Cost- Volume-Profit Analysis (C-V-P Analysis)

Cost- Volume-Profit Analysis (C-V-P Analysis) is an extension of the principle of Marginal

Costing. It is an attempt to measure the variations in the cost and profit with volume.
The inter-relationship of three basic factors in business operations are studied in C-V-P
Analysis. Three basic factors – Cost, Volume and Profit are inter- connected in such a manner
that they act and react on one another because of cause and effect relationship amongst them.
There is a direct relation between volume and profit but inverse relation between
volume and cost. If volume is increased, the cost per unit will decrease and profit per unit will
increase.CIMA, London has defined CVP analysis as, “the study of effects on future profits by
change in fixed cost, variable cost and sales price with quantity and mix.”

SPECIAL TERMS USED IN C-V-P ANALYSIS

Marginal Cost Equation

Mathematical relationship among Cost-Volume-Profit requires the understanding of marginal
cost equation. It explains that the total sales minus total variable cost are the contribution
towards fixed cost and profits .Marginal cost equation starts with total sales as follows:

Total Sales = Total Cost± Profit /Loss

Or, Total Sales = (Total Variable Cost+ Total Fixed Cost) ±Profit/Loss

Or, (Output × Selling Price per Unit) = (Output ×Variable Cost per Unit) + Fixed cost ±
profit/Loss

Or, OS = OV + F ± P/L

Or, OS- OV = F ± P/L

Or, O(S-V) = F+P (Marginal Cost Equation, in case of Profit )

Or, O(S-V) = F - L (Marginal cost equation, in case of Loss)

Where, O= Output, S= Selling Price per Unit, V= Variable Cost per Unit, F =Total Fixed
Cost, P= Profit, L = Loss

Contribution

The important element of the marginal cost equation is the ‘contribution’ factor. It is resulted
from the sales value after deduction of variable cost. It has been stated above that ‘contribution’
is the composition of fixed costs plus profit. Contribution first contributes to fixed cost, then to
profit. Contribution is also known as Gross Margin. Contribution enables to meet fixed costs
and adds to the profit.
 The management of an organization tries to increase contribution for higher earnings. The
contribution may or may not be equal to profit depending upon the amount of fixed cost. The
relations between contribution and fixed cost are as follows.

1. If Contribution > Fixed Cost, there will be Profit.

2. If Contribution = Fixed Cost, there will be no Profit no Loss, i.e., BEP.
3. If Contribution < Fixed Cost, there will be Loss.
Thus, contribution is basically that portion of sales which remains after recovering
variable costs and now available towards fixed cost and profit. Conceptually, contribution
and profit are different. The difference between contribution and profit are as follows.

Example-1
Calculate contribution in each of the following independent situations:
(i) Fixed cost ₹.8,000, profit ₹.5,600.
(ii) Variable cost ₹.7,000 , Sales ₹.11,000.
(iii) Contribution per unit ₹.7, profit ₹.3,000 , BEP = 2,000 units.

Solution:

(i) Contribution = Fixed Cost + Profit

=₹. 8,000 +₹. 5,600 = ₹.13,600
(ii) Contribution = Sales – Variable Cost
= ₹.11,000 –₹. 7,000 = ₹.4,000
(iii) Contribution =[ BEP (in Units) x Contribution per Unit] + Profit
= (2,000 x ₹.7) +₹. 3,000 = ₹.17,000
Profit-Volume Ratio (P/V Ratio)
The Profit-Volume Ratio, popularly known as the P/V ratio, expresses the relation of
contribution to sales. This ratio is also known as ‘Contribution Ratio ‘or ‘Margin Ratio’. The
Profit-Volume Ratio is often expressed as a percentage and is a guide to the profitability of a
business firm. P/V Ratio can be calculated in different manner as follows.
Contribution per unit
1. P/V Ratio = x100
Selling price per unit
Contribution
2. P/V Ratio = x100
Sales
Sales−Variable cost
3. P/V Ratio = x100
Sales
¿ cost + Profit
4. P/V Ratio = x100
Sales
Change∈ profit ∨contribution
5. P/V Ratio = X 100
Change ∈sales
6. P/V Ratio = 1- Variable Cost to Sales Ratio
EXAMPLE-3
Given:
(i) Variable Cost ₹.60 , Contribution ₹.40
(ii) Sales ₹.20 , Variable Cost ₹.15
(iii) Ratio of Variable Cost to S84%
(iv) Profit ₹.5,000; Sales ₹.25,000; Fixed Cost ₹.8,000
(v) Year I sales ₹.50,000. Total Costs ₹.40,000
Year II Sales ₹.60,000, Total Cost ₹.45,000.
Calculate P/V Ratio in each of the above independent situations.

