Accounting for decision making

MARGINAL COSTING
MARGINAL COSTING
 It is one of the most useful techniques available to
the management.
 It guides the management in pricing, decision-
making and assessment of profitability.
 It reveals the inter-relationship between cost, volume
of sales and profit.
 It classifies costs into fixed and variable and only
variable costs are changed is also known as direct
costing or variable costing or incremental costing.
DEFINITION

 According to ICMA, England, “ Marginal cost

is the amount, at any given volume of output, by
which aggregate costs are changed, if the volume of
output is increased or decreased by one unit”.
 Marginal costing is defined as, “the
ascertainment of marginal cost and of the effect on
profit in volume or type of output by differentiating
between fixed and variable costs”.
 FEATURES OF MARGINAL COSTING
 All costs are classified into two-fixed and variable.
 Only the variable costs ( marginal costs ) are treated as the
cost of the product.
 The stock of finished goods and work-in-progress are
valued at marginal cost only.
 Fixed costs are charged against the contribution earned
during the period.
 Prices are based on marginal cost plus contribution.
Contribution is the different between selling price and
variable cost.
MERITS
 Marginal costing helps in taking decisions such as
pricing, accepting foreign orders at low price, to
make or buy, selection of suitable product mix etc.
 It yields better results when combined with
standard costing.
 It enables effective cost control by dividing costs
into fixed and variable costs.
 It enables the proper apportionment of fixed costs.
 It avoids the complication of over-recovery or under-
recovery of overheads.
 It facilitates the study of relative profitability of
different products when a number of products are
being manufactured.
 Inventory valuation becomes more realistic when it is
based on marginal cost.
 Since fixed costs are not absorbed in unsaleable
stock, there is no question of fictitious or false profits.
DEMERITS
 It is difficult to separate fixed and variable costs clearly.
 There are semi-variable costs. They are not considered in the
analysis.
 It ignores time element. In the long run, all costs including fixed
costs change. Therefore, comparison of performance between two
periods on the basis of contribution is not possible.
 Since variable overheads are apportioned on estimated basis,
problem of under or over –recovery cannot be totally eliminated.
 Price fixation and comparison between two jobs cannot be done
without considering fixed costs.
 The stock is valued at marginal cost. Hence, in the case of loss due to fire,
full loss cannot be recovered from the insurance company.
 Valuation of inventories and profit estimations based on marginal costing are
objected to by tax authorities.
 In controlling costs, marginal costing is not useful in concerns where fixed
costs are huge in relation to variable costs.
 It is found unsuitable in industries like ship building, contract etc., where the
value of work-in-progress is high in relation to turnover. If fixed expenses
are ignored in the valuation of work-in-progress, losses may occur every
year till the contract is completed. On completion there may be huge profit.
It may create income tax problems.
 The systems of budgetary control and standard costing serve the purpose
better than marginal costing. Hence, this technique is not required.
BREAK EVEN ANALYSIS
 The study of cost-volume-profit relationship is often
referred to as BEA.
 The term BEA is interpreted in two senses. In its narrow
sense, it is concerned with finding out the BEP.
 BEP is the point at which total revenue is equal to total
cost. It is the point of no profit, no loss.
 In its broad sense, it means a system of analysis that can
be used to determine the probable profit at any level of
production.
ASSUMPTIONS
 All costs are classified into two-fixed and variable.
 Fixed costs remain constant at all levels of output.
 Variable costs vary proportionally with the volume of output.
 Selling price per unit remains constant in spite of competition or changes
in the volume of production.
 There will be no change in operating efficiency.
 There will be no change in the general price level.
 Volume of production is the only factor affecting the cost.
 Volume of sales and volume of production are equal. Hence, there is no
unsold stock.
 There is only one product or in the case of multiple products, sales mix
remains constant.
MERITS
 All costs are classified into two-fixed and variable.
 Fixed costs remain constant at all levels of output.
 Variable costs vary proportionally with the volume of output.
 Selling price per unit remains constant in spite of competition or changes
in the volume of production.
 There will be no change in operating efficiency.
 There will be no change in the general price level.
 Volume of production is the only factor affecting the cost.
 Volume of sales and volume of production are equal. Hence, there is no
unsold stock.
 There is only one product or in the case of multiple products, sales mix
remains constant.
DEMERITS
 Break even analysis presents only cost, volume and profits. It ignores
other consideration such as capital amount, marketing aspects and
effect of government policy etc., which are necessary in decision
making.
 It is assumed that sales, total cost and fixed cost can be represented as
straight lines. In actual practice, this may not be so.
 It assumes that profit is a function of output. This is not always true.
The firm may increase the profit without increasing its output.
 A major draw back of BEC is its inability to handle production and
sales of multiple products.
 It is difficult to handle selling costs such as advertisement and sales
promotion in BEC.
 It ignores economies of sale in production.
 Fixed costs do not remain constant in the long run.
 Semi-variable costs are completely ignored.
 It assumes production is equal to sales. It is not always true because
generally there may be opening stock.
 When production increase variable cost per unit may not remain
constant but may decrease on account of bulk buying etc.
 the assumption of static nature of business and economic activities
is a well known defect of BEC.
 In practice, selling price may not remain fixed. More over, it may be
necessary to give extra discount to sell extra units.
TERMS TO NOTE
 Fixed Cost : Expenses that do not vary with the volume of production are known as
fixed expenses. E.g. Manager’s salary, rent and taxes, insurance etc. It should be noted
that fixed charges are fixed only within a certain range of plant capacity. The concept
of fixed overhead is most useful in formulating a price fixing policy. Fixed cost per
unit is not fixed.
 Variable Cost : Expenses that vary almost in direct proportion to the volume of
production or sales are called variable expenses. E.g. Electric power and fuel, packing
materials, consumable stores. It should be noted that variable cost per unit is fixed.
 Contribution : Contribution is the difference between sales and variable costs and it
contributes towards fixed costs and profit. It helps in sales and pricing policies and
measuring the profitability of different proposals. Contribution is a sure test to decide
whether a product is worthwhile to be continued among different products.
 Contribution = Sales – Variable Cost
 Contribution = Fixed Cost + Profit.
 Margin of Safety : Margin of safety is the excess of sales over the break
even sales. It can be expressed in absolute sales amount or in percentage.
It indicates the extent to which the sales can be reduced without resulting
in loss. A large margin of safety indicates the soundness of the business.
The formula for the margin of safety is :
 Present sales – Break even sales (or) Profit
 P.V. ratio
 Margin of safety can be improved by taking the following steps.
-Increasing production
-Increasing selling price
-Reducing the fixed or the variable costs or both
-Substituting unprofitable product with profitable one.
 Angle of Incidence : This is the angle between sales line and total cost line at the
break even point. It indicates the profit earning capacity of the concern. Large angle of
incidence indicates a low rate of earnings. To improve this angle, contribution should
be increased either by raising the selling price and / or by reducing variable cost. It also
indicates as to what extent the output and sales price can be changed to attain a desired
amount of profit.
 Profit Volume Ratio : The Profit Volume Ratio is usually called P.V. ratio. It is one of
the most useful ratios for studying the profitability of business. The ratio of
contribution to sales is the P / V ratio. It may be expressed in percentage. Therefore,
every organization tries to improve the P.V. ratio of each product by reducing the
variable cost per unit or by increasing the selling price per unit. The concept of P.V.
ratio helps in determining break-even-point, profit at any volume of sale, sales volume
required to earn a desired amount of profit etc.
 P.V. ratio = Contribution x 100
 Sales
 Break-Even-Point : If we divide the term into three words, then it does not require further
explanation.
 Break-divide
 Even-equal
 Point-place or position
 Break Even Point refers to the point where total cost is equal to total revenue. It is a point
of no profit, no loss. This is also a minimum point of production where total costs are
recovered. If sales go up beyond the Break Even Point, the organization makes a profit. If they
come down, loss is incurred.
 Fixed Expenses
 Break Even Point ( in Units ) =
 Contribution per unit
 Break Even Point ( in Rupees ) = Fixed Expenses x Sales
 ------------------------------

Contribution
COST VOLUME PROFIT ANANLYSIS
 Cost-Volume-Profit Analysis is a technique for studying the relationship between cost,
volume and profit.
 Profit maximization is the main objective of all business concerns. Profits determine
the financial position, liquidity and solvency, of the company.
 Profits serve as a yardstick for judging the competence and efficiency of the
management. therefore, every organization tries to bring under its control all those.
factors which influence the profits
 The amount of profit is determined by the following factors : (a) Price of the product
(b) Volume of sales (c) Cost of production – fixed and variable cost. The three factors
cost, volume and profit are interconnected and dependent on one another.
 For example, profit depends upon sales, selling depends upon cost, volume of sales
depends upon volume of production which in turn is related to cost. In Cost Volume
Profit analysis, an attempt is made to analyse variations in cost with variations in
volume. Of all the factors, volume is the single most important factor which influence
cost.
 The cost volume profit analysis is very useful for
management planning and control. It may be applied for
profit planning, cost control and decision making. The
cost volume profit analysis can also be used to answer
questions such as :
 How much sales should be made to avoid losses ?
 How much sales should be made to earn a desired profit ?
 Which product or product mix is the most profitable ?
 Whether to make or buy a component part ?
 The cost volume profit relationship may be expressed in graphs such
as break chart or profit graph or in a statement form as follows :
 Marginal Cost Statement of Product A
 Sales xxxxxx
 Less : Marginal Cost :
 Direct Material
 Direct Labour
 Variable overhead xxxxxx
 Contribution xxxxxx
 Less : Fixed Cost xxxxxx
 Profit xxxxxx
OBJECTIVES OR ADVANTAGES
 This analysis may be applied for profit planning, cost control and
decision making. The following are the main objectives of such an
analysis.
 Cost –Volume-Profit Analysis is helpful in the preparation of flexible
budgets, which indicate cost and profit at various levels of activity.
 It helps the management in forecasting the profits with reasonable
accuracy.
 It also assists the management in evaluating the performance.
 It assists in formulating price policy. This enables the management in
determining the selling prices of the products especially when the
demand for the product is elastic.
 It helps in controlling costs.
IMPORTANCE OF MARGINAL COSTING FOR MANAGERIAL
DECISIONS

 Fixation of Selling Price

 Accepting Bulk Orders or Foreign Market Orders
 Make or Buy Decision
 Selection of Suitable Product Mix
 Key Factor
 Maintaining a Desired Level of Profit
 Alternative Methods of Production
 Determination of Optimum Level of Activity
 Evaluation of Performance
 Decision Making
UNDER WHAT CIRCUMSTANCES MAY SELLING PRICES BE REDUCED TO MARGINAL COST OR
BELOW MARGINAL COST ?

 Contribution is the difference between selling price and

variable cost. If the selling price is below the variable
cost there would below contribution to cover fixed
expenses and the firm will incur a loss. Hence, efforts
should be made to sell the products at a price which is
more than the variable cost. Production should be
discontinued if the price is below the variable cost. But
there are certain circumstances under which selling
price may be reduced below variable cost. However, this
can be done only for a short period.
 In the following circumstances the selling price of the product may be fixed
even below the marginal cost.
 To introduce a new product in the market.
 To popularize a particular product.
 To explore a foreign market.
 To eliminate the competitions from the market.
 To help the sale of joint products.
 To avoid the retrenchment of workers.
 To utilize idle capacity.
 To dispose off surplus stocks.
 To retain old customers and prevent loss of future orders.
 To avoid extra losses that may result from the closure of business.
DISTINGUISH BETWEEN ABSORPTION COSTING AND MARGINAL COSTING.

