has earned contribution of Rs 2,00,000 and net profit

of Rs.1,50,000 on sales of Rs 8,00,000 What is its margin of
safety?

E10. Given the following find the margin of safety sales:

i) profit earned Rs 24,000.
ii) Selling price per unit Rs 10
iii) Marginal cost per unit Rs 7
iv) Fixed cost Rs 12,000.

P11. The profit volume (P/V) ratio of BB & Co. dealing in

precision instruments is 50% and the margin of safety is
40%. Sales are Rs 50 Lakhs.
You are required to work out the break even point and the
net profit.

E11. If margin of safety is Rs 2,40,000(40% of sales) and P\V

ratio is 30% of AB Ltd. Calculate its 1) B.E. Sales and 2)
Amount of profit on sales of Rs.9,00,000.

P12. A Ltd. maintains a margin of safety of 37.5% with an overall

contribution to sales ratio of 40%. Its fixed costs amount
to Rs.5 lakhs.
Calculate the following:
(i) Break even sales; (ii) Total sales;
(iii)Total variable costs; (iv) Current profit;
(v) New margin of safety if the sales volume is increased by 7
1/2 %

E12. On the basis of the following data, work out the expected
profits; capacity utilisation (in %) break even points and
margins of safety (in terms of quantity and value in both
the cases) for the year 1994-95 and 1995-96:
1994-95 1995-96
Production capacity (in units) 2 lakhs 3 lakhs
Production sales (in units) 1.8 lakhs 2.25 lakhs
Selling price per unit Rs.6 Rs.6.50
Variable cost per unit Rs.3 Rs.3.30
Fixed expenses (including depreciation)
Rs.3 lakhs Rs.5.12 lakhs
Expected Profits Rs 2,40,000 and Rs 2,08,000.
Break even point Rs 6,00,000 and Rs 10,40,000

PROBLEMS ON H.O. ALLOCATED COST

P13. Plant 3 budgeted income and cost estimates are as follows:

Sales (annual) Rs 10,00,000
Costs
Fixed Rs 4,00,000
Variable Rs 3,00,000
Head office allocated Rs 3,50,000 Rs 10,50,000
Loss 50,000
Sale of plant 3 is under consideration. What is your
recommendation based on the data given? Justify your
recommendation.

E13. Company prepares a cost volume profit budgeted analysis for

each plants as per details below:
Profit plan for Plant I shows annual budgeted fixed costs Rs
12,00,000 variable costs Rs 8,40,000. And sales value of
production Rs 22,00,000.

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Allocated head office budgeted fixed costs are Rs 32,000.

You are asked to prepare an analysis indicating the break
even points before and after HO cost allocation. Explain why
the break point change (in Rs) is greater than the
allocated amount.

P14. Plant 4 produces one product. The budgeted income and cost estimates are as
follows:
Sales ( annual) @ Rs 200 per unit. Rs 20,00,000
Cost
Fixed Rs 7,47,500
Variable Rs 13,50,000
Head office allocated Rs 5,02,500 Rs 26,00,000
Loss 6,00,000
How many additional units must be manufactured in the plant
in order to break even ? What would be the profit pickup per
unit above break even?

E14. Plant 4 produces one product. The budgeted income and cost estimates are as
follows:
Sales ( annual) @ Rs 200 per unit. Rs 10,00,000
Cost
Fixed Rs 3,75,000
Variable Rs 6,75,000
Head office allocated Rs 2,50,000 Rs 13,00,000
Loss 3,00,000
How many additional units must be manufactured in the plant
in order to break even? What would be the profit pickup per
unit above break even?

PROBLEMS ON CHANGE IN LEVEL

P15.
Sales (Rs.) Profit (Rs.)
Period 1 10,000 2,000
Period 2 15,000 4,000
You are required to calculate -
i) P\V ratio
ii) Fixed cost
iii) Break even sale volume
iv) Sales to earn a profit of
Rs 3,000 and
v) profit when sales are Rs
8,000.

E15. The Vijaya Electronics Co. furnishers you the following income
information of the year 1995.
Particulars First Half (Rs.) Second Half (Rs.)
Sales 4,05,000 5,13,000
Profit 10,800 32,400
From the above you are required to compute the following
assuming that the fixed cost remains the same in both the
period.
(a) P/V Ratio (b) Fixed Cost (c) break-even Point
(d) Variable Cost for First and Second Half of the year
(e) The amount of Profit or Loss where sales are Rs.3,24,000.
(f) The amount of sales required to earn a profit of Rs.54,000.