Solution:

Contribution Contribution 40 40
(i) P/V Ratio = = = = = 40%
Sales Variable cost +Contribution 60+40 100
Contribution S−V 20−15 5
(ii) P/V Ratio = = = = = 25%
Sales S 20 20
(iii) P/V Ratio = 100 – Variable cost to sales ratio = 100 – 84% = 16%
Contribution F + P 5,000+8,000 13,000 13
(iv) P/V Ratio = = = = = = 52%
Sales S 25,000 25,000 25
profit∗¿ 15,000−10,000 5,000
(v) P/V Ratio = Change∈ ¿= = = 50%
Change ∈sales 60,000−50,000 10,000
*Profit is the difference between sales and total cost.

BREAK-EVEN ANALYSIS
Break- even analysis is a widely used technique to study the Cost, Volume and Profit
relationship at different levels of operations. It is known as Cost-Volume –Profit analysis (CVP
analysis).It can be interpreted in three different ways as follows:

Narrow sense: Break-even analysis is concerned with finding out the crisis point (Break-Even
Point) that is no profit or no loss point. At this point total cost is equal to total sales value. In
other words, Break –Even Analysis helps in locating the level of output which evenly breaks the
costs and revenues.

Broad sense: Break-Even Analysis is that system of analysis which determines profit, and sales
value at different levels output. It establishes the relationship of cost, volume and profits used to
determine the probable profit or loss at any given level of production or sales.

Popular sense: Break-even analysis is a method of studying the relationship among sales,
revenue, fixed costs and variable costs to determine the minimum volume at which production
can be profitable. Break-even analysis is aimed at measuring variations of cost with volume and
is widely used in managerial decisions.

Note. Break-even analysis is a widely used technique to study the C-V-P relationship. Break-
even analysis and C-V-P analysis is same and used interchangeably in the text.

MARGIN OF SAFETY (M/S)

Margin of safety is the difference between the actual sales and the break-even sales. It is the
excess of actual sales over break even sales. At any level of margin of safety, fixed costs are zero
.It is because fixed costs are already recovered up to break-evenpoint. So, at any level of M/S,
the contribution is equal to profits.

Margin of safety indicates the soundness of the business firm. High margin of safety indicates
the soundness of a business firm because even with substantial fall in sale or fall in production,
some profit can be made.

Small margin of safety on the other hand is an indicator of the weak position of the business firm
and even a small reduction in sale or production will adversely affect the profit position of the
business firm.

METHODS OF CALCULATING MARGIN OF SAFETY

Margin of Safety can be calculated in through algebraic method and graphic method as follows:

1. Algebraic methods of calculating Margin of safety

M/S canbe expressed in terms of number of units, value or percentage of sales as follows.

1. (i)M/S (in units) = Actual sales (in units) – Break-even sales (in units)

Profit
(ii)M/S (in units) =
Contribution per unit

2. (i) M/S(in Value) = Actual sales (in value) – Break-even sales (in value)

Profit
(ii) M/S(in Value)= P
Ratio
V

(iii) M/S(in Value)= M/S (in units) x Selling price per unit
 Margin of Safety ( ¿units )
3. (i) M/S (in % of sales) = x 100
Acual Sales (¿ Units)

Margin of Safety ( ¿ Rs)

(ii) M/S (in % of sales) = x 100
Acual Sales(¿ Rs)

Profit
(iii)M/S (in % of sales) = ¿ x 100
Total Contribution ¿

(iii) M/S (in % of sales) =100 – Break-Even Sales (in %)

4.(i) M/S =Actual Sales – Break-even Sales

(ii) Actual Sales = Break-even Sales + M/S

¿ cost + Profit Profit

(i) M/S =Actual Sales = p + P
Ratio Ratio
v V

¿ cost Profit
(ii) M/S = Actual Sales = P +P
Ratio Ratio
V V
4. When actual sales are given:
Profit = Actual Sales x P/V Ratio x M/S Ratio