 Absorption costing system and marginal costing system differ in respect of

the following points :
 Absorption is a total cost technique. That is, both variable and fixed costs are
changed to products. In marginal costing, only variable costs are charged to
products.
 Absorption costing values stock at cost which includes fixed costs also. On
the other hand, marginal costing values stock at variable cost only. This
results in higher value of stock under absorption costing than under
marginal costing.
 In absorption costing, managerial decisions are guided by net profit which is
the excess of sales over total cost. In marginal costing, decisions are guided
by ‘contribution’ which
 is excess of sales over variable costs.
 From the following data, construct a Break even Chart.
 1 2 3 4 5

 Sales Units Fixed cost Variable cost Total cost Sales value
 ( Re. 0-20 p.u.) (Re.0.40 p.u.)
 Rs. Rs. Rs. Rs.
 5,000 2,000 1,000 3,000 2,000
 10,000 2,000 2,000 4,000 4,000
 15,000 2,000 3,000 5,000 6,000
 20,000 2,000 4,000 6,000 8,000
25,000 2,000 5,000 7,000 10,000
 Prepare Marginal Cost statement from the following particulars:
 Rs.
 Variable Cost :
 Direct Material 4,500
 Direct Wages 2,500
 Factory Overheads 1,500
 8,500
 Fixed Cost :
 Administrative expenses 1,250
 Total Cost 9,750
 Profit 5,250
 -------------
 Sales 15,000
 Solution :
 Marginal Cost Statement
 Rs. Rs.
 Sales 15,000
 Less : Variable Costs :
 Direct Materials 4,500
 Direct Wages 2,500
 Factory Overheads 1,500
 8,500
 --------------------------------------------------------------------------------------------------------------------------------------------------------------

 Contribution 6,500
 Less : Fixed Cost :
 Administrative expenses 1,250

 ----------------
 Profit 5250
PROBLEM 2

Determine the amount of fixed expenses from the

following particulars :
 Rs.
 Sales 2,50,000
 Direct Material 80,000
 Direct Labour 50,000
 Variable Overheads 20,000
 Profit 60,000
 Solution :
 Calculation of fixed expenses :
 Marginal Cost Statement
 Rs. Rs.
 Sales 2,50,000
 Less : Variable Costs :
 Direct Material 80,000
 Direct Labour 50,000
 Variable Overheads 20,000
 1,50,000
 Contribution 1,00,000
 Less : Fixed expenses ( Balancing figure ) 40,000
 - --------------
 Profit 60,000
PROBLEM 3
Case No of Selling Variable Contributio Fixed Profit
units sold price per cost-% of n margin cost
unit in Rs sales Rs Rs

I 15,000 ? 90 ? 30,000 0
II 2,000 160 ? 80,000 ? (2,000)
III ? 15 75 ? 25,000 50,000
 Solution :
 Case I : Marginal Cost Statement
 Sales ( 15,000 units ) Rs. 3,00,000 ( see working )
 Less : Variable Cost ( bal. fig ) Rs.2,70,000
 Contribution Rs. 30,000
 Less : Fixed Cost ( given ) Rs. 30,000
 Profit ( given ) Rs. 0
 Working
 Variable cost id 90% of sales
 Contribution = Sales - Variable Cost
 = Rs.100 - Rs. 90 = Rs. 10
 If Contribution is Rs.10, Sales = Rs.100
 100
 If Contribution is Rs.30,000, Sales = 30,000 x ------
 10
 = Rs.3,00,000
 Rs. 3,00,000
 Selling price p. u. = ---------------------- = Rs. 20
 15,000 units
 Case II : Marginal Cost Statement
 Sales ( 2,000 x 160) Rs. 3,20,000
 Less : Variable Cost (bal. fig ) Rs. 2,40,000
 Contribution ( given ) Rs. 80,000
 Less : Fixed Cost ( ? ) Rs. 82,000
--- -----------------
 Loss ( given ) Rs. 2,000
  
 Variable cost
 Percentage of Variable Cost of Sales = ---------------- x 100
 Sales
 2,40,000
 = ------------------ x 100 = 75%
3,20,000
 Case III : Marginal Cost Statement
 Sales Rs. 3,00,000 ( 20,000 units x 15 )
 Less : Variable Cost ( bal. fig ) Rs. 2,25,000
 Contribution Rs. 75,000
 Less : Fixed Cost ( given ) Rs. 25,000
 Profit ( given ) Rs. 50,000
 Variable Cost is 75% of sales
 Contribution = Sales - Variable Cost
 = Rs. 100 – Rs. 75 = Rs. 25
 If Contribution is Rs. 25, Sales = Rs. 100

 If Contribution is Rs.75,000, sales = 75,000
 ----------------- x 100
 25
 = Rs. 3,00,000
 Sales Rs. 3,00,000
 No. of units produced = ------------ = ------------------
 S. P. p. u. 15
 = Rs. 20,000 units
PROBLEM 4
 Calculate Break-Even Point from the following
particulars.


Rs.
 Fixed expenses 1,50,000
 Variable cost per unit 10
 Selling price per unit 15
 Solution :
 Calculation of Break-Even Point :
 Fixed expenses
 B.E.P. ( in units ) = --------------------------
 Contribution on per unit
 Contribution per unit = Selling price p. u. – Variable cost p. u.
 = Rs. 15 – Rs. 10 = Rs. 5
 Rs. 1,50,000
 B.E.P. ( in units ) = ---------------------- = 30,000 units
 5
 B.E.P. ( in rupees ) = B.E.P. in units x Selling price per unit
 = 30,000 x Rs. 15
 = Rs. 4,50,000
PROBLEM 5
 Calculate Break-Even Point :
 Rs.
 Sales 6,00,000
 Fixed expenses 1,50,000
 Variable costs :
 Direct Materials 2,00,000
 Direct Labour 1,20,000
 Other Variable expenses 80,000
 Solution :
 Calculation of Break-Even Point :
 Fixed expenses
 B.E.P. ( in units ) = ---------------------------------------
 Contribution on per unit
 Contribution per unit = Selling price p. u. – Variable cost p. u.
 = Rs. 15 – Rs. 10 = Rs. 5
 Rs. 1,50,000
 B.E.P. ( in units ) = ------------------------ = 30,000 units
 5
 B.E.P. ( in rupees ) = B.E.P. in units x Selling price per unit
 = 30,000 x Rs. 15
 = Rs. 4,50,000

Note : When per unit cost and selling price are not given, B.E.P. can be calculated only in terms of
Rupees.
PROBLEM 6
 The following informations are given for two companies.
 X Ltd. Y Ltd.
 Units produced & sold 17,000 17,000
 Revenues Rs.1,70,000 Rs. 1,70,000
 Fixed costs 85,000 34,000
 Operating income 51,000 51,000
 Variable cost 34,000 85,000
 Find out the Break-Even point of each company both in
units as well as in volume.
 Solution :
 X Ltd. Y Ltd.
 Rs. Rs.
 Sales 1,70,000 1,70,000
 Less : Variable cost 34,000 85,000
 Contribution 1,36,000 85,000
 Less : Fixed cost 85,000 34,000


---------------------------------------------------
 Profit ( Operating income ) 51,000 51,000
 B.E.P. ( in Rs. ) = fixed cost
 ---------------------- x Sales
 Contribution
 85,000
 X Ltd = ------------------- x 1,70,000 = Rs. 1,06,250
 1,36,000
 34,000
 Y Ltd. = ------------------ x 1,70,000 = Rs. 68,000
 85,000
 1,70,000
 Selling price p. u. = -------------------------- = Rs. 10
 17,000
 B.E.P. ( in units )
 1,06,250
 X Ltd = ----------------------- = 10,625 units
 10
 68,000
 Y Ltd = ------------------- = 6,800 units
 10
PROBLEM 7

Given :
Fixed cost Rs. 8,000
Break Even Sales ( in units ) 4000
Sales 7000
units
Selling price per unit Rs.10
Calculate ( a ) Variable cost ( b ) Profit
 Solution :
 Break Even Sales = 4000 units
 Selling price p. u. = Rs. 10
 Break Even Sales ( in Rs. ) = 4,000 x 10 = Rs. 40,000
 (a)Calculation of Variable cost :
 At break even sales profit is NIL
 Break Even Sales = Rs. 40,000
 Less : Variable Cost ( bal. fig ) = Rs. 32,000
 Contribution = Rs. 8,000
 Less : Fixed Cost = Rs. 8,000
 Profit = 0
 32,000
 Variable Cost p. u. = ------------------------ = Rs. 8
 4,000 units
 (b)Profit when sales are 7,000 units :
 Sales ( 7,000 units x Rs.10 ) = Rs70,000
 Less : Variable cost ( 7000 x 8 ) = Rs.56,000
 Contribution = Rs. 14,000
 Less : Fixed cost = Rs. 8,000


--------------
 Profit = Rs. 6,000
PROBLEM 8
 The annual profit plan of ABC Ltd. is given in the following table. From the data given in the table,
calculate the break-even point in units.
 Annual profit Plan of ABC Ltd.
 Fixed cost Variable cost Total
 Rs. Rs. Rs.
 Budgeted Sales ( 2,00,000 @
 Rs. 21 each ) 42,00,000
 Budgeted Cost :
 Direct Labour 8,00,000
 Direct Material 9,00,000
 Factory Overhead 6,00,000 2,00,000
 Administrative expenses 5,00,000 1,00,000
 Distributive expenses 3,00,000 2,00,000
 Total 14,00,000 22,00,000 36,00,000
 Budgeted profit 6,00,000
 Capacity of production 2,50,000 units
 Solution :
 Fixed expenses
 B.E.P. ( in units ) = ---------------------------------------------
 Contribution on per unit
  
 Total Variable cost
 Variable cost per unit =-------------------------------------------
 No. of units
 Contribution per unit ( S – V ) = Rs. 21 – Rs.11 = Rs.10
 14,000
 = --------------------- = 1,400units

 10
PROBLEM 9
 The following information relating to a company
is given to you.
 Rs.
 Sales 4,00,000
 Fixed cost 1,80,000
 Variable cost 2,50,000
 Ascertain how much the value of sales must
be increased for the company to break-even .
 Solution :
 Fixed expenses
 B.E.P. ( in Rs. ) = ------------------------------- x Sales
 Contribution
 Contribution ( S – V ) = Rs. 4,00,000 – Rs. 2,50,000
 = Rs. 1,50,000
 1,80,000
 = ------------ x 4,00,000 = Rs. 4,80,000
 1,50,000
 B.E. Sales = Rs. 4,80,000
 Present Sales = Rs. 4,00,000
 Therefore, sales are to be increased by Rs. 80,000 to break-even.
PROBLEM 10
 From the following particulars find out the B.E.P.
What will be the selling price per unit if B.E.P. is
to be brought down to 9,000 units ?
 Rs
Variable cost per unit 75
 Fixed expenses 2,70,000
 Selling price per unit 100
 Solution :
 Fixed expenses
 B.E.P. ( in units ) = ------------------------------------------
 Contribution on per unit
 Contribution = Selling price p. u. – Variable cost p. u.
 = Rs. 100 – Rs. 75 = Rs. 25
 2,70,000
 B.E.P. ( in units ) = --------------------------- = 10,800 units
 25
 If break-even point is brought down to 9,000 units, fixed expenses are to be recovered from 9,000 units to have no profit
and no loss.
 Fixed expenses
 Fixed expenses per unit = ------------------------------
 No. of units
 2,70,000
 = Rs. ---------------------- = Rs. 30
 9,000
 When B.E.P. is 9,000 units, Selling price p. u. is calculated as follows :
 Selling price = Fixed expenses + Variable expenses per unit.
 = Rs. 30 + Rs. 75 = Rs. 105
PROBLEM 11
 From the following data, Calculate Break-even point
expressed in terms of units and also the new B.E.P. if selling
price is reduced by 10%.
 Fixed expenses :
 Depreciation Rs. 1,00,000
 Salaries Rs. 1,00,000
 Variable expenses :
 Materials Rs. 3 per unit
 Labour Rs. 2 per unit
 Selling price Rs. 10 per unit
 Solution :
 Calculation of B.E.P. ( in units ) :
 Fixed expenses
 B.E.P. ( in units ) = -----------------------------
 Contribution on per unit
 Contribution (S – V ) = Rs. 10 – Rs. 5 = Rs. 5
 2,00,000
 = --------------------- = 40,000 units
 5
  
  
 When selling price is reduced by 10%:
 New selling price per unit = Rs. 9 ( Rs. 10 – Re. 1 )
 Less : Variable cost per unit = Rs. 5
 ---------
 New contribution = Rs. 4
 --------
 2,00,000
 New B.E.P. ( in units ) = -------------------- = 50,000 units
 4
PROBLEM 12
 From the following data calculate
 Numbers of units to be sold to earn a profit of Rs.
1,20,000.
 Sales to earn a profit of Rs.1,20,000.
 Selling price per unit Rs. 40.
 Variable selling cost per unit Rs. 3
 Variable manufacturing cost per unit Rs. 22
 Fixed factory overhead Rs. 1,60,000
 Fixed selling cost Rs. 20,000.
 Solution :
 Number of units to be sold to earn a profit of Rs. 1,20,000
 Fixed expenses + desired profit
 = ------------------------------------------------------
 Contribution per unit
 Contribution p. u. = Rs. 40 – Rs. 25 = Rs. 15.
 1,80,000+ 1,20,000
 = ------------------------------------------------
 15
 3,00,000
 = ---------------------------- = 20,000 units
 15
 Sales to earn a profit of Rs. 1,20,000
 Fixed expenses + desired profit
 = ----------------------------------------------- x Selling price p. u.
 Contribution per unit
 1,80,000 + 1,20,000
 = ----------------------------- x 40 = Rs. 8,00,000
 15
PROBLEM 13
 The statement of cost of a cycle is as follows :
 Material Rs. 200 Fixed expenses Rs. 75
 Labour Rs. 100 Profit Rs. 125
 Variable expenses -Rs. 25 Selling price - Rs. 525
 The number of cycles made and sold are 10,000
units.
 Find out :

Break even point (ii) How many cycles must be produced and
sold if the selling price is reduced by Rs. 25 and the same
profit is maintained.
 Solution :
 Fixed expenses
 B.E.P. ( in units ) =
--------------------------------------------
 Contribution on per unit
 Contribution ( S – V ) = Rs. 525 - Rs. 325 = Rs. 200
 Fixed expenses per unit = Rs. 75
 for 10,000 units = 75 x 10,000 = Rs. 7,50,000
 75,000
 B.E.P. ( in units ) = --------------------- = 3,750 units
 200
 Present profit for 10,000 units at Rs. 125 p. u. = Rs. 12,50,000
 Rs.
 Present selling price per unit 525
 Less : Reduction in selling price to be made 25
 -------
 Revised selling price per unit 500
 -------
 No. of units to be produced to earn the present profit of Rs. 12,50,000 is :
 Fixed expenses + Desired profit
 = -----------------------------------------------------------
 Contribution per unit
 Contribution per unit = Rs. 500 - Rs. 325 = Rs. 175
 7,50,000 + 12,50,000
 = ---------------------------------------------
 175
 = 11,428 units
PROBLEM 14
 A ball pen manufacturer has developed a mew ball with unique
features. His design development executive has suggested three
possible retail prices Viz. Rs. 15 for Super star; Rs. 10 for Deluxe and
Rs. 7.50 for Economy model. His marketing manger opines that the
wholesalers and retailers have to be given atleast 30% discount.
 The estimated fixed cost would be around Rs. 75,000 and
variable cost per unit would be Rs. 3.50.
 Calculate break-even point would be around Rs. 70,000 and variable
cost per unit would be Rs. 3.50.
 How much should the manufacturer sell in order to make a profit of
Rs. 21,000?
 Work out for each model of ball pen.
 Solution :
 CALCULATION OF CONTRIBUTION PER UNIT
 Particulars Super star Deluxe Economy
 Rs. Rs. Rs.
 Selling price per unit 15.00 10.00 7.50
 Less : Discount at 30% 4.50 3.00 2.25
   ------------------------------------------------------------------------