P16. The following figures relating to the performance of a

company for year I and year II are available. Assuming that
(i) the ratio of variable cost to sales and (ii) the fixed
cost are the same for both the year ascertain
a) The P/V ratio b) The amount of the fixed costs
c) The break even Point and
d) The budgeted profit for the year III, if the budgeted sales for
the year are Rs 1 crore.

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Total Sales Total Costs

( Rs in '000) ( Rs in'000)
Year I 7,000 5,800
Year II 9,000 6,600

E16. S Ltd. a multi product company furnished the following data relating to the year
1992:
1st half of the year 2nd half of the year
(Rs.) (Rs.)
Sales 45,000 50,000
Total costs 40,000 43,000
Assuming that there is no change in prices and variable
costs and that the fixed expense are incurred equally in the
two half year periods, calculate for the year 1992 :
i) The profit volume ratio, ii) The fixed expenses
iii) The break even sales and iv) the percentage of margin of
safety to total sales.

P17. Plant 2 produces product that sells at Rs 40. It costs Rs

42.50 when 15000 units are produced. At a production level
of 20,000 the cost per unit is Rs.38.125 what is the break-
even point in Rs and in units.

E17. A Company sells its product at Rs.15 per unit. In a period

if it produces and sells 8,000 units, it incurs a loss of
Rs.5 per unit. If the volume is raised to 20,000 units, it
earns a profit of Rs.4 per unit. Calculate break even point
both in terms of rupees as well as in units.

PROBLEMS ON COMPARISION

P18. Two firms A & Co. and B & C. sell the same type of product in the same market.
Their budgeted Profit & Loss Account for the year ending 31st March, 1996 are
as follows:
A & Co. B & Co.
Sales Rs. 5,00,000 Rs.6,00,000
Variable costs Rs.4,00,000 Rs.4,00,000
Fixed costs 30,000 4,30,000 70,000 4,70,000
Net profit 70,000 1,30,00
Required:
1. Calculate at which sales volume both the firms will earn
equal profit.
2. State which firm is likely to earn greater profits in
condition of:
(i) heavy demand for the product; (ii) low demand for the
product.

E18. Two competing companies HERO Ltd. and ZERO Ltd. sell the
same type of product in the same market. Their forecasted
profit and loss accounts for the year ending December 1990
are as follows:
HERO Ltd. ZERO Ltd.
Sales Rs.5,00,000 Rs.5,00,000
Less: Variable
cost of Sales 4,00,000 3,00,000
Fixed Costs 50,000 4,50,000 1,50,000 4,50,000
Forecast Net
Profit before tax 50,000 50,000
You are required to state which company is likely to earn
greater profits in conditions of:
(a) low demand and (b) high demand.

P19. A company presents the following cost estimates for three

prospective plants A, B and C

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Plant A Plant B Plant C

Annual fixed cost (Rs) 60,000 1,08,000 1,20,000
Variable cost per unit) 2.50 2.20 2.10
Annual capacity ( Units) 75,000 1,20,000 1,50,000
i) Calculate the range of output over which each of the plants
would be most economical.
ii) If sales are steady at 1,00,000 units per annum and the unit
selling price is Rs 4 per unit, what will be the profits
earned with each of the plants ? Assume that Plant A can be
worked double shift with an additional expenses of 10% in
fixed costs and 5% in variable costs of all units.

E19. XY Ltd has offered a choice to buy machine A or Machine B.

From the following data, you are required to compute:
a) Break-even point for each of the machines.
b) The level of sales at which both machines earn equal
profits.
c) The range of sales at which one is more profitable than the other.
Machine
A B
Annual output ( in units) 10,000 10,000
Fixed cost (Rs) 30,000 16,000
Profit at given level of production (Rs)30,000 24,000
The market price of the product is expected to be Rs 10 per
unit.

PROBLEMS ON COMBINED B.E.P.