5. Profit % on Sales = M/S Ratio x P/V Ratio %

EXAMPLE-5
From the following details find out (i) Profit- Volume Ratio, (ii) BEP (iii) Margin of safety.
Amount
Particulars (₹.)
Sales 1,00,000
Total costs 80,000
Fixed costs 20,000
Net profit 20,000

Solution:
Sales−Variable cost
(i) P/V Ratio = × 100
Sales
1, 00,000−60,000
= = 40%
1 , 00,000
¿ cost 20,000 20,000× 100
(ii) BEP = = = = ₹.50,000
P /V Ratio 40 % 40
 Profit 20,000 20,000× 100
(iii) Margin of safety = = = = ₹.50,000
P /V Ratio 40 % 40
Or, Margin of safety = Actual sales – Sales at BEP
= 1,00,000 – 50,000 = ₹.50,000
Example-6
Calculate Margin of Safety in each of the following independent situations.
(i) Break-even point 40%, Actual sales ₹.40,000
(ii) Actual sales 40,000 units, Break-even point 25,000 units
(iii) Break-even point 75% ,P/V Ratio 40%, profit ₹.35,000
(iv) Contribution per unit ₹.20, Profit ₹.15,000

Solution:
(i) Margin of safety = Actual sales – BE Point
= ₹.40, 000 – 40% = ₹.24,000
(ii) Margin of safety = Actual sales – BE point
= 40,000 units – 25,000 units = 15,000 units
(iii) Margin of safety = 100 – BE Point = 100 – 75% = 25%
Profit
35,000
(iv) Margin of safety = P = = ₹.87,500
Ratio 40 %
V
Profit ₹ .15,000
Margin of safety = =
Contribuition per unit ₹ .20
Illustration- 5
The sales and profits of ABC Co. Ltd. for the two years are as follows:

Year Sales (₹) Profit (₹)

I 2,40,000 18,000
II 2,80,000 26,000
Calculate:

(i) P/V Ratio

(ii) Fixed Cost
(iii) Variable Cost
(iv) Break- even Point
(v) Margin of Safety
(vi) Margin of Safety when sales are ₹ 3,60,000
(vii) Sales required for a profit of ₹ 30,000
(viii) Profit at a sale of ₹ 2,25,000

Solution:
Change∈ profits
(i) P/V Ratio = x100
Change∈Sales
Rs 26,000−Rs 18,000
= x 100
Rs 2 , 80,000−Rs 2, 40,000
= 20%

(ii) Fixed Cost: Sales x P/V Ratio = Profit + Fixed Cost

Or, ₹ 2, 40,000 X20% = ₹ 18,000 + FC
Or, ₹ 48,000 = ₹ 18,000 = FC
Or, FC = ₹ 30,000

(iii) Variable Cost: Sales – Variable Costs = Profit +Fixed Costs

₹2, 40,000 – Variable Costs = ₹ 18,000 + ₹ 30,000
Or, Variable Costs = ₹ 2,40,000 -- ₹ 48,000 = ₹ 1,92,000

¿Costs
Rs 30,000
(iii) B.E.P: P
Ratio
= = ₹ 1,50,000
20 %
V
(iv) Margin of Safety
M/S = Actual Sales – Sales at B.E.P
M/S = ₹ 2, 40,000 -- ₹ 1,50,000 = ₹ 90,000

(v) Margin of Safety when sales are ₹ 3,60,000:

M/S = Actual Sales – Sales at B.E.P
M/S = ₹ 3, 60,000 -- ₹ 1,50,000 = ₹ 2,10,000

(vi) Sales required for a profit of ₹ 30,000

¿ Costs+ Desired profits
Required Sales = P
Ratio
V
Rs 30,000+ Rs 30,000
= 20 %
=Rs3, 00,000

(vii) Profit at a sale of ₹ 2,25,000:

Profit = (Sales X P/V Ratio) – Fixed Costs
= (2, 50,000 X 20%)- 30,000
= ₹ 20,000

Illustration-6
The Cost, Volume and Profit relationship of a company is described by equation Y = 4,00,000 +
0.60 X in which X represents sales revenue and Y represents the total cost.
Find out the following:
(a) P/V Ratio (b) B.E.P. (C) Sales when there is a loss of ₹ 40,000;
(d) Sales when there is a profit of ₹ 80,000.