Net Selling price per unit 10.50 7.00 5.25

 Less : Variable cost per unit 3.50 3.50 3.50
   ---------------------------------------------------------------------------


Contribution per unit 7.00 3.50 1.75




 Calculation of B.E.P. ( in units ) for each model :

 - Fixed expenses
 B.E.P. ( in units ) = --------------------------------------------
 Contribution on per unit
 70,000 70,000 70,000
 = --------------- ------------------ ---------------
 7 3.50 1.75
 = 10,000 units 20,000 units 40,000 units
 Sales of each model to earn a profit of Rs. 21,000 :
 Fixed expenses + Desired profit
 = -------------------------------------------------------------------
 Contribution per unit
 91,000 91,000 91,000
 = -------------- ------------- -----------------
 7 3.50 1.75
 = 13,000 units 26,000 units 52,000 units
PROBLRM 15
 From the following information relating to Quick
Standards Ltd., you are required to find out (a) P.V.
ratio (b) Break-even point (c) Profit (d) Margin of
safety
 Total Fixed Costs Rs. 4,500
 Total Variable Cost 7,500
 Total sales 15,000
 (e) Also Calculate the Volume of sales to
earn profit of Rs. 6,000.
 (a)Profit volume ratio :
 Contribution
 = ---------------------------------- x 100
 Sales
 7,500
 = ------------------ x 100 = 50%
 15,000
 (b)Break even point ( in Rs. ) :
 Fixed expenses
 = ------------------------
 P.V. ratio
 4,500
 = ----------------- x100 = Rs. 9,000
 50
 (c) Profit = Sales – Total cost
 = Rs. 15,000 – Rs. 12,000 = Rs. 3,000
 (or) = Contribution - Fixed expenses
 = Rs. 7,500 - Rs. 4,500 = Rs. 3,000
 (d)Margin of safety = Present sales – Break even sales
 = Rs.15,000 – Rs.9,000 = Rs.6,000
 Profit 3,000
 (or) = ---------------- = ------------ x 100 = 6,000
 P.V. ratio 50
 (e) Sales required to earn a profit of Rs.6,000
 Fixed expenses + Desired profit
 = ------------------------------------------ -------------------------
 P.V. ratio
 4,500 + 6,000
 = -------------------------- x 100 = Rs. 21,000
 50
PROBLEM 16
 The cost, volume and profit relationship of a
company is described by equation Y =
Rs.3,00,000 + 0.7 X in which X represents sales
and Y represents total cost. Find out (a) P.V. ratio
(b) B.E. sales (c) Sales Volume required to earn a
profit of Rs.60,000 (d) Sales Volume when there
is a loss of Rs. 30,000.
 Solution :
 Total cost = Fixed cost + Variable cost
 or Y = Rs. 3,00,000 + 0.7 X
 ( Where Y = Total cost and X = Sales )
 Variable cost = 0.7 of sales
 (ie) Variable cost is Rs.7 when sales = Rs. 10
 Contribution = Sales – Variable cost
 = Rs. 10 – Rs. 7 = Rs. 3
 Contribution
 P.V. Ratio =------------------------- x 100
 Sales
 3
 = --- x 100 = 30%
 10
 Fixed cost
 B.E. Sales = ---------------------------
 P.V. Ratio
 Rs.3,00,000
 = ---------------------- x 100 = Rs.10,00,000
 30
 Sales required to earn profit of Rs.60,000
 Fixed cost + Profit
 = -----------------------------------
 P.V. Ratio
 Rs.3,00,000 + Rs.60,000
 =-------------------------------------------
 30%
 3,60,000
 = --------------------x 100
 30
 = 1,20,000
 Sales Volume at a loss of Rs.30,000
 Fixed cost - Loss
 = --------------------------------
 P.V. Ratio
 3,00,000 - 30,000
 = -------------------------------------
 30%
 2,70,000
 = --------------------x 100
 30
 = Rs. 9,00,000
PROBLEM 17
 A company has earned a profit of Rs. 30,000 during the year 1999. If the marginal cost and selling price of a
product are Rs. 8 and Rs. 10 p. u. respectively, find out the margin of safety.
 Solution :
 Profit
 Margin of safety = -------------------------
 P. V. ratio
 Contribution
 P.V. ratio = ------------------x 100
 Sales
 Contribution = Sales – Marginal cost
 = Rs. 10 – Rs. 8 = Rs. 2
 2
 = ------ x 100 = 20%
 10
 30,000
 Margin of safety = ----------------- x 100 = Rs. 1,50,000
 20
PROBLEM 18
 You are required to calculate Break Even Volume from the following data :
 Profit Rs. 5,000 ( 20% of sales )
 P.V. ratio is 50%
 Solution :
 Sales :
 Profit is 20% of sales
 (ie) If profit is Rs.20, Sales = Rs. 100
 100
 If profit is Rs. 5,000 Sales = 5,000 x ---------- = 25,000
 20
 Sales = Rs. 25,000
 Fixed Cost :
 P.V. ratio is 50%
 If means rate of contribution to sales is 50%
 Contribution = Sales x P.V. ratio
 = 25,000 x 50% = 12,500
 Contribution = Rs. 12,500
 Less Fixed cost ( ? ) = Rs. 7,500
 Profit = Rs. 5,000
 Break Even Sales :
 Fixed cost
 Break Even Sales = --------------------------
 P.V. ratio
 7,500
 = ---------------- x 100 = Rs. 15,000
 50
PROBLEM 19
 You are given :
 Margin of safety Rs.10,000 which represents 40% of sales. P.V. ratio
50%. Calculate (a) Sales (b) Break even sales (c)Fixed cost (d) Profit
 Solution :
 Sales :
 Margin of safety 40% of sales
 If margin of safety is Rs. 40, sales = Rs. 100


 If margin of safety is Rs. 10,000, Sales = 10,000 x 100

 -------
40
 = Rs. 25,000
 Break Even Sales :
 Break Even Sales = Sales - Margin of safety
 = Rs. 25,000 – Rs. 10,000 = Rs. 15,000
 Fixed Cost :
 P.V. ratio = 50%
 It means contribution is Rs.50 when sales are Rs. 100
 Contribution at beak even sales
 = Break even sales x P.V. ratio
 = Rs. 15,000 x 50%
 Contribution = Rs. 7,500
 Less Fixed cost ( ? ) = Rs. 7,500
 Profit at B.E.P. = Rs. 0
 Profit :
 Contribution = Sales x P.V. ratio
 = 25,000 x 50%


 Contribution = Rs. 12,500

 Less Fixed cost ( ? ) = Rs. 7,500
 Profit = Rs. 5,000
PROBLEM 20
 Find the profit from the following data :
 Rs.
 Sales 80,000
 Marginal cost 60,000
 Break-even sales 60,000
 Solution :
 Contribution
 P.V. ratio = --------------- x 100
 Sales
 20,000
 = ------------------ x 100 =
25%
 80,000
 Fixed expenses :
 Fixed expenses
 B.E.P. ( in Rupees ) = --------------------------
 P.V. ratio
 Fixed expenses
 60,000 = ------------------------
 25%
  
  
 25
 Fixed expenses = 60,000 x ---------- = Rs. 15,000
 100
 Profit :
 Contribution = Rs. 20,000
 Less Fixed cost = Rs. 15,000
 Profit = Rs. 5,000
PROBLEM 21
 You are required to calculate a) P.V. ratio (b) Margin of safety (c) Sales (d) Variable cost from
the following figures : Fixed cost Rs. 12,000; Profit Rs. 1,000; Break Even Sales Rs. 60,000.
 Solution :
 P.V. ratio :
 Fixed cost
 Break Even Sales = --------------------
 P.V. Ratio
 12,000
 60,000 = ----------------------
 P.V. Ratio
 By Cross Multiplication, 60,000 x P.V. ratio = Rs. 12,000
 12,000
 P.V. ratio = ----------------- x 100 = 20%
 60,000
 Profit
 Margin of Safety = ---------------------
 P.V. ratio
 1,000
 = ----------------------x 100 = Rs. 5,000
 20
 Sales = B.E. Sales + Margin of Safety
 = Rs. 60,000 + Rs. 5,000 = Rs. 65,000
  
 Variable Sales :
 Sales = Rs. 65,000
 Contribution = Fixed cost + Profit
 = 12,000 + 1000 = Rs. 13,000
 Variable cost = Sales - Contribution
 = Rs. 65,000 – Rs. 13,000 = Rs. 52,000
PROBLEM 22
 A company has a P / V ratio of 40%. By what
percentage must sales to be increased to offset :
 10% reduction in selling price

 20% reduction in selling price

 Solution :

Profit volume ratio is 40%

It means contribution is Rs. 40 when sales are Rs.100
Variable cost = Sales – Contribution
= Rs. 100 – Rs. 40 = Rs. 60
 Present position 10% reduction in 20% reduction in
selling price selling price
Rs. Rs. Rs.
Sales 100 90(100-10%) 80(100-20%)
Less-Variable cost 60 60 60

Contribution 40 30 20
 Percentage of sales required to offset 10% reduction in selling price
 For a contribution of Rs.30, Sales is Rs. 90
 40
 For a contribution of Rs. 40, Sales = 90 x ------ = Rs. 120
 30
 Extra sales required in terms of percentage = 20% ( 120 – 100 )
 Percentage of sales required to offset 20% reduction in selling price
 For a contribution of Rs.20, Sales required = Rs. 80
   80
 For a contribution of Rs. 40, Sales required = 40 x ------ = Rs. 160
 20
 Extra sales required in terms of percentage = 60% ( 160 – 100 )
PROBLEM 23
 An analysis of Tiptop Manufacturing Co. Ltd. led to the following information :
 Cost element Variable cost Fixed cost
 ( % of sales )
 Direct Material 32.8
 Direct Labour 28.4
 Factory Overheads 12.6 1,89,900
 Distribution Overheads 4.1 58,400
 Administrative Overheads 1.1 66,700
 Budgeted sales are Rs.18,50,000. You are required to determine
 the break-even sales volume
 the profit at the budgeted sales volume
 the profit, if actual sales
 (a) drop by 10% (b) increases by 5% from budgeted sales.
 Solution :
 Percentage of variable cost of sales is 79% calculated as follows :
 Direct Material 32.8% of sales
 Direct Labour 28.4% of sales
 Factory Overheads 12.6% of sales
 Distributive overheads 4.1% of sales
 Administrative overheads 1.1% of sales
 Total Variable Cost 79.0% of sales
 Percentage of contribution to sales = 100 – 79 = 21
 Contribution
 P.V. ratio = ------------------------- x 100
 Sales


  
 21
 = ------ x 100 = 21%
 100
 Fixed Costs
 Break-even Sales Volume = ---------------------------------------
 P.V. Ratio
 Rs. 1,89,900 + Rs. 58,400 + Rs.66,700
 = -----------------------------------------------------------------------
 21%
 100
 = 3,15,000 x ---------- = Rs. 15,00,000
 21
 Profit at the budgeted sales of Rs.18,50,000 :
 Percentage of contribution to sales = 21
 21
 Contribution at the budgeted sales = 18,50,000 x -----
 100
 Profit = Contribution - Fixed expenses
 = Rs. 3,88,500 - Rs. 3,15,000 = Rs. 73,500
 (a) Profit is actual sales drop by 10%
 Rs.
 Budgeted Sales = 18,50,000
 Less : 10% decline = 1,85,000
 ----------------------------
 Actual Sales = 16,65,000
 -------------------------------
 21
 Contribution 21% of sales 16,65,000 x ---- = 3,49,650
 100
 Less : Fixed expenses = 3,15,000
 Profit Rs. 34,650
 Profit if actual sales increased by 5% from budgeted sales :
 Rs.
 Budgeted Sales = 18,50,000
 Add : 5% increase = 92,500
 Actual Sales = 19,42,500
 19,42,500 x 21
 Contribution at 21% of sales =----------------- = 4,07,925
 100
 Less : Fixed expenses = 3,15,000
 Profit = 92,925
PROBLEM 24
 Raj Corpn. Ltd. has prepared the following budget estimates for the year 1999- 2000.
 Sales ( units ) 15,000
 Fixed Expenses Rs,34,000
 Sales Rs.1,50,000
 Variable costs Rs. 6 per unit
 You are required to :
 Find the P / V ratio, break-even point and margin of safety.
 calculate the revised P / V ratio, break-even point and margin of safety in each of the
following cases :
 a.Decreases of 10% in selling price :
 b.Increase of 10% in variable costs :
 c.Increase of sales volume by 2,000 units :
 d.Increase of Rs. 6,000 in fixed costs.
 Solution :
 At the existing level :
 Contribution
 P.V. ratio = -------------------------- x 100
 Sales
 Sales Value = Rs. 1,50,000
 Sales Units = 15,000
  