P20. A, B and C are three similar plants under the same management who
want them to be merged for better operation. The details are as
under:
Plant A B C
Capacity operated 100% 70% 50%
Rs Rs Rs
(in lakhs) (in lakhs) (in lakhs)
Turnover 300 280 150
Variable cost 200 210 75
Fixed cost 70 50 62
Find out -
i) The capacity of the merged plant for break even.
ii) the profit at 75% capacity of the merged plant.
iii) the turnover from the merged plant to give a profit of Rs 28
lakhs.

E20 Two manufacturing cost which have the following operating details
decided to merge:
Company No. 1 Company No. 2
Capacity utilisation % 90 60
Sales (Rs lakhs) 540 300
Variable Costs (Rs lakhs) 396 225
Fixed Costs ( Rs lakh) 80 50
Assuming that the proposal is implemented calculate:
i) Break even sales of the merged plant and the capacity
utilization at that stage.
ii) Profitability of the merged plant at 80% capacity
utilization.
iii) Sales turn over of the merged Plant to earn a profit of Rs
75\- lakhs.
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% infixed
overheads.

P21. The following data are extracted from annual planning

budget:

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Products
A B C Total
Sales:
5,000 units @Rs. 2 each 10,000 ---- ---- ----
10,000 units @Rs. 6 each ---- 60,000 ---- ----
20,000 units @Rs. 4 each ---- ---- 80,000 1,50,000
Cost: Fixed 1,000 13,500 12,000 26,500
Variable 3,000 12,000 48,000 63,000
Total 4,000 25,500 60,000 89,500
Net Profit 6,000 34,500 20,000 60,500
You are required to compute break even points for each product and the
company’s BEP assuming a constant sales mix quantity ratio of 1:2:4. Based on
the data given, what product should be pushed and why? Also compute the
company’s break even points assuming the constant sales mix as follows:
Case I Case II
Product A 10,000 units 5,000 units
Product B 10,000 units 15,000 units
Product C 15,000 units 10,000 units

E21. The budgeted income statement by product lines of Adarsh

Multiproducts Ltd. for 1990 is as follows:
Product A Product B Product C
Rs Rs Rs
Sales 2,00,000 5,00,000 3,00,000
Variable Expenses:
Cost of goods sold 1,10,000 2,80,000 1,35,000
Selling Expenses 20,000 90,000 45,000
Fixed Expenses:
Overheads 30,000 75,000 45,000
Administrative Expenses 12,000 30,000 18,000
Income before tax 28,000 25,000 57,000
Income Tax @ 40% 11,200 10,000 22,800
Net Income 16,800 15,000 34,200

All products are manufactured with the same facilities under

common administrative control. Fixed expenses are allocated
among the products in proportion to their budgeted sales
value.
Required :
a) to compute the budgeted break even point of the company as a
whole from the data provided.
b) to draft an income statement product wise to ascertain the
effect on budgeted income if half of the budgeted sales
value of product B were shifted to product A and C in equal
rupee amounts, so that the total budgeted sales in rupees
remain the same.
c) to show the effect of the shift suggested in (b) above on
the budgeted break even point of the whole company.
PROBLEMS ON CHANGE IN FIXED COST

P22. Frazer Ltd manufactures and sells a product, the selling price and
raw material cost of which have remained unchanged during the past
two years. The following are the are the relevant data :-
Particulars Year 1 Year 2
Quantity sold (Kgs) 100 150
Rs Rs
Sales value 20,000 ?
Raw materials 10,000 ?
Direct wages 3,000 ?
Factory overheads 5,000 5,700
Profit 2,000 2,550
During year 2, direct wage rates increased by 50% but there
was a saving of Rs 300 in fixed factory overheads.
Required:

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What quantity (in kgs) the company should have produced and
sold in year 2 in order to maintain the same amount of net
profit per Kg. as it earned during year 1?

E22 PQR Ltd. has furnished the following data for the two years:
1997-98 1998-99
Sales Rs.8,00,000 ?
Profit/Volume Ratio (P/V ratio) 50% 37.5%
Margin of Safety sales as
a % of Total Sales 40% 21.875%
There has been substantial savings in the fixed cost in the
year 1998-99 due to the restructuring process. The company
could maintain its sales quantity level of 1997-98 in 1998-
99 by reducing selling price.
You are required to calculate the following:
(i) Sales for 1998-99 in Rs.
(ii) Fixed cost for 1998-99
(iii)Break even sales for 1998-99 in Rs.

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