Solution:
In the equation Y = ₹ 4, 00,000 + 0.60X
Fixed cost (given) ₹ 4, 00,000 and Variable cost is 0.60 of sales, i.e. , 60% of sales.

(a) P/V Ratio = 1 – V.C. Ratio

= 1—60% = 40%

¿Costs
Rs 4 , 00,000
(b) B.E.P. = P
Ratio
= = ₹ 10,00,000
40 %
V
 ¿ Costs+(loss)
(c) Sales when there is a loss of ₹ 40,000 = P
Ratio
V
Rs 4 , 00,000(Rs 40,000)
= =Rs9,00,000
40 %

¿ Costs+ Desired Profit

(d) Sales when there is a profit of ₹ 80,000= P
Ratio
V
Rs 4 , 00,000+(Rs 80,000)
= = Rs12, 00,000
40 %
Illustration-12
A company has two similar plants and the company wants to merge these two plants. The following
particulars are available:
Company in operation Plant I Plant II
100% 60%
Sales ₹ 3,00,000 ₹ 1,20,000
Variable Costs ₹ 2,20,000 ₹ 90,000
Fixed Costs ₹ 40,000 ₹ 20,000
You are required to calculate:
(i) Capacity of merged plants to be operated for the purpose of break- even point.
(ii) What would be the profitability on working at 75% of merged Capacity?
Solution:
First of all both the plants should be levelled at 100% capacity of output.
Statement of contribution and profitability of merged plants:
Particulars Plant-(100%) Plant- II( 100%) Merged Plant (100%)
(₹) (₹) (₹)
Sales at 100% Capacity 3,00,000 2,00,000 5,00,000
Less: Variable Cost 2,20,000 1,50,000 3,70,000
Contribution
Fixed Cost 80,000 50,000 1,30,000
Profit 40,000 20,000 60,000
40,000 30,000 70,000
P/V Ratio of the merged plant:
S—V 5 ,00,000 — 3 , 70,000
P/V Ratio = x 100 = x 100 = 26%
S 5 , 00,000

(i) B.E.P (in ₹) of the merged plant:

 FC
60,000
B.E.P = P
Ratio
= x 100 = ₹ 2,30,769
26
V

Capacity of merged plant at B. E. P.:

B . E . P Sales 2 ,30,769
= x 100 = x 100 = 46.15%
Sales 5 ,00,000

(ii) Profit at 75% merged plant at B.E.P.:

Sales (75% of ₹ 5,00,000) ₹ 3,75,000
Less: Variable Cost 75% of ₹ 3, 70,000 = ₹ 2, 77,500
Contribution ₹ 97,500
Less: Fixed Costs ₹ 60,000
Profit ₹ 37,500

37,500
Percentage of Profit = x 100 = 10%
3 ,75,000

Illustration-13
The following information is available from the records of Radha Krishna Ltd.
% of Variable Cost on Sales Fixed Cost (₹)
Direct Materials 30 --
Direct Wages 25 --
Works Overhead 15 4,25,000
Office Overhead 8 92,000
Sales Overhead 2 83,000
Total Sales (At 80% capacity) 40,00,000

Calculate:
(i) P/V Ratio (ii) B.E.P (iii) Margin of Safety
(i) Annual Sale to earn monthly profit of ₹ 1,00,000
(ii) Profit at 100% Capacity.
Solution:
Variable Cost Ratio (%) = 30+25+15+8+2
= 80% (Given)
Total Fixed Cost = 4, 25,000 + 92,000 + 83,000 = ₹ 6, 00,000 (Given)
(i) P/V Ratio = 1 – Variable Cost Ratio
 = 1 – 80% = 20%
¿ Costs Rs 6 ,00,000
(ii) B.E.P. =
P /VRatio
= 20 % = ₹ 30, 00,000.