 1,50,000
 Selling price per unit = ------------------------ = Rs. 10
 15,000
 Contribution = Rs.10 - Rs. 6 = Rs. 4
 4
 P.V. ratio = ---------- x 100 = 40%
 10
 Fixed expenses
 B.E.P. ( in units ) = ----------------------------------
 Contribution on per unit
 34,000
 = ------------- = 8,500 units
 4
 B.E.P. ( in Rs.) = B.E.P. in units x Selling price per unit
 = 8,500 x Rs. 10 = Rs. 85,000
 Margin of safety = Present Sales - B.E.P. Sales
 = Rs. 1,50,000 – Rs. 85,000 = Rs. 65,000
 II. (a) Decrease of 10% in selling price :
 Selling price per unit Rs.10
 Less : 10% Reduction 1
 Revised selling price per unit 9
 Contribution = Rs.9 - Rs. 6 = Rs. 3
 3 1
 P.V. ratio = ----- x 100 = 33-- %
 9 3
 34,000
 B.E.P. ( in units ) = ---------------- = 11,333 units
 3
 B.E.P. ( in Rs. ) = 11,333 x 9 = Rs. 1,01,997
 Margin of safety = ( 15,000 x 9 ) – 1,01,997
 = Rs. 1,35,000 – Rs.1,01,997 = Rs. 33,003
 (b)Increase of 10% in variable costs :
 Variable cost per unit = Rs. 6.00
 Add : 10% increase = Rs. 0.60
 Revised variable cost = Rs.6.60
 Contribution = Rs. 10 - Rs. 6.60 = Rs. 3.40


  
 3.40
 P.V. ratio = ------ x 100 = 34%
 10
 34,000
 B.E.P. ( in units ) = ------------------- = 10,000 units
 3.40
 B.E.P.( in Rs. ) = 10,000 x 10 = Rs. 1,00,000
 Margin of safety = Rs. 1,50,000 – Rs. 1,00,000 = Rs. 50,000
 Increase of sales volume by 2,000 units :
 Sales 15,000 units
 Add : Increase 2,000 units
 Revised sales 17,000 units
 4
 P.V. ratio = ----------- x 100 = 40%
 10
 34,000
 B.E.P. ( in units ) = -------------- = 8,500 units
 4
 B.E.P.( in Rs. ) = 8,500 x 10 = Rs. 85,000
 Margin of safety = ( 17,000 x 10 ) – Rs. 85,000
 = Rs. 1,70,000 – Rs. 85,000 = Rs. 85,000
 (d)Increase of Rs. 6,000 in fixed costs :
 4
 P.V. ratio = ------ x 100 = 40%
 10
 Fixed costs = Rs. 34,000
 Add : Increase = Rs. 6,000
 Revised Fixed costs = Rs. 40,000


 40,000
 B.E.P. ( in units ) = ---------------- = 10,000 units
 4
 B.E.P.( in Rs. ) = 10,000 x 10 = Rs. 1,00,000
 Margin of safety = Rs. 1,50,000 – Rs. 1,00,000 = Rs. 50,000
PROBLEM 25
 The P.V. ratio of a firm dealing in precision
instrument is 50% and the margin of safety is
40%.
 You are required to work out the B.E.P. and
the net profit if sales volume is Rs.50,00,000.
 Solution :
 Contribution :
 Contribution
 P.V. ratio = ---------------------------------- x 100
 Sales
 Contribution
 50% = -----------------------------------
 50,00,000
 50
 Contribution = 50,00,000 x ------- = Rs. 25,00,000
 100
 Break – Even Sales :
 Rs.
 Sales = 50,00,000
 Less : Margin of safety 40% on sales = 20,00,000
 Sales at B.E.P. = 30,00,000
 Fixed cost :
 Fixed expenses
 B.E.P. ( in Rupees ) = -------------------------------
 P.V. ratio
 Fixed expenses
 30,00,000 = -------------------------
 50%
 Fixed expenses = 3,00,000 x 50% = Rs. 15,00,000
 Profit :
 Contribution = Rs. 25,00,000
 Less : Fixed expenses = Rs. 15,00,000
 Profit = Rs. 10,00,000
PROBLEM 26
 From the following data calculate :
 P / V ratio
 Profit when sales are Rs. 20,000
 New break-even point if selling price is reduced
by 20%
 Fixed expenses Rs. 4,000
 Break-even sales Rs. 10,000
 Fixed expenses
 (i) Break-even sales = ------------------------------
 P.V. ratio
 4,000
 10,000 = ---------------
 P.V. ratio
 4,000 4
 P.V. ratio = ---------- = -------- or 40%
 10,000 10
 (ii)Profit when sales are Rs.20,000 :
 Contribution = Sales x P.V. ratio
 40
 = 20,000 x ----------- = Rs. 8,000
 100
 Contribution = Rs. 8,000
 Less : Fixed expenses = Rs. 4,000
 Profit = Rs. 4,000
 (iii)New break-even point if selling price is reduced by 20% :
 P.V. ratio is 40%.It means contribution is Rs. 40 when selling price is Rs. 100.
 S - V = C
 100 - V = 40
 V = 60
 Selling price = Rs. 100
 Less : 20% decrease = Rs. 20
 Revised selling price = Rs. 80
 Less : Variable cost = Rs. 60
 New contribution = Rs. 20


 20
 New P.V. ratio = ----- x 100 = 25%
 80
 4,000
 New B.E.P. = --------- x 100 = Rs. 16,000
 25
PROBLEM 27
 Break even sales Rs. 1,60,000
 Sales for the year Rs. 2,00,000
 Profit for the year 1997 Rs. 12,000
 Calculate : (a) Profit or Loss on a sale value of Rs. 3,00,000
 (b)During 1998, it is expected that selling price
will be reduced by 10%. What should be the sales if the
company desires to earn the same amount of profit as in
1997 ?
 ( B. Com., Bharathidasan )
 Solution :
 Margin of safety = Present sales - Break even sales
 = Rs. 2,00,000 - Rs. 1,60,000 = Rs. 40,000
 Profit
 Margin of safety = -------------- = 40,000
 P.V. ratio
 12,000
 = ------------- = 40,000
 P.V. ratio
 12,000 3
 P.V. ratio = ----------------- = ----- or 3%
 40,000 10
 i.e. For a sales of Rs.10, Contribution = Rs.3
 2,00,000 x 3
 For a sales of Rs. 2,00,000, Contribution = ------------------- = Rs. 60,000
 10
 Fixed expenses + Profit = Contribution
 Fixed expenses + 12,000 = 60,000
 Fixed expenses = 60,000 – 12,000 =Rs. 48,000
 Sales – Variable cost = Contribution
 2,00,000 - Variable cost = 60,000
Variable cost = Rs. 1,40,000
 Profit of loss for a sales value of Rs. 3,00,000


 P.V. ratio = 3/10 i.e. for a sales of Rs.10, Contribution = Rs.3


 3,00,000
 For sales of Rs. 3,00,000 Contribution = --------------- x 3
 10
 = Rs. 9,00,000
 Contribution = Rs. 90,000
 Less : Fixed expenses = Rs. 48,000
 Profit = Rs 42,000
 Sales to earn the same profit after price reduction :
 Rs.
 Sales after price reduction ( 2,00,000 – 10% ) 1,80,000
 Less : Variable cost 1,40,000
 Contribution 40,000
 Contribution 40,000 2
 P.V. ratio = ----------------------- = ---------------- = --------
 Sales 1,80,000 9
 Sales to earn the same profit of Rs. 12,000
 Fixed expenses + Desired profit
 = ------------------------------------------------------
 P.V. ratio
 48,000 + 12,000
 = -------------------------------- = Rs. 2,70,000
 2 / 9
PROBLEM 28
 Assuming that the cost structure and selling prices remain the same in
periods I and II find out :
 P / V ratio
 B. E. Sales
 Profit when sakes are Rs. 1,00,000
 Sales required to earn a profit of Rs. 20,000
 Margin of safety in IInd period
 Period Sales Profit
 Rs. Rs.
 I 1,20,000 9,000
 II 1,40,000 13,000
 Solution :
 Contribution
 P.V. ratio = -------------------------- x 100
 Sales
 Changes in profit
 = ------------------------------ x 100
 Changes in sales
 13,000 - 9,000
 = ---------------------------------- x 100
 1,40,000 - 1,20,000
 4,000
 = ---------------- x 100 = 20%
 20,000
 To calculate break-even point it is necessary to calculate
 Fixed expenses :
 Contribution = Sales x P.V. ratio
 20
 = 1,20,000 x ------ = Rs. 24,000
 100
  
 Contribution = Rs. 24,000
 Less : Fixed expenses ( ? ) = Rs. 15,000
 Profit ( given ) = Rs. 9,000
 Fixed expenses Rs. 15,000 p. a.
 Note : Even if you proceed with 2 nd period sales, you will get same fixed cost.
 Fixed expenses
 B.E. Sales = --------------------------
 P.V. ratio
 15,000
 = ------- ---------------- x 100 = Rs. 75,000
 20
 Profit when sales are Rs. 1,00,000 :
 Contribution = Sales x P.V. ratio
 20
 = 1,00,000 x = Rs. 20,000
 100
 Contribution = Rs. 20,000
 Less : Fixed expenses = Rs. 15,000
 Profit ( given ) = Rs. 5,000
 Sales required to earn a profit of Rs. 20,000
 Fixed expenses + Desired profit
 = ------------------------------------------------
 P.V. ratio
 15,000 + 20,000 35,000
 = -------------------------------- = -------------- x 100 = Rs. 1,75,000
 20% 20
 Margin of safety in II period .
 Profit 13,000
 = ---------------- = ---------------- x 100 = Rs. 65,000
 P.V. ratio 20
 SV Ltd., a multi-product company, furnishes you the following data relating to the year

 1999:
 First Half of the Second Half of the
 Year Year
 Sales Rs. 45,000 Rs. 50,000
 Total cost 40,000 43,000
 Assuming that there is no change in prices and variable costs and that the
fixed expenses are incurred equally in the two half year period calculate for the year
1999 :
 The profit volume ratio
 Fixed expenses
 Break-even sales
 Percentage of margin of safety.
 Solution :
 Profit of I period = Sales – Total cost
= 45,000 - 40,000 = Rs. 5,000
 Profit of II period = 50,000 - 43,000 = Rs, 7,000
 Change in profit
 P.V. ratio = -------------------------- x 100
 Change in sales
 7,000 – 5,000 2,000
 = ------------------------ = ---------------- x 100 = 40%
 50,000 - 45,000 5,000
 Fixed expenses :
 Contribution = Sales x P.V. ratio
 40
 = 50,000 x ----- = Rs. 20,000
 100
 Contribution = Rs. 20,000
 Less : Fixed expenses ( ? ) = Rs. 13,000
 Profit ( given ) = Rs. 7,000
 Fixed expenses for half year Rs. 13,000
 Fixed expenses for whole year = Rs. 26,000
  
  
 Fixed expenses
 (iii) B.E. Sales = ----------------------
 P.V. ratio
 26,000
 = ------------ x 100 = Rs. 65,000
 40
 (iv)Percentage of Margin of Safety :
 Total sales for the whole year Rs. 95,000 ( 45,000 + 50,000 )
 Less : B.E. Sales Rs. 65,000
 Margin of safety Rs. 30,000
 30,000
 Percentage of margin of safety = ------------------ x 100 = 31.58%
 95,000
PROBLEM 30
 S. Ltd., furnishes you the following information relating to the half year ended
30th June 2000:
 Fixed expenses Rs. 45,000
 Sales value 1,50,000
 Profit 30,000
 During the second half of the year, the company has projected loss of Rs.
10,000.
 Calculate :
 The break-even point and margin of safety for six months ending 30th June,
2000.
 Expected sales volume for second half of the year assuming that the P / V ratio
and fixed expenses remain constant in the second half year also.
 The break-even point and margin of safety for the whole year 2000.
 Solution
 Calculation of B. E. P. and Margin of safety :
 Fixed expenses
 B.E. Sales = -----------------------------------
 P.V. ratio
  
  
 Contribution
 P.V. ratio = -------------------------------- x 100
 Sales
 Contribution = Fixed expenses + Profit
 = Rs. 45,000 + Rs. 30,000 = Rs. 75,000
 75,000
 P.V. ratio = -------------------------- x 100 = 50%
 1,50,000
 45,000
 B.E.P. ( in Rupees ) = ------------- x 100 = Rs. 90,000
 50
 Margin of safety = Present sales - B.E. Sales
 = Rs. 1,50,000 - Rs. 90,000 = Rs. 60,000
 Expenses sales for the second half of the year :
 Contribution = Fixed expenses - Loss
 = Rs. 45,000 - Rs. 10,000 = Rs. 35,000
 Fixed expenses - Loss
 Sales = -------------------------------------
 P.V. ratio
 45,000 - 10,000 35,000
 = -------------------------- = --------------------- x 100
 50% 50
 = Rs. 70,000
 Sales for the 2nd half = Rs. 70,000
 B.E.P. and Margin of safety for the whole year :
 Fixed expenses for half year Rs. 45,000
 Fixed expenses for whole year Rs. 90,000
 Fixed expenses
 B.E. Sales ( in Rupees ) = -----------------------------------
 P.V. ratio
 90,000
 = ----------------x 100 = Rs. 1,80,000
 50
 Sales of the whole year ( 1,50,000 + 70,000 ) = Rs. 2,20,000
 Less : B.E. Sales = Rs. 1,80,000
 Margin of safety = Rs. 40,000
  
