Accountancy for Managers

Sale of a product amounts to 1000 units per annum at Rs.500 per unit. Fixed overheads are
Rs.100000 per annum and variable cost Rs.300 per unit. There is a proposal to reduce the price
by 20%. Calculate present and future P/V ratio and Break even point in units? How many units
must be sold to maintain profit at present level?

Particulars Present (Rs) Future (Rs)

Selling Price per unit 500 400
Less: Variable Cost per unit 300 300
Contribution per unit 200 100
P/V Ratio ( C/S x 100) 40% 25%
Break even point in units (FC/C) 500 units 1000 units
Present Profit= (C-FC) 1,00,000
Units to be sold to maintain present profit= FC + P / C = 200000/ 100 = 2000 units
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An analysis of cost of a company reveals the following particulars : -

Cost Elements Variable Costs (% of sales) Fixed costs

Direct Materials 32.8
Direct Labour 28.4
Factory Overheads 12.6 189900
Distribution Expenses 4.1 58400
Administrative Expenses 1.1 66700
Budgeted sales for next year is Rs.18,50,000.
Determine-
i) The break even sales volume
ii) The profit at the budgeted sales volume
iii) The profit, if actual sales – a) Drop by 10% b) Increase by 5% from actual sales.
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Percentage of Variable cost to sales: i) Break even point in sales value- = FC / P/V Ratio
Direct Materials - 32.8% of sales = 189900 + 58400 + 66700 / 21/100 = 315000 x 100/ 21 = 15,00,000
Direct Labour - 28.4% of sales ii) Profit at the budgeted sales of Rs.18,50,000
Factory overheads- 12.6% of sales Contribution = 1850000 x 21% = 3,88,500
Distribution expenses- 4.1% of sales Profit = Contribution – Fixed expenses
Administrative expenses- 1.1.% of sales = 3,88,500 – 3,15,000 = 73,500
----------------- iii) Profit, if actual sales drop by 10%
Total Variable Cost 79% of sales = 90% of Budgeted sales = 16.65,000
Contribution= 16,65,000 x 21% = 3,49,650
Percentage of contribution to sales Profit = C- FC = 349650 – 315000= 34650
(C = S – V) = 100 – 79 = 21 iv) Profit, if actual sales increase by 5%
P/V Ratio = (C/S) = 21/100 = 105% of 18,50,000 = 19,42,500
= 21% Contribution= 21% of 1942500= 407925
= 407925 – 315000 (FC) = 92925
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The fixed costs are Rs.150000 and the percentage of variable costs to sales is 66 2/3%. If 100% capacity
Sales at normal are Rs.9,00,000, find out the break even point and the percentage sales when it occurs.
Also determine profit at 80 % capacity sales.

If sales is 100, then % of contribution to sales is = 100 – 200/3 = 100/3

Contribution 100 1 1 1 1
P/V Ratio = ---------------- = ------- x ------ = ---- or, --- x 100 = 33 --- %
Sales 3 100 3 3 3
Fixed expenses 150000 3
Break even point = --------------------- = ----------- = 150000 x -- = Rs.450000
P/V Ratio 1/3 1
100% Capacity sales is Rs.900000, so BEP occurs at
450000 / 900000 x 100 = 50%
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Profit at 80% Capacity sales :-

100 % capacity sales = Rs.900000

80
So, 80% capacity sales is 900000 x ----- = 720000
100
Variable cost at 80 % sales (66 2/3% of 7,20,000) = 480000
Fixed Costs = 150000
------------
Total cost 630000
Sales 720000
-----------
Profit at 80% capacity sales 90000
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Margin of Safety-

It is the difference between the actual sales and the sales at break even point. As it represents the shock
absorption capacity of the business, larger the difference better it is. Larger difference means that the business
Has a greater capacity to bear loss due to price reduction or fall in sales. Margin of safety can also be termed as
The excess production over break even point. It can also be expressed in percentage.

Margin of safety = Present sales – Break even sales

Or Profit
Margin of safety = ---------------
P/V Ratio
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A company has fixed expenses of Rs.90000 with sales at Rs.300000 and a profit
of Rs.60000 during the first half year. If in the next half year, the company Margin of safety =
suffers a loss of Rs.30000, calculate –
a) The P/V Ratio, Break even point and Margin of safety for the first half year. Actual sales –
b) Expected sales volume for next half year assuming that selling price and break even sales
fixed expenses remain unchanged
c) The break even point and Margin of safety for the whole year. = 300000 – 180000
a) Contribution = 300000 – 90000 – 60000 = 150000 = 120000
Contribution 150000
a) P/V ratio = ----------------- x 100 = --------- x 100 = 50%
Sales 300000
Fixed Cost 90000
Break even point = --------------- = ----------- = 180000
P/V ratio 50%
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b) Fixed Cost – Loss

Expected sales volume = --------------------------
P/V ratio
90000 – 30000
= -------------------- = 120000
50%
c) Fixed cost for the whole year
Break even point (For the whole year) = ----------------------------------------
P/V ratio
180000
= ----------- = 360000
50%
Margin of safety = Actual sales- Break even sales = 420000 – 360000 = 60000
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Assuming that cost structure and selling prices remain the same in Periods I and II, find out :-

a) P/V ratio
b) Fixed cost
c) Break even point for sales
d) Profit when sales are Rs.100000
e) Sales required to earn a profit of Rs.20000
f) Margin of safety at a profit of Rs.15000
g) Variable cost in period II

Period Sales (Rs) Profit Rs)

I 120000 9000
II 140000 13000
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a) Change in profits 13000 – 9000 4000

P/V ratio = ----------------------- x 100 = ---------------------- x 100 = --------- x 100 = 20%
Change in sales 140000 – 120000 20000

b) Fixed cost = (Sales x P/V ratio) – Profit = (120000 x 20%) – 9000 = 24000 – 9000 = 15000

c) Fixed cost 15000

Break even point (In rupees) = --------------- = --------- = 75000
P/V ratio 20%
d) Profit = (Sales x P/V ratio) – Fixed cost = (100000 x 20%) – 15000 = 20000 -15000 = 5000
e) Fixed cost + Desired profit 15000 + 20000 35000
Sales = ------------------------------------- = --------------------- = ----------= 175000
P/V ratio 20% 20%
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f) Profit
Margin of safety = --------
P/V ratio
15000
= --------- = 75000
20%

g) Variable cost in Period II = (1- P/V ratio) x Sales

= (100% – 20%) x Sales

= 80% x 140000
= 112000