(iii) Margin of Safety =Actual Sales –BEP Sales

= ₹ 40, 00,000 – ₹ 30, 00,000 = ₹ 10, 00,000

(iv) Sales to earn monthly profit of ₹ 1, 00,000:

Desired Profits per annum=Rs100, 000 x 12 = ₹ 12, 00,000
¿ Costs+ Desired Profits
Required Sales =
P/VRatio
₹ 6 , 00,000+₹ 12 ,00,000
=
20 %
= ₹ 90, 00,000
(v) Profit at 100% capacity:
Sales of 100% capacity =Rs40, 00,000 x 100/80 = ₹ 50, 00,000
Profit = (Sales X P/V Ratio) – Fixed Cost
= (₹ 50, 00,000 x 20 %) – ₹6, 00,000
= ₹4, 00,000
Illustration-14
The following information is given by Swapna Traders:
Selling price per unit ₹10, Variable cost per unit ₹6, Fixed Costs ₹24,000.
You are required to calculate:
(a) Profit-Volume Ratio
(b) Break-even Sales (in Units) and in (Rupees)
(c) Profit when sales are 10% above the Break-even Sales
(d) Sales to earn Profit of ₹4,000
(e) Sales to earn profit @ 10% on sales
(f) Sales to earn profit of ₹2 per unit
(g) New B.E.P. if selling price is reduced by 10%
(h) New selling price, if existing quantity B.E.P. is to be brought down by 20%
(i) New selling price, if existing value of B.E.P. is to be brought down by 40%
(j) Margin of safety ,if profit is ₹60,000

Solution:
Contribution ₹ 10−₹ .6
(a) Profit-Volume Ratio = ×100 = ×100 = 40%
Sales ₹ 10
¿ Costs Rs .24,000
(b) B.E.P.(in units) = = =6,000 units
Contribution per unit Rs .4
 ¿ Cost ₹ 24,000
= =₹ 60,000
B.E.P. (in ₹) = P 40 %
VRatio
(c) Profit when sales are 10% above the Break-even Sales
Profit when sales are 6,600 units (i.e., 6,000 + 10% of 6,000)
A. No. of sales units 6,600
B. Selling price per unit ₹10
C. Total Sales ₹66,000
D. Less: Variable Cost (6,600 ×₹6) ₹39,600
E. Contribution (C – D) ₹26,400
F. Less : Fixed Costs ₹24,000
G. Profit (E – F) ₹2,400
Alternatively, profit on 600 units = (600 ×₹10) ×40% = ₹2,400
(d) Sales to earn a profit of ₹4,000
¿ Cost + Desired Profit ₹ 24,000+₹ .4,000
Desired sales (in Units) = = = 7,000 units
Contribution per Unit ₹ .4
¿ Cost + Desired Profit
Desired sales (in ₹) = = ₹70,000
P /VRatio
(e) Sales to earn Profit @10% on sales
Let, Desired sales be X and hence desired profit is 10% of X
¿ Cost + Desired Profit
Desired sales (in ₹) =
P /VRatio
₹ .24,000+10 % of X
X=
40 %
.4X = ₹24,000 + .X
.4X -.X = ₹24,000
X = 24,000/.3 = ₹80,000
Desired Sales (in Units) = ₹80,000/₹10 = 8,000 units

(f) Sales to earn a profit of ₹2 per unit

Let desired sales be X and hence Desired Profit is ₹2X
¿ Cost + Desired Profit ₹ 24,000+₹ .2 X
Desired Sales (in Units) X = =
Contribution per Unit ₹4
X = ₹24,000/2 = 12,000 units
Desired sales (in ₹) = (12,000 × ₹10) = ₹1,20,000
(g) New B.E.P. if selling price is reduced by 10%
New Contribution = (₹10 – ₹1) – ₹6 = ₹3
¿ Costs Rs .24,000
B.E.P. (in units) = = =8,000 units
Contribution per unit Rs .3
¿ Costs
B.E.P. (in units) = × Selling Price per unit
Contribution per unit
 Rs .24,000
¿ ×9=₹ .72,000
Rs .3
(h) New selling price, if existing quantity B.E.P. is to be brought down by 20%
¿ Costs ¿Costs
B.E.P. (in units) = =
Contribution per unit New Selling Price−Variable Cost
Let New Selling price be X, New B.E.P. = 80% 6000 = 4800 units
₹ .24,000
4800 =
X−Rs .6

4,800 (X – ₹6 ) = ₹24,000
24,000
X – ₹6 = = ₹5
4,800
X = ₹5 + ₹6 = ₹11
(i) New selling price, if existing value of B.E.P. is to be brought down by 40%
¿ Cost
B.E.P. (₹) = , Let P/V Ratio be X
P /VRatio
Rs .24,000
60% of ₹60,000 =
X
2 2
X = ₹24,000/₹36,000 = or 66 %
3 3
Selling price per unit−Variable cost per unit X−Rs .6 2
P/V Ratio = = =
Selling price per unit X 3
X = ₹18
(i) Margin of safety, if profit is ₹60,000
Profit Rs .60,000
Margin of Safety = = == = ₹1,50,000
P /VRatio 40 %
Illustration-17