PROBLEM 31
 From the following data, you are required to calculate the
break-even point and net sales value at this point.
 Selling price per unit Rs. 25
 Direct material cost per unit 8
 Direct labour costs per unit 5
 Fixed overheads 24,000
 Variable overheads @ 60% on direct labour
 Trade discount 4%
 If sales are 15% and20% above the break-even volume,
determine the net profits.
 Solution :
 Statement showing contribution per unit
 Selling price per unit Rs. 25
 Less : Trade discount @ 4% 1
 Net Selling price per unit Rs. 24
 Less : Variable costs
Direct materials per unit Rs. 8
 Direct labour per unit 5
 Variable overheads 3 Rs. 16
 -------
 Contribution per unit Rs. 8
 Break-even point ( in units ) :
 Fixed expenses
 = ------------------------------------
 Contribution per unit
 24,000
 = ----------- = 3,000 units
 8
 Break-even Sales :
 = B.E.P. in units x Net selling price per unit
 = 3,000 x Rs. 24 = Rs. 72,000
  
 Statement showing net profit if sales are 15% above the Break-Even
Volume:
 Units Rs.
 Sales at B.E.P. 3,000
 Add : 15% over B.E.P. 450
 --------
 Sales 15% above B.E.P. 3,450
 Contribution for 3,450 units (3,450 x 8 ) 27,600
Less : Fixed costs 24,000


--------------------
 Profit 3,600
 Statement showing net profit if sales are 20% above the Break-Even
Volume:
 Units Rs.
 Sales at B.E.P. 3,000
 Add : 20% over B.E.P. 600
 ------------
 Sales 20% above B.E.P. 3,600
 Contribution for 3,600 units (3,600 x Rs. 8 ) 28,800
 Less : Fixed costs 24,000
 -----------
 Profit 4,800
PROBLEM 32
 . Two competing companies ABC Ltd., and XYZ Ltd., produce and sell same type of product
in the same market. For the year ended March 2000, their forecasted profit and loss accounts
are as follows :
 ABC Ltd. XYZ Ltd.
 Sales Rs. 2,50,000 Rs. 1,50,000 Rs. 2,50,000
 Less : Variable cost Rs. 2,00,000
 Fixed cost 25,000 2,25,000 75,000 2,25,000


------------------------------------------------------------------------------------ ----
 Forecasted net profit before tax 25,000 25,000
 You are required to compute :
 P / V ratio (ii) Break-even Sales Volume
 You are also required to state which company is likely to earn greater profits in condition of :
 A.Low demand, and (b) high demand
 Solution :
 ABC Ltd. XYZ Ltd.
 Sales Rs. 2,50,000 Rs. 2,50,000
 Less : Variable cost Rs. 2,00,000 Rs. 1,50,000
 Contribution Rs. 50,000 Rs. 1,00,000
 P.V. ratio :
 Contribution 50,000 1,00,000
 --------------------------x100 = ------------------ x 100 = -----------------
x 100
 Sales 2,50,000 2,50,000
 = 20% 40%
 Break-even Sales :
 Fixed cost 25,000 75,000
 = x 100 = x 100
 P.V. ratio 20 40
 = Rs. 1,25,000 = Rs.1,87, 500
 A.In condition of Low demand, a company with lower Break-even
point is likely to earn greater profit because it will start earning profit at
a lower level of sales. In this case ABC Ltd. is likely to earn greater
profit.
 B.In condition of heavy demand, a company with larger P.V. ratio can
earn greater profit. In this case XYZ Ltd., is likely to earn greater profit.
DECISION MAKING PROBLEMS
PROBLEM 33-FIXATING OF SELLING PRICE :

 P.V. ratio is 60%. Marginal cost is Rs. 50. What is the selling price per unit.
 Solution :
 P.V. ratio is 60%.
 It means contribution is Rs. 60. when sales are Rs. 100
 Variable cost = Sales - Contribution
 = Rs. 100 – Rs. 60 = Rs. 40
 If Variable cost is Rs. 40, selling price is Rs. 100


  
 50
 If variable cost is Rs. 50, selling price = ----- x 100 = 125
 40
 Selling price = Rs. 125
PROBLEM 34
 Make or Buy Decision
 The management of a company finds that while the cost of making a component
part is Rs. 10, the same is available in the market at Rs. 9 with an assurance of
continuous supply.
 Given a suggestion whether to make or buy this part. Give also your views
in case the suppliers reduces the price from Rs. 9 to Rs. 8.
 The cost information is as follows :
 Rs.
 Material 3.50
 Direct Labour 4.00
 Other variable expenses 1.00
 Fixed expenses 1.50
 Total 10.00
 Solution :
 To take a decision on whether to make or but the component part, fixed
expenses should not be added to the cost because these will be incurred even if the
part is not produced. Thus, additional cost of the part will be as follows :
 Materials Rs. 3.50
 Direct Labour 4.00
 Other Variable expenses 1.00
 Total 8.50
 The company should produce the part if the part is available in the market at
Rs. 9.00 because the production of every part will give to the company a contribution
of 50 paise ( Rs. 9.00 – Rs. 8.50 )
 The company should not manufacture the part if it is available in the market at
Rs. 8 because additional cost of producing the part is 50 paise ( Rs. 8.50 – Rs. 8 )
more than the price at which it is available in the market.
PROBLEM 35ACCEPTING ADDITIONAL ORDER :

 .
 The cost sheet of a product is given below :
 Direct Material Rs. 5.00
 Direct Wages 3.00
 Factory Overhead :
 Fixed Re.0.50
 Variable Re.0.50 1.00
 Administrative expenses 0.75
 Selling or distributive overhead :
 Fixed Re. 0.25
 Variable Re. 0.50 0.75
 10.50
 Selling price per unit is Rs. 12.00
 The above figures are for an output of 50,000 units. The capacity for the firm is 65,000 units. A
foreign customer is desirous of buying 15,000 units at a price of Rs. 10 per unit.
 Advice the manufacturer whether the orders should be accepted. What will be your advise if the
order were from a local merchant ?
 Solution :
 Marginal cost statement for additional 15,000 units
 Per unit 15,000 units
 Rs. Rs.
 Selling price 10 1,50,000
 Less : Marginal cost : Rs.
 Direct material 5.00
 Direct wages 3.00
 Variable overhead :
 Factory 0.50
 Selling & Distribution 0.50 9 1,35,000
 --------------------------------------------------------------------------------------------------------------------
 Contribution 1 15,000
  
 The order from the foreign customer will give an additional
contribution of Rs.15,000. Hence, the order should be
accepted because additional contribution of Rs. 15,000 will
increase the profit by the amount as fixed expenses have
already been recovered from the internal market.
 The order from the local merchant should not be
accepted at a price of Rs.10 which is less than normal price
of Rs. 12.This price will affect relationship with other
customers and there will be a general tendency of reduction
in the price.
PROBLEM 36
 A company producing 40,000 units of X product working at 80% capacity
receives an order from a foreign dealer for 10,000 units at Rs. 50 per unit
although the local price is Rs. 90 per unit.
 Material Rs. 20
 Labour :
 Skilled ( fixed ) 10
 Unskilled labour 10
 Variable Overhead 10
 Fixed Overhead 20
 Total 70 per unit
 Advice the management whether to accept the order or not.
 What will be your advice if the order has come from the local merchant ?
 If there is temporary fall in demand what will be minimum price to be charged ?
 Solution :
 Per unit for 10,000 units
 Rs. Rs.
 Selling price 50 5,00,000
 Less : Variable cost : Rs.
 Material 20
 Unskilled labour 10
 Variable overhead 10 40 4,00,000


----------------------------------------------------------------------------------------------------------
----
 Contribution 10 1,00,000
  
  
  
 The order from the foreign customer will give an additional contribution
of Rs.1,00,000. Hence, the order should be accepted because additional
contribution of Rs. 1,00,000 will increase the profit by this amount as
fixed costs have already been met in the local market.
 The order from the local merchant should not be accepted at a price of
Rs.50 per unit which is less than normal price of Rs. 90. This price will
affect relationship with other customers and there will be a general
tendency of a reduction in the price.
 If there is a temporary fall in demand, the selling price should not be
reduced below variable cost. In other words, selling price must be equal to
variable cost. i.e. Rs.40.
PROBLEM 37-MAINTAINING THE DESIRED LEVEL OF PROFIT

 A company produces and markets industrial containers and packing

cases. Due to competition the company proposes to reduce the selling
price. If the present level of profit is to be maintained indicate the
number of units to be sold if the proposed reduction in selling price is (1)
5% (2) 10% (3) 15%.
 The following additional information is available :
 Rs.
 Present sales ( 30,000 units ) 3,00,000
 Variable cost ( 30,000 units ) 1,80,000
 Contribution 1,20,000
 Less : Fixed cost 70,000
 Profit 50,000
 Solution :
 Present price is Rs. 10
 5
 If the reduction is 5% = 10 - ----- x 10 = Rs. 9.50
 100
 10
 If the reduction is 10% = 10 - ----- x 10 = Rs. 9.00
 100
 15
 If the reduction is 15% = 10 - ------- x 10 = Rs. 8.50
 100
 Contribution at various proposed selling prices :
 Price reduction at
 5% 10% 15%
 Rs. Rs. Rs.
 Selling Price 9.50 9.00 8.50
 Less : Variable or Marginal cost 6.00 6.00 6.00
 ------------------------------------------------------------------------------------------------------
------------------
 Contribution 3.50 3.00 2.50
 Total contribution required to maintain the present level of profit is as follows :
 Present sales = Rs. 3,00,000
 Variable cost = 1,80,000
 Contribution = 1,20,000
 Units to be sold to earn the total contribution of Rs. 1,20,000 to maintain the present
level of profits.
 Total Contribution Fixed expenses + Desired profit
 = -------------------------------- (or)-----------------------------------------------
 Contribution per unit Contribution per unit
 1,20,000
 If the price is reduced by 5% = ------------------ = 34,286 units
 3.50
 1,20,000
 If the price is reduced by 10% = ----------------- = 40,000 units
 3
 1,20,000
 If the price is reduced by 15% = ---------------- = 48,00 0units
 2.50
PROBLEM 38-KEY FACTOR
. From the following data, which product would you recommend to be
manufactured in a factory, time being the key factor ?
 Per Unit of Per Unit of
 Product A Product B

 Rs. Rs.
 Direct material 24 14
 Direct labour @ Re.1 per hour 2 3
 Variable overhead @ 2 per hour 4 6
 Selling price 100 110
 Standard time to produce 2 hours 3 hours
 Solution :
 Product A Product B

 per unit per unit

 Rs. Rs.
 Selling price 100 110
 Less : Marginal Cost : Rs. Rs.
 Direct material 24 14
 Direct Labour 2 3
 Variable overhead 4 30 6 23
 =========================================
 Contribution 70 87
 Standard Time to produce 2 hours 3 hours
 70 87
 Contribution per hour ------ = Rs. 35 -------- = Rs. 29
 2 3
 Contribution per hour of product A is more than that of product B by Rs. 6. Therefore, Product A is more
profitable and is recommended to be manufactured.
PROBLEM 39
 The following particulars are obtained from costing records of a factory.
 Product A Product B
 ( Per unit ) (Per unit )
 Rs. Rs.
 Selling price 200 500
 Material ( Rs. 20 per kg.) 40 160
 Labour ( Rs. 10. per hour ) 50 100
 Variable overhead 20 40
 Total fixed overheads Rs. 15,000
 Comment on the profitability of each product when :
 Raw material is in short supply ;
 Production capacity is limited ;
 Sales quantity is limited ;
 Sales value is limited ;
 Only 1,000 kgs. of raw material is available for both type of products in total and maximum sales
quantity of each product is 300 units.
 Solution:
 Statement showing Contribution p. u.
 Product A Product B
 ( per unit ) ( per unit )
 Selling price Rs. 200 Rs. 500
 Less : Variable Costs : Rs. Rs.
 Materials 40 160
 Labour 50 100
 Variable overhead 20 110 40 300
 ---------------------------------------------------------------------------------------------
-----------------------
 Contribution per unit 90 200
 Contribution 90 200
 P / V Ratio = --------------------- x 100 ------- x 100 ------ x 100
 Sales 200 500
 45% 40%
 Rs. 90 Rs. 200

Contribution per Kg. = -------- =45 -------- = 25
 2 kgs. 8 kgs.
 Rs. 90 Rs. 200

Contribution per hr. = ---------------------- = 18 ----------------=20
5 hrs. 10 hrs.
 (a) When raw material is in short supply, contribution per kg. of product A is higher and hence product A is
more profitable.
 (b)When production capacity is limited contribution per hour of product B is higher and hence product B is
more profitable.
 ©When sales quantity is limited, contribution per unit of product B is higher and hence product B is more
profitable
 (d)When sales value is limited, the P / V Ratio of product A is higher and hence product A is more profitable.
 (e)When raw material as well as sales quantity are limited, the raw materials should first be used for maximum
number of units of product A, i.e. for 300 units. This will consume 600 Kgs. of material and the balance 400 kgs.
shall be utilized for producing 50 units.
 400
 i.e., -------------- of product B.
 8
 The profit in such a case would be :
 Rs.
 Contribution from 300 units of product A ( 300 x 90 ) 27,000
 Contribution from 50 units of product B ( 50 x 200 ) 10,000
 ------------
 Total Contribution 37,000
 Less : Fixed overheads 15,000
 ---------------
 Profit 22,000
  
  
PROBLEM 40-ALTERNATIVE METHODS OF PRODUCTION

 Product X can be produced either by machine A or machine B ;

Machine A can produce 100 units of X per hour and machine B 150
units per hour. Total machine hours available during the year are
2,500. Taking into account the following data determine the
profitable method of manufacture :
 Per Unit of X
 Machine A Machine B
 Rs. Rs.
 Marginal Cost 5 6
 Selling Price 9 9
 Fixed Cost 2 2
 Solution :
 PROFITABILITY STATEMENT