Two firms A & Co. and B & Co. sell the same type of product in the same market. Their
budgeted profit & Loss Account for the year ending 31st March 2017 are as follows:
A & Co. B & Co.
5,00,00 6,00,00
Sales(₹) 0 0
4,00,00 4,00,00
Variable Cost(₹) 0 0
4,3,000 4,70,00
Fixed Costs(₹) 30,000 0 70,000 0
1,30,00
Net Profit(₹) 70,000 0
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 :
 (a) Heavy demand for the product.
(ii) Low demand for the product.
Give Reasons:
Solutions:
Calculation of indifference sales volume of two firms.
Particulars A & Co. B & Co.
Sales (₹): 5,00,000 6,00,000
Less : Variable Cost(₹) 4,00,000 4,00,000
Contribution(₹) 1,00,000 2,00,000
Contribution 1
P/V Ratio ( ×100) 33 %
Sales 20% 3

Indifference sales volume of two firms to earn equal profit

₹ .40,000
Difference ¿ Cost ¿
= Difference P /VRatio ×100 = 13 1 % = ₹3,00,000
3
1
The P/V Ratio B & Co. 33 % is higher than the P/V Ratio 20% of A & Co. This indicates the
3
higher profit for B & Co. with increase in sales volume beyond the level of ₹3,00,000 and is likely
to earn higher profits under conditions of heavy demand for the product above ₹3,00,000.
On the other hand A & Co. is likely to earn higher profits under conditions of low demand for the
product (below₹3,00,000).
Illustration-18
The following data relate to a manufacturing company:
Plant Capacity: 4,00,000 units per annum. Present utilization: 40%
Actual for the year 2016 were:
Selling Price₹50 per unit, Variable manufacturing Costs ₹15 per unit
Material Cost ₹20 per unit ,Fixed Costs 27 lakhs

In order to improve capacity utilization, the following two alternative proposals are considered:
1. Reduce selling price by 10%
2. Spend additionally ₹3 lakhs on sales promotion.
You are required to calculate how many units should be sold to earn a profit of ₹5 lakhs per year
under each of these proposals?
Particulars Proposal I Proposal II
A. Selling Price ₹45 ₹50
B. Less: Variable Costs :(₹20 + ₹15) ₹35 ₹35
C. Contribution per unit (A - B) ₹10 ₹15
D. Fixed Costs 27,00,000 30,00,000
E. No. of units to be sold to earn a profit of ₹5 lakhs:
 ¿ Costs+ Desired profit 27 , 00,000+5 , 00,00030 ,00,000+ 5 ,00,000
Contribution per unit 10 15
3,20,000 units 2,33,000 units
GLOSSARY
1. Marginal Cost Equation: - It explains that the total sale minus total variable costs is the
contribution, towards fixed cost and profit.
As per Marginal cost equation, sales- variable cost = fixed cost ± profit/loss
2. Contribution: - It is the excess of total sales value over total variable cost. It is a pool of
amount from which total fixed cost is deducted to get profit or loss.
3. P/V Ratio: - It is a ratio of contribution to sales. It is usually expressed as a percentage.
This ratio indicates the effect on profit for a given change in the sales.
4. Break Even Analysis: - It is a technique used for studying the relationship between the
Cost- Volume and Profit at different levels of operation. It is also called as Cost-
Volume- Profit Analysis(C-V-P Analysis).
5. Break-Even Point: - It refers to that volume of operation at which total sales revenue is
just equal to total costi.e., fixed cost and variable cost. It is the point at which there is
neither profit nor loss. It is the point at which contribution is just equal to fixed cost.
6. Margin of Safety- It is the difference between actual sales and break even sales. Since
fixed costs are already recovered up to break- even point, at any level of margin of safety,
the contribution is equal to profit, since fixed costs are zero.
7. Break Even Chart: - It is a graphical representation of break-even analysis, i.e. the
relationship among cost, volume and profit. It shows variable costs at different levels of
activity, fixed costs at different levels of activity, total costs at different level of activity,
profit or loss at different level of activity, break -even point, margin of safety, angle of
incidence, loss area, profit area etc.
8. Angle of Incidence: - It is the angle between total sales line and total cost line drawn in
the case of break -even chart. It indicates the rate at which profits are being earned. The
larger the angle, the higher the rate of profit and vice versa.
9. Key factor – It is factor which limits the activities of an undertaking. The extent of
influence must be assessed at first while preparing functional budges and taking decisions
about the profitability of a product. It is also called as budget factor, limiting factor,
problem factor etc. For Example, shortage of material, availability of plant capacity,
availability of cash.
10. Profit Planning- It is a sensitivity analysis by observing different cost and revenue
situation and its resultant impact on profit. It guides the management in determining the
activity level for earning a desired profit.
11. Indifference Point: - It is the level of sales at which total costs and profits of two options
are equal. The decision- maker is indifferent as to option chosen, since both options will
result in the same amount of profit.
THEORETICAL QUESTIONS
A. State whether the following statements are True or False
1. Absorption Costing is a total costing technique.
2. There can be under and over absorption of overhead in Marginal Costing and Absorption
Costing.
3. Marginal Costing is a system of costing.
4. In Marginal Costing all costs are classified on functional basis.
5. Variable Costing is more widely used than Absorption costing for external reporting.
6. Contribution is the difference between total sales and total cost.
7. Contribution is always equal to fixed cost.
8. Under Absorption Costing, inventory valuation is at total cost.
9. For calculating taxable income, Marginal Costing is applicable.
10. Margin of safety is the excess of actual sales over budgeted sales.

Answer- True- 1, 8, False- 2, 3, 4, 5, 6,7, 9, 10,

B. State whether the following statements are True or False

1. Variable costing shows higher profit where production is more than sales.
2. P/V Ratio is the ratio of contribution to fixed cost.
3. When opening stock is more than closing stock, marginal costing shows higher profit
than absorption costing.
4. Variable Costing is mainly used for internal reporting.
5. Margin of Safety is the point at which fixed cost is zero.
6. Selling and distribution expenses are treated as period cost under both Marginal Costing
and Absorption Costing.
7. A firm earn profits when sales are below the BEP.
8. In Absorption Costing, semi variable costs must be segregated into fixed and variable
costs.
9. The valuation of closing stock in Absorption costing is higher than Marginal Costing.
10. In Marginal Costing, managerial decisions are guided by contribution margin than by
profit.

True- 3, 4, 5, 6, 9, 10 False- 1, 2, 7, 8

C. Fill in the blanks

1. Marginal costing is known as --------------------.
2. The difference between sales volume and the marginal sales is called------------------.
3. Contribution minus fixed cost is equal to ------------------.
4. If the fixed cost exceeds the amount of contribution, it results in........................
5. In make or buy decisions, it is profitable to buy from outside only when the suppliers’
price is below the firm’s own.............
 6. In..................... decisions, choice is to be made between making a part or article
within the company or purchasing it from outside.
7. In marginal costing, the stock of work in progress and finished goods are valued
at ...........................cost of production.
8. Under marginal costing, the difference in magnitude of opening stock and closing
stock does not affect the ................... cost of production, since all the product costs
are variable cost.
9. Threeproducts, three limiting factors problem requires------------------------------
technique to find out optimum product mix.
10. ..................concept is known as cost behaviour oriented approach to product costing.

Answer- 1.Variable Costing 2.Contribution 3.Profit. 4. Loss 5. Variable cost 6. Make or Buy 7.
Variable 8.Unit9.Linear Programming 10. Marginal costing