 Machine A Machine B
 Rs. Rs.
 Selling price per unit 9 9
Less : Marginal Cost 5 6
 ----------------------------------------------------------------------------------------------------------

---
 Contribution per unit 4 3
 Output per hour 100 units 150 units Contribution
per hour Rs. 400 Rs. 450
Machine Hours per year 2,500 2,500
Annual contribution Rs. 10,00,000 11,25,000
 Hence, production by machine B is more profitable.
PROBLEM 41-ALTERNATIVE COURSE OF ACTION :

 The costs per unit of the three products A, B & C of a company are given below :
 Products
 A B C
 Rs. Rs. Rs.
 Direct Materials 20 16 18
 Direct Labour 12 14 12
 Variable overhead 8 10 6
 Fixed Expenses 6 6 4
 ------------------------------------------------------------------------------------------------------------------------
 46 46 40
 Profit 18 14 12
 ---------------------------------------------------------------------------------------------------------------------------
 Selling Price 64 60 52
 No. of units produced 10,000 5,000 8,000
 Production arrangements are such that if one product is given up the production of the others can be
raised by 50%. The direction propose that C should be given up because the contribution from that production
is the lowest. Do you agree ?
 Solution :
 Fixed expenses :
 Units Rate Amount
 A 10,000 x Rs. 6 = Rs. 60,000
 B 5,000 x Rs. 6 = Rs. 30,000
 C 8,000 x Rs. 4 = Rs. 32,000
 ------------------------------------------------------------------------------------------------------------------
 Total Rs. 1,22,000
 Contribution per unit :
 Products
 A B C
 Selling price Rs. 64 60 52
 Marginal cost 40 40 36
 Contribution per unit 24 20 16
 Total Profit if A is given up :
 A B C Total
 Units - 5,000 8,000
 Addl. Units - 2,500 4,000
 ----------------------------------
 7,500 12,000
 Contribution ( Rs. ) 1,50,000 1,92,000 3,42,000
Less : Fixed cost ( Rs. ) 1,22,000
Total Profit Rs. 2,20,000
  
  
 Total Profit if B is given up :
 A B C Total
 Units 10,000 - 8,000
 Addl. Units 5,000 - 4,000
 15,000 12,000
 Contribution ( Rs. ) 3,60,000 - 1,92,000 5,52,000
 Less : Fixed cost ( Rs. ) 1,22,000
 Total Profit Rs. 4,30,000
 Total Profit if C is given up :
 A B C Total
 Units 10,000 5,000 -
 Addl. Units 5,000 2,500 -
 15,000 7,500 -
 Contribution ( Rs. ) 3,60,000 1,50,000 5,10,000
Less : Fixed cost ( Rs. ) 1,22,000
 Total Profit Rs.3,88,000
 If product B is given up the profit is the maximum. The
proposal to give up product C is, therefore, not advisable.
PROBLEM -42SELECTION OF A SUITABLE PRODUCT MIX

 Following information has been made available from the cost

records of United Automobiles Ltd. manufacturing spare parts.
 Direct Materials Per Unit
 X Rs. 8
 Y 6
 Direct Wages
 X 24 hours at 25 paise per hour
 Y 16 hours at 25 paise per hour
 Variable overheads 150% of wages
 Fixed overheads Rs. 750
 Selling price
 X Rs. 25
 Y 20
 The directors want to be acquainted with the desirability of
adopting any one of the following alternative sales mixes in the budget for
the next period.
 (a) 250 units of X and 250 units of Y
 (b) 400 units of Y only
 (c) 400 units of X and 100 units of Y
 (d) 150 units of X and 350 units of Y.
 State which of the alternative sales mixes you would
recommend to the management ?
 Solution :
 Marginal Cost Statement ( per unit )
 Products
 X Y
 Direct Materials Rs. 8 6
 Direct Wages 6 4
 Variable overheads 9 6
 Marginal cost 23 16
 Contribution 2 4
 ---------------------------------------------------------------------------------------------
------------------
 Selling Price 25 20
 Selection of Sales Alternative
 (a) 250 units of X and250 units of Y Rs.
 Contribution :
 Product X 250 units x 2 500
 Product Y 250 units x 4 1,000
 1,500
 Less : Fixed overheads 750
 -----------------------------------------------------------------------------------------------
 Profit 750
 (b) 400 units of product Y only
 Contribution 400 x 4 1,600
 Less : Fixed overheads 750
 -----------------------------------------------------------------------------------------------
 Profit 850
 (c) 400 units of X and 100 units of Y
 Contribution :
 Product X 400 units x 2 800
 Product Y 100 units x 4 400
 Less : Fixed overheads 1,200
 750
 --------------------------------------------------------------------------------------------------
 Profit 450
  
 (d) 150 units of X and 350 units of Y
 Contribution :
 Product X 150 units x 2 300
 Product Y 350 units x 4 1,400
 Less : Fixed overheads 1,700
 750
 ---------------------------------------------------------------------------------------------
 Profit 950
 The alternative (d) id more profitable since it gives the maximum profit of Rs. 950.
PROBLEM 43-DETERMINING OPTIMUM
 A factory engaged in manufacturing plastic buckets is working at 40%
capacity and produces 10,000 buckets per annum.
 The present cost break-up for bucket is as under :
 Material Rs. 10
 Labour Rs. 3
 Overheads Rs. 5 ( 60 % fixed )
 The selling price is Rs. 20 per bucket.


If it is decided to work the factory at 50% capacity, the selling price falls by
3%. At 90% capacity the selling price falls by5% accompanied by a similar
fall in the prices of material.
 You are required to calculate the profit at 50% and 90% capacities and
also calculate the break-even point for the same capacity production.
 Solution :
 Statements showing Profit at different capacity levels.
 Capacity levels 50% 90%
 Production ( in units ) * 12,500 22,500
 Per Unit Total Per Unit Total
 Rs. Rs. Rs. Rs.
 Sales 19.40 2,42,500 19.00 4,27,500
 Variable Costs :
 Materials 10.00 1,25,000 9.50 2,13,750
 Wages 3.00 37,500 3.00 67,500
 Variable overheads 2.00 25,000 2.00 45,000
 Total Variable Cost 15.00 1,87,500 14.50 3,26,250
 Contribution 4.40 55,000 4.50 1,01,250
 Less : Fixed costs 30,000 30,000
 -------------------------------------------------------------------------------------------------------------------------------------
------
 Profit 25,000 71,250
 At 50% capacity At 90% capacity
 Rs. 30,000 Rs. 30,000
 (i) B.E.P. ( in units ) ------------------- = 6,8181 = -----------------
6,667
 Rs. 4.40 Rs. 4.50
 (ii) B.E.P. ( in Rs. ) 6,818 x 19.40 6,667 x 19
 = Rs. 1,32,270 = Rs. 1,26,673
 For 40% capacity, production in units are 10,000
 For 50% capacity, production in units are
 50 x 10,000
 = ---------------------------- = 12,500 units
 40
PROBLEM 44-EVALUATION OF PERFORMANCE

 The management of a company considers that

product Y, one of its three main lines, is not as
profitable as the other two with the result that no
particular efforts are being made to push its
sales. The selling prices and costs of the three
products are :
 Product Selling Direct Direct Labour
 price material Dept. A Dept. B Dept. C
 Rs. Rs. Rs. Rs. Rs.
 X 68 10 8 2 2
 Y 58 6 2 8 2
 Z 64 8 2 2 8
 Overhead rates for each department per rupee of direct labour are as follows :
 Dept. A Dept. B Dept. C
 Rs. Rs. Rs.
 Variable overhead 1.20 0.40 1.00
 Fixed overhead 1.20 2.00 1.40
 Total 2.40 2.40 2.40
 What advice would you give to the management about the profitability of
product ? Give reasons.
 Solution :
 Statement showing comparative profitability
 X Y Z
 Rs. Rs. Rs. Rs. Rs. Rs.
 Selling price 68.00 58.00 64.00
 Less : Marginal cost :
 Direct material 10.00 6.00 8.00
 Direct labour 12.00 12.00 12.00
 Variable overhead :
 Dept. A 9.60 2.40 2.40
 Dept. B 0.80 3.20 0.80
 Dept. C 2.00 2.00 8.00
 -------------------------34.40----------------------- -- -------- 25.60 ---------------- 31.20
 Contribution 33.60 32.40 32.80
 ------------------------------------------------------------------------------------------------------------------------------------------
 P / V Ratio
 ( Approx. ) 49.4% 55.8% 51.25%
 Comment : Since P / V Ratio of product Y is the highest, it is the most profitable.
PROBLEM 45 REDUCTION IN SELLING PRICE

 The following data relate to a manufacturing company :

 Plant capacity : 4,00,000 units per annum
 Present utilization : 40%
 Actuals for the year 2000 were :
 Selling price Rs. 50 per unit
 Material cost 20 per unit
 Variable manufacturing costs 15 per unit
 Fixed costs 27 lakhs
 In order to improve capacity utilization the following proposals are considered :
 i. Reduce selling price by 10%.
 ii. Spend additionally Rs. 3 lakhs on sales promotion.
 How many units should be sold to earn a profit of Rs. 5 lakhs per year.
SOLUTION
 Proposal I : Reduction of selling price by 10%
 New Selling price ( Rs. 50 - Rs . 5 ) Rs. 45
 Less : Variable costs :
 Materials cost Rs. 20
 Variable manufacturing cost 15 35
 Contribution per unit 10
 No. of units to be sold to earn a profit of Rs. 5 lakhs :
 Fixed costs + Desired profit
 = --------------------------------------------------
 Contribution per unit
 27,00,000 + 5,00,000 32,00,000
 = --------------------------------------------- = ------------------- = 3,20,000 units

 10 10
 Proposal II : Additional expenditure of Rs. 3 lakhs on sales promotion :
 Selling price Rs. 50
 Less : Variable costs :
 Materials cost Rs. 20
 Variable manufacturing cost 15 35
 Contribution per unit 15
 No. of units to be sold to earn a profit of Rs. 5 lakhs :
 Fixed costs + Additional sales promotion costs + Desired profit
 = ------------------------------------------------------------------------------------------------------------------
 Contribution per unit
 27,00,000 + 3,00,000 + 5,00,000
 = ------------------------------------------------------------------------------
 15
 35,00,000
 = ------------------------ = 2,33,334 units
 15
PROBLEM 46
 A Ltd. is formed to produce product X, the demand for which is uncertain. Their estimated costs
are :
 Materials p. u. Rs. 2
 Labour cost p. u. Rs. 6
 Variable overheads Rs. 4
 Fixed manufacturing expenses Rs. 96,000
 (a) If the selling price p. u. is Rs. 20, how many units they have to sell to :
 (i) break even
 (ii) make a profit of Rs. 32,000
 (iii) make a profit of 20% on sales
 (b) If the demand for the product is 10,000 units, what selling price they must charge in
order to :
 (i) break even
 (ii) make a profit of Rs. 24,000
 (iii) make a profit of 20%on sales
 Solution :
 (a) Calculation of Break-Even Sales :
 Fixed cost
 (i) Break-Even Sales =
 Contribution per unit
 Selling price p. u. = Rs. 20
 i.e. Variable cost p. u. = Rs. 12 ( 2 + 6 + 4 )
 Contribution p. u. = Rs. 8
 96,000
 = ------------------ = 12,000 units
 8
 (ii) Sales required to earn a profit of Rs. 32,000

 Fixed costs + Desired profit

 = -----------------------------------------

 Contribution per unit

Rs96,000 + Rs.32,000
= ------------------------------------------
8 = 120000/8 =
16,000 units
 (iii) No. of units to be sold to make a profit of 20% on sales :
 Selling price p. u. = Rs. 20
 Profit 20% on sales
 20
 Profit = 20 x ------- = Rs. 4
 100
 Selling price p. u. = Rs. 20
 Less : Variable cost p. u. = Rs. 12
 Contribution p. u. = Rs. 8
 Less : Fixed cost ( ? ) = Rs. 4
 Profit p. u. = Rs. 4
 If Fixed cost is Rs. 4, No. of units manufactured = 1
 If Fixed cost is Rs. 96,000 No. of units manufactured
 1
 = 96,000 x ------ = 24,000 units
 4
 (b) (i) If the demand for the product is 10,000 units, selling
price to be charged to attain break even point :
 Sales ( ? ) = Rs. 2,16,00 Less
: Variable cost = Rs . 1,20,000 ( 10,000 x 12 )
 Contribution = Rs. 96,000
 Less : Fixed cost ( given ) = Rs. 96,000
 Profit at break even point = 0
 Rs. 2,16,000
 Selling price p. u. = -------------------------- = Rs. 21.60
 10,000 units
 (ii) Sales required to make a profit of Rs. 24,000
Sales ( ? ) = Rs. 2,40,000 ( 24 x 10,000 units )
 Less : Variab = Rs . 1,20,000 ( 12 x 10,000 units )
 Contribution = Rs. 1,20,000
Less : Fixed cost ( given ) = Rs. 96,000
 Profit = Rs. 24,000
 iii) Sales required to make a profit of 20% on sales
 Profit 20% on sales
 ie. Profit is Rs. 20 when sales are Rs. 100
 Cost = Rs. 80 ( Rs. 100 - Rs. 20 )
 Total Cost = Variable Cost + Fixed Cost
 = Rs. 1,20,000 + Rs. 96,000 = Rs. 2,16,000
 If cost is Rs. 80, selling price Rs. 100
 100
 If cost is Rs. 2,16,000 selling price = 2,16,000 x -----
 80
 = 2,70,000


 Sales = Rs. 2,70,000

 Less : Variable cost = Rs . 1,20,000 ( 12 x 10,000 units )
 Contribution = Rs. 1,50,000
 Less : Fixed cost ( given ) = Rs. 96,000
 Profit = Rs. 54,000 ( 20% on Rs. 2,70,000 )
PROBLEM 47
 Raja Ltd. manufacturers and sells 4 types of products under the brand name A, B, C
 & D. The sales mix in value comprises
 1 2 2 1
 33 --- %, 41--- %, 16 ----- % and 8 % of A, B, C & D respectively. The total
 3 3 3 3
 budget sales ( 100 % ) are Rs. 60,000 p. m. Operating costs are :
 Product A 60% of selling price
 Product B 68% of selling price
 Product C 80% of selling price
 Product D 40% of selling price
 Fixed costs Rs. 14,700 p.m.
 Calculate the B. E. P. for the products on an overall basis.
 (b) It has been proposed to change the sales mix as follows :
 Total sales per month remaining Rs. 60,000
 Product A 25% Product C 30%
 Product B 40% Product D 5%
 Assume that the proposal is implemented, Calculate the Break even point.
 ( M.Com., Bharathidasan )
 Solution :
 (a) Products
 A B C D Total
 1 2 2 1
 Sales Mix 33---- % 41 ---- % 16 --- % 8 ---- % 100%
 3 3 3 3
 Sales 20,000 25,000 10,000 5,000 60,000
 Less : Operating Cost
 ( % of sales ) 12,000 17,000 8,000 2,000 39,000
 Contribution 8,000 8,000 2,000 3,000 21,000
 Less : Fixed Cost 14,700
 -----------------------------------------------------------------------------------------------------------------------------------------------------
 Profit 6,300
 Fixed cost
 B. E. sales ( in Rs. ) = ------------------ x Sales
 Contribution
 Rs. 14,700
 = ------------------------ x 60,000 = Rs. 42,000
 Rs. 21,000
 (b) Products
 A B C D Total
 Revised Sales Mix 25% 40% 30% 5% 100%
 Sales 15,000 24,000 18,000 3,000 60,000
 Variable Cost 9,000 16,320 14,400 1,200 40,920
 Contribution 6,000 7,680 3,600 1,800 19,080
 Less : Fixed Cost 14,700


---------------------------------------------------------------------------------------------
Profit 4,280
 Rs. 14,700
 B. E. sales ( in Rs. ) = --------------- x 60,000 = Rs. 46,226
 Rs. 19,080

PROBLEM 48
  
 Capacity Levels of Production
 60% 70%
 6000 units 7000 units
 Rs. Rs.
 Raw Materials 2,40,000 2,80,000
 Direct Wages 1,80,000 2,10,000
 Production overheads 1,26,000 1,32,000
 Total cost 5,46,000 6,22,000
 Profit 54,000 78,000
 Sales 6,00,000 7,00,000
 Calculate Break – even point.
SOLUTION
  
 24,000
 (i) Raw Materials p. u. = ------------------ = Rs. 40
 6,000
 1,80,000
 (ii) Direct Wages p. u. =----------------------= Rs. 30
 6,000
 (iii) Production overheads is neither fixed nor variable and
is a semi – variable cost. It has to be segregated into fixed and
variable.
 Production overheads :
 At 7000 units production overheads = Rs. 1,32,000
 At 6000 units production overheads = Rs. 1,26,000
 At 1000 units production overheads = Rs. 6,000
 For 1000 units, variation in production overheads = Rs. 6,000
 6000
 For 1 unit, variation in production overheads = ------------ = Rs. 6
 1000
 Variable production Overheads p. u. = Rs. 6
  
 Total production overheads ( for 7000 units ) = Rs. 1,32,000
 Less : Variable production overheads ( 7000 x 6 ) = Rs. 42,000
 --------------------------------------------------------------------------------------------------------------------
---
 Fixed production overheads = Rs. 90,000
 Sales
 Selling price per unit = ---------------------------------------
 No. of units sold
 Rs. 7,00,000
 = ------------------- = Rs. 100
 7,000 units
 Variable costs p. u.
 Direct material p. u. 40
 Direct Wages p. u. 30
 Variable production Overhead p. u. 6
 Total Variable cost 76
 Contribution per unit = Selling price p. u . - Variable cost p. u.
 = Rs. 100 - Rs. 76 = Rs. 24
 Fixed cost
 B.E. Sales ( in Rs. ) = -------------------------------------
 Contribution per unit
 Rs. 90,000
 = -------------------------- = 3750 units
 24
 BE. Sales ( in Rs. ) = Rs. 100 x 3750 units = Rs. 3,75,000
PROBLEM 49
 . A company has annual fixed costs of Rs. 1,40,000. In
1999, sales amounted to Rs. 6,00,000 as compared to Rs.
4,50,000 in 1998. Profit in 1999 was Rs. 42,000 higher
than that of in 1998.
 (a) At what level of sales does the company break-even ?
 (b) Determine the profit or loss on a forecast sales volume
of Rs. 8,00,0000.
 (c) If there is a reduction in selling price by 10% in 2000
and the company desires to earn the same amount of profit
as in1999, what should be the required sales volume ?
 1. P.V. ratio :
 Increase in sales in 1999 = Rs. 6,00,000 - 4,50,000
 = Rs. 1,50,000
 Increase in profit = Rs. 42,000
 Changes in profit 42,000
 P.V. ratio = ------------------------------- = ------------------ x 100 =
28%
 Changes in sales 1,50,000
 2. Break-even sales :
 Fixed expenses 1,40,000
 = ----------------------------- = -------------- x 100 = Rs 5,00,000
P V Ratio 28
 3. Profit when sales are Rs. 8,00,000
 P. V. ratio = 28%
 Contribution = Sales x P. V. ratio
 28
 = 8,00,000 x ----- = 2,24,000
 100
 Less : Fixed expenses = 1,40,000
 Profit = 84,000
 4. Profit in 1999
 P.V. ratio is 28% : Sales in 1999 = Rs. 6,00,000
 28
 Contribution = 8,00,000 x ------ = Rs. 1,68,000
 100
 Less : Fixed expenses = Rs . 1,40,000
 Profit = Rs. 28,000
 P.V. Ratio = 28%; that is sales is Rs. 100, variable cost is Rs. 72 and contribution is Rs. 28
 New P.V. ratio if selling price is reduced by 10% :
 Contribution = New Sales - Variable cost
 = Rs. 90 - Rs. 72 = Rs. 18
 18 1
 New P.V. Ratio will be ---------- or ---- or 20%
 90 5
 5. Sales to earn a profit of Rs. 28,000
 Fixed costs + Desired profit
 = -------------------------------------------
 P.V. ratio
1,40,000 + 28,000 1,68,000
 = ------------------------------------- = ---------------------- x 100 = Rs. 8,40,000
20% 20
PROBLEM 50
 . Cauvery Sugar markets three products, all of which require sugar. The average
monthly sales, cost of sales and sugar consumption are as follows :
 Products
 A B C Total
 Sales 10,000 12,000 8,000 30,000
 Cost of sales 6,000 8,000 5,000 19,000
 Sugar requirements 500 kg. 800 kg. 200 kg. 1500 kg.
 Due to government restrictions its sugar quota has been reduced to 1405
kg per month. Suggest a suitable sales mix which would give the company
maximum profit under the given circumstances.
 Solution :
 Statement of Profitability
 Products
 A B C Total
 Rs. Rs. Rs. Rs.
 Sales 10,000 12,000 8,000 30,000
 Less : cost of sales 6,000 8,000 5,000 19,000
 Contribution 4,000 4,000 3,000 11,000
 Sugar requirement 500 kg. 800 kg. 200 kg. 1500 kg.
 Contribution per kg. Rs. 8 Rs. 5 Rs. 15
 ( 4000 / 500 ) ( 4000 / 800 ) ( 3000 / 200 )
 Ranking II III I
 As per the above ranking, products C and A should
be produced up to the maximum limit ( i.e. 200 kg
+ 500 kg ) and the balance 705 kg. ( 1,405 kg –
200 kg – 500 kg ) be used for product B.
Therefore contribution of A, B & C is as follows:
 Contribution =
Rs. 4,000 3,525 3,000
( 500 kg x 8 ) ( 705 x 5 ) ( 200 x15 )
PROBLEM 51
 . From the following particulars find out the profitable product mix and prepare a statement of profitability.
 Product Product Product
 A B C
 Units produced and sold 1,500 2,000 1,000
 Selling price per unit Rs. 60 Rs. 55 Rs. 50
 Requirement per unit:
 Direct material 5 kgs 3 kgs 4 kgs
 Direct labour 4 hours 3 hours 2 hours
 Variable overhead Rs. 9 Rs. 14 Rs. 6
 Fixed overhead Rs. 5 Rs. 5 Rs. 5
 Cost of direct material per kg Rs. 4 Rs. 4 Rs. 4
 Direct wages per hour Rs. 2 Rs. 2 Rs. 2
 Total availability of direct material 12,000 kgs
 Total availability of direct labour hours 10,000 hours
 At the products A, B and C are produced from the same direct material using the same type of
machines. Consider both material and labour as key factors.
 Solution :
 A B C
 Rs. Rs. Rs.
 Selling price per unit 60 55 50
 Variable costs per unit :
 Direct materials ( 5 x 4 ) 20 ( 3 x 4 )12 ( 4 x 4 )16
 Direct labour (4x2) 8 ( 3x 2 ) 6 ( 2x 2 ) 4
  
 Variable overheads 9 14 6
 Total variable cost per unit 37 32 26
 Contribution per unit 23 23 24
 Direct materials per unit 5 kgs 3 kgs 4 kgs
 Direct labour hours per unit 4 3 2
 A B C Ranking

 Rs. Rs. Rs. I II III

 Contribution per unit 23 23 24 C B&A -
 Contribution per kg of raw material 4.60 7.67 6 B C A
 Contribution per labour hour 5.75 7.67 12 C B A
 As per the above ranking, products C and B should be produced up to the maximum limit, i.e. 1000 and 2000 units respectively.
The balance of raw material and labour hours available are to be used for the manufacture of product A.
 Total raw material available 12,000 Kgs
 Less
 raw material for C ( 4 x 1000 ) 4,000
 raw material for B ( 3 x 2000 ) 6,000 10,000 Kgs
 Balance available for A 2,000 Kgs
 2,000
 No. of units, that can be produced, ----------- = 400 units of A
 5
 Total labour hours available 10,000
 Less :
 labour hours for C ( 2 x 1000 ) 2,000
 labour hours for B ( 3 x 2000 ) 6,000 8,000
 Balance available for A 2,000
 2,000
 No. of units, that can be produced, ------- = 500 units of A
 4
 Although labour hours are available for production of 500 units of A, only 400 units can be produced due to limited
availability of raw material.
Statement of Profitability
A B C
Total
Production ( Uts ) 400 2,000 1,000
Contribution P.U 23 23 24
Cont 9,200 46,000 24,000 79,200
Less : FC 7,500 10,000 5,000 22,500
Profit 1,700 36,000 19,000 56,700
PROBLEM 52
 . A toy manufacturer earns an average net profit of Rs. 3 per piece in a selling price of Rs. 15 by
producing and selling 60,000 pieces at 60% of the potential capacity. Composition of his cost of
sales is :
 Direct material : Rs. 4
 Direct wages : Re. 1
 Works overhead : Rs. 6 ( 50% fixed )
 Sales overhead : Re. 1 ( 25% variable )
 During the current year, he intend to produce the same number but anticipates that :
 (a) his fixed charges will go up by 10%.
 (b) rates of direct labour will increases by 20%.
 (c) rates of direct material will increase by 5%.
 (d) selling price cannot be increased.
 Under these circumstances, he obtains an order for a further 20% of his capacity.
What minimum price will you recommend for accepting the order to ensure the manufacturer an
overall profit of Rs. 1,80,500 ?
SOLUTION
 Marginal Cost for the Current Year
 Direct material Rs. 4.20
 Direct wages 1.20
 Variable overheads :
 Works overhead 3.00
 Sales overhead 0.25
 Total Marginal cost 8.65
 Contribution per unit 6.35
 --------------------------------------------------------------------------------------------------------

 Selling price 15.00

 Statement of Profit on sale of 60,000 units
 Sales Rs. 9,00,000
 Less : Variable cost ( 60,000 x 8,65 ) 5,19,000
 Contribution 3,81,000
 Less : Fixed cost :
 Works overheads ( 1,80,000 + 18,000 ) 1,98,000
 Sales overheads ( 45,000 + 4,500 ) 49,500 2,47,500
 -----------------
 Profit 1,33,500
 Profit required 1,80,500
 Profit 0n 60,000 units 1,33,500
 -----------------------
 Profit to be earned on 20,000 units 47,000
 Statement of Minimum Selling Price Per Unit of an Order
of 20,000 units
 Variable costs ( 20,000 x 8.65 ) Rs. 1,73,000
 Desired Profit 47,000
 Total Sales 2,20,000
 2,20,000
 Selling price per unit = ----------------- =11
 20,000
  