D. Fill in the blanks

1. In make or buy decision, it is profitable to buy from outside firm when suppliers
price is below the firm’s own .........................cost
2. A company has an idle plant capacity. It gets a bulk order which will not affect prices
of company products in the market. Such a bulk order may be accepted at a price
which is more than it’s ..........................cost
3. An export order is generally................. at a price which is below total cost but above
marginal cost.
4. The concept marginal costing is based on ……………
5. The difference in cost due to increase or decrease of one unit from the normal cost of
production is known as ……………..
6. The sales above Break- even point will give ……………….
7. The difference between actual sales and sales at break- even point is called
…………………
8. Margin of safety is the ratio between profit and ………………
9. The factor which puts a limit on production or on profit is known as ………factor.
10. The graphical representation of marginal costing is called ………….
11. A company manufacturers a single product with a variable cost per unit of ₹110. If
the P/V ratio is 45% and the monthly sales are ₹. 9, 90,000, then break- even point
(Units) is …………………..
12. A firm makes a single product. A budget has been prepared for the year ahead and
includes production and sales of 60,000 units with a break- even point of 45,000
units. Its margin of safety ratio is ……………….
13. A company sales a single product which has a contribution of ₹. 27 per unit and a
contribution to sales ratio is 45 %. It is forecasted to sale 1,000 units by giving a
margin of safety of ₹. 13,500. Then the total fixed cost of the company for the period
is ………………...
 Answer-1.Variable 2.Variable3 .Accepted 4. Variable cost 5. Marginal cost 6. Profit 7.
Margin of safety 8. P/V Ratio 9.Key Factor 10. Break -Even Chart 11. 11,000 12.25 % 13.₹
20,925

(A)Calculate the following :

(i) Calculate sales, if marginal cost is ₹ 4,800 and P/V Ratio is 20%.
(ii) Find out margin of safety, if profit is ₹ 30,000 and P/V Ratio 40%.
(iii) Find out P/V Ratio, if fixed cost is ₹ 10,000 and Break even sales are ₹ 40,000
(iv) Find profit at the sales of ₹ 20,000 if fixed cost is ₹ 4,000 and B.E.P is ₹ 10,000.
(v) If at the sales of Rs8,00,000, the contribution is ₹ 2,00,000 and net profit is ₹ 1,50,000,
what is margin of safety?
(vi) If margin of safety is ₹ 24,000 (40% of sales) and P/V Ratio is 30%, find out B.E.P.
(vii) Ascertain profit when sales ₹ 2,00,000; fixed cost ₹ 40,000 and B.E.P ₹ 1,60,000.
(viii)If B.E.P. is ₹ 60,000 and fixed cost is ₹ 22,000, find out variable cost.
(ix) Calculate variable cost per unit if selling price is ₹ 60 per unit and P/V Ratio is 40%.
(x) If margin of safety is ₹ 80,000 and profit is ₹ 32,000, find out P/V Ratio.
Solution:
(i) P/V Ratio = 20%
Marginal Cost = 1 – 20% = 80%
Sales = Rs4,800 x100/80 = ₹ 6,000

Profit
30,000
(ii) M/S = P = = ₹ 75,00
Ratio 40 %
V
¿Costs
(iii) BEP Sales = P
Ratio
V
¿Costs ₹ 10,000
Or, P/V Ratio= x 100 = x100 = 25%
BEP Sales ₹ 40,000
¿Costs ₹ 4,000
(iv) P/V Ratio = x 100 = x 100 =40%
BEP Sales ₹ 10,000
Profit = (Sales X P/V Ratio) – Fixed Costs
= (Rs20, 000 x 40%) – 4,000 = ₹ 4,000
Contribution Rs 2, 00,000
(v)P/V Ratio = x 100 = x 100 = 25%
Sales Rs 8 ,00,000
 Profit
Rs 1 , 50,000
M/S = P = = ₹ 6,00,000
Ratio 25 %
V
(VI) M/S = 40%
Hence, B.E.P. = 1—40% = 60%
M /S ₹ 24,000
Total Sales = = = ₹ 60,000
40 % 40 %

B.E.P = Total sales x 60% = ₹ 36,000

¿ cost ₹ 40,000
(VII) P/V Ratio = x 100 = x 100 = 25%
BEP ₹ 1, 60,000
Profit =( Sales X P/V Ratio) – Fixed Cost
=( 2,00,000 X 25% ) - ₹ 40,000 = ₹ 10,000

(VIII) BEP = Total Costs = Fixed Costs + Variable Costs

Or, Variable Costs = BEP – Fixed Costs
Or, Variable Costs = 60,000 – 22,000 = ₹ 38,000
(IX) Variable Cost to sales = 1 – P/V Ratio = 1 – 40% = 60%
Variable Cost per unit = Selling price per unit x 60% = ₹60 x 60%= ₹ 36
Profit
(X) Margin of Safety = P
Ratio
V
Profit ₹ 32,000
Or, P/V Ratio = x 100 = x 100 = 40%
Margin of Safety ₹ 80,000