 Verification : Rs.
Sales 60,000 units x 15 = 9,00,000
20,000 units x 11 = 2,20,000
 ----------------------
11,20,000
 Less : Variable costs ( 80,000 x 8.65 ) 6,92,000
 Fixed costs 2,47,500
(9,39,500 )
 ----------------------------------------------------------------------------------
-----------------
 Profit 1,80,500
PROBLEM 53
 . The Sony Manufacturing Company produces 10,000 units per annum by employing 50% of the
factory capacity. The selling price of the unit is Rs. 5, and the total costs
 were :
 Rs.
 Material 10,000
 Wages 20,000
 Fixed overheads 10,000
 Variable overhead 4,000
 44,000
 Variable overhead maintains a constant ratio to the number of units produced. The company
accepts an order for additional 10,000 units at a selling price of Rs. 3.875 each.
 The increased volume of purchases reduces the material prices by 2 ½ %, wage rates remain
constant, but due to employment of new workers there is a drop in labour efficiency of 5% on all
production.
 Prepare a statement showing the variation of new profits resulting from the acceptance of
the order.
 Solution :
 Profit Statement ( at 50% capacity )
 Rs.
 Sales ( 10,000 units @ Rs. 5 ) 50,000
 Less : Variable costs : Rs.
 Material 10,000
 Wages 20,000
 Overheads 4,000 34,000
 Contribution 16,000
 Less : Fixed costs 10,000
 -----------------
 Net Profit 6000
 Profit Statement ( at 100% capacity )
 Rs. Rs.
 Sales :
 ( 10,000 units @ Rs. 5 ) 50,000
 ( 10,000 units @ Rs. 3.875) 38,750 88,750
 Less : Variable costs :
 Materials ( Rs. 20,000 x 97 ½ % ) 19,500
 100
 Wages Rs. 40,000 x 42,105
 95
 Variable overhead 8,000 69,605
 Contribution 19,415
 Less : Fixed cost : 10,000
 ------------------
 Net Profit 9,145
 Increase in the net profit by accepting the offer is : Rs. 9,145 - Rs. 6,000 = Rs. 3,145
 Note : It has been assumed that the company will maintain production at full capacity. As labour efficiency has reduced
by 5% more workers will be employed and wages will have to be paid to them to maintain the same level of efficiency.
PROBLEM 54
 There are two plants manufacturing the same product under one corporate
management which decides to merge them. Following particulars are available :
  
 Capacity operation Plant I Plant II
 100% 60%
 Sales Rs. 6,00,000 2,40,000
 Variable costs Rs. 4,40,000 1,80,000
 Fixed costs Rs. 70,000 34,000
 For the consideration of the Board of Directors, Calculate.
 (a) What would be the capacity of the merged plant to be operated for the
purpose of break-even.
 (b) What would be the profitability on working at 75 percent of the merged
capacity.
 Solution :
 (a) Sales at 100% capacity of the merged plant :
 Plant I Rs. 6,00,000
 100
 Plant II 2,40,000 x ---- Rs. 4,00,000
 60 -------------------------------------------
 Rs. 10,00,000
 Variable costs at 100% capacity of the merged plant :
 Plant I Rs. 4,40,000
 100
 Plant II 1,80,000 x ---- Rs. 3,00,000
 60 -----------------------------------------
 Rs. 7,40,000
 Contribution at 100% capacity of the merged plant :
 Total sales Rs. 10,00,000
 Total Variable costs Rs. 7,40,000
 Rs. 2,60,000
 Contribution
 P.V. ratio = ------------------------- x 100
 Sales


  
 2,60,000
 = ------------------------------- x 100 = 26%
 10,00,000
  
 Fixed expenses
 Break-Even Sales = ------------------------------------
 P.V. ratio
 1,04,000
 = --------------------x 100 = Rs. 4,00,000
 26
 Break-even sales in terms of percentage
 4,00,000
 = --------------------- x 100 = 40% capacity
 10,00,000
 (b) Profitability of the merged plant at 75% capacity
 Marginal cost statement
 Rs.
 Sales (75% of Rs. 10,00,000 ) 7,50,000
 Less : Variable costs ( 75% of 7,40,000 ) 5,55,000
 Contribution 1,95,000
 Less : Fixed costs 1,04,000


---------------------------------
 Profit 91,000
PROBLEM 55
 The budgeted results of PQR Ltd. include the following :
 Product Sales Value ( Rs. ) P.V. ratio
 P 90,000 40%
 Q 1,44,000 40%
R 2,16,000 30%
 Fixed cost for the period Rs. 1,80,00. Prepare a statement
showing the amount of loss expected and recommend a change
in sales of any of the products which eliminate the expected loss.
 Solution :
 Statement of Expected Loss
 Product Sales ( Rs. ) P.V. ratio Contribution ( Rs. )
 P 90,000 50% 45,000
 Q 1,44,000 40% 57,600
 R 2,16,000 30% 64,800
 1,67,400
 Less Fixed cost 1,80,000
 ---------------------------
 Loss ( 12,600 )
 as per the above statement, expected loss amounts to Rs. 12,600. In order
to eliminate this loss, additional sales of any product should be made.
 Unrecovered fixed cost
 Additional sales required = ---------------------------------------
 P.V. ratio
 12,600 12,600 12,600
 = -------------- ----------------------- -------------------
 50% 40% 30%
 = Rs. 25,200 Rs. 31,500 Rs. 42,000
 The sales of product P should be increased by Rs.
25,200 or that of product Q by Rs. 31,500 or that of product R
by Rs. 42,000 in order to avoid the loss.
PROBLEM 56
 . Calculate from the following data :
 1. the value of output at which the business breaks even and
 2. the percentage capacity at which it breaks-even;
 Budget based on Estimated shut
 100% capacity down expenditure
 Rs. Rs.
 Direct material 3,00,000
 Direct Wages 1,50,000
 Works expenses 1,60,000
 Selling expenses 50,000 64,000
 Admin. expenses 40,000 42,000
 Net sales 8,20,000 20,000
 Solution :
 Variable cost Fixed cost
 ( shut down cost )
 Rs. Rs.
 Direct material 3,00,000
 Direct wages 1,50,000
 Works expenses 96,000 64,000
 Admin. expenses 8,000 42,000
 Selling expenses 20,000 20,000
 ------------------------------------------------------------------
 Total Variable Cost 5,74,000 1,26,000
 Add : contribution 2,46,000
 ---------------------------------------
 Net Sales 8,20,000
 Fixed cost
 1. Break-Even Sales = ---------------------- x Sales
 Contribution
 1,26,000
 = ---------------------- x 8,20,000
 2,46,000
 = Rs. 4,20,000
 2. Break Even Percentage Capacity :
 4,20,000
 = -------------------- x 100
 8,20,000
 = 51.22%
PROBLEM 57
 Consider on the basis of the following data as to
reasonableness of accepting a foreign order :
 1. Variable cost p. u. Rs. 24.
 2. Selling price p. u. Rs. 40.
 3. Break Even Volume 60% of production capacity
 4. Total production capacity 50,00 units
 5. Margin of safety before export order 10,000 units
 6. Export under 10,000 units at Rs. 30 per unit
 Note : Units to be exported require some modifications
resulting in an increase of Re. 1 invariable cost per unit.
 Solution :
 Present position Export offer Total
 40,000 units 10,000 units 50,000 units
 Sales price p. u. Rs. 40 Rs. 30 Rs.
 Sales value 16,00,000 3,00,000 19,00,000
 Less Marginal cost 9,60,000 2,50,000 12,10,000
 ( 24 x 40,000 ) ( 25 x10,000 )
 --------------------------------------------------------------------------------------------------------------------
--------------------------
 Contribution 6,40,000 50,000 6,90,000
 Less Fixed cost 4,80,000 --- 4,80,000
 =============================================================
 Profit 1,60,000 50,000 2,10,000
 Acceptance of export order will result in an increase of Rs. 50,000 in the contribution and the
net profit. Hence, export order should be accepted.
 Working :
 Sales before export order = Break-even sales + Margin of safety
 = 30,000 + 10,000
 ( 60% of 50,000 )
 = 40,000 units
 Fixed cost :
 Fixed cost
 B. E. P. ( in Units ) = --------------------------------------------------
 Contribution per unit
 Fixed cost
 30,000 = ------------------------------------
 16
 Fixed cost = 30,000 x 16 = Rs. 4,80,000
PROBLEM 58
 . The variable cost of the power drill manufactured by Home tools Ltd. is Rs. 4 and
selling price Rs. 10. The Company expects its net profit for the year ending to be Rs.
2,75,000 after charging fixed costs amounting to Rs. 85,000. The company’s
production capacity is not fully utilized and market research suggests three alternative
strategies for the forthcoming year, Viz.,
 Strategy Reduce selling Sales volume expected
 price by to increase by
 1 5% 10%
 2 7% 20%
 3 10% 25%
 (a) Assuming the same cost structure as the current year, evaluate the alternative
strategies available to the company and state which is the most profitable.
 (b) Suggest other consideration which management would probably have in mind in
making its decision.
 Solution :
 Contribution per unit = Rs. 10 - 4 = Rs. 6
 Expected contribution = Fixed cost + Profit
 = Rs. 2,75,000 + Rs. 85,000
 = Rs. 3,60,000
 If the contribution is Rs. 6 units to be sold = 1
 If the contribution is Rs. 3,60,000, units to be sold
 3,60,000
 =- ------------- = 60,000
 3
 (a) Alternative strategies :
 Strategy Selling Contribution Estimated Total
 price p. u. p. u. sales ( units )
contribution
 ( Rs. )
 1 9.50 5.50 66,000 3,63,000
 2 9.30 5.30 72,000 3,81,000
 3 9.00 5.00 75,000 3,75,000
 Thus, of the three alternative courses of action, strategy 2 is the most profitable.
 (b) Other consideration are :
 the availability of material and labour, finance, demand for the product,
availability of spare capacity, risk involved etc.
PROBLEM 59
 A company for which you are the cost accountant, manufacturers foods in three separate
factories. The projected figures for the next year are as follows :
 Trichy Madurai Salem
 Rs. Rs. Rs.
 Sales 44,00,000 40,00,000 70,00,000
 Branch expenses :
 Salaries 4,20,000 3,80,000 6,20,000
 Advertising 80,000 1,50,000 1,00,000
 Others 1,00,000 80,000 1,10,000
 There is a Central office in Madras which estimated to cost Rs. 15,40,000 and this is to
apportioned to the three factories on the basis of the sales figures. Variable costs amount to
75% of sales of each factory. You are required to prepare a comparative profit and loss a/c
for the next year and advise whether the Madurai factory should be closed if that would
save all the Madurai branch expenses and reduce the Central office expenses from Rs.
15,40,000 to Rs. 12,40,000.
 Solution :
 Profitability Statement
 Trichy Madurai Salem
 Rs. Rs. Rs.
 Sales 44,00,000 40,00,000 70,00,000
 Less Variable cost 33,00,000 30,00,000 52,50,000
 -------------------------------------------------------------------------------------------------------------------------------------
 Contribution 11,00,000 10,00,000 17,50,000
 Less Fixed Cost :
 Branch expenses 6,00,000 6,10,000 8,30,000
 Share of H. O. expenses 4,40,000 4,00,000 7,00,000
 -------------------------------------------------------------------------------------------------------------------------------------
-
 Total fixed cost 10,40,000 10,10,000 15,30,000
 ------------------------------------------------------------------------------------------------------------------------------------
 Profit / Loss 60,000 ( 10,000 ) 2,20,000
 Madurai Branch shows a loss of Rs. 10,000 although it gives a contribution of Rs.
10,00,000.
 If the Madurai factory is closed to save all the Madurai Branch expenses and to
reduce the Central office expenses from Rs. 15,40,000 to Rs. 12,40,000 the net
profit would be Rs. 1,80,000 which is calculated as follows :
 Total contribution of Trichy and Salem Rs. 28,50,000
 Less Total expenses of both braches 14,30,000
 Total Central office expenses 12,40,000
 --------------------------- Rs. 26,70,000
 ------------------------------
 Net Profit Rs. 1,80,000
 From the above working, it is clear that Madurai Branch may be closed
down subject to other consideration.
PROBLEM 60
 . A Ltd. manufactures three different product and the following
information has been collected from the books of accounts :
 Products
 S T Y
 Sales mix 35% 35% 30%
 Selling price Rs. 30 Rs. 40 Rs. 20
 Variable cost Rs. 15 Rs. 20 Rs. 12
 Total fixed cost Rs. 1,80,000
 Total Sales Rs. 6,00,000
 The company has currently under discussion, a proposal to
discontinue the manufacture of product Y and replace it with product M,
when the following results are anticipated.
 Products
 S T M
 Sales mix 50% 25% 25%
 Selling price Rs. 30 Rs. 40 Rs. 30
 Variable cost Rs. 15 Rs. 20 Rs. 15
 Total fixed cost Rs. 1,80,000
 Total Sales Rs. 6,40,000
 Will you advise the Company to change over to production of M ?
Give reasons for your answer.
 Solution :
 Existing production :
 Products
 S T Y Total
 Selling price Rs. 30 Rs. 40 Rs. 20
 Variable cost 15 20 12
 Contribution p. u. 15 20 8
 P/ V ratio 50% 50% 40%
 Sales mix 35% 35% 30%
 Contribution per
 rupee of sales 17.5% 17.5% 12% 47%
 ( P. V. ratio x sales mix )
 Present Total Sales Rs. 6,00,000
 Total contribution ( 6,00,000 x 47% ) Rs. 2,82,000
 Less Fixed cost Rs. 1,80,000
 --------------------------
 Profit Rs. 1,02,000
 Fixed cost
 Break Even Point = ----------------------------
 P.V. ratio
 1,80,000
 = ---------------x 100
 47
 =Rs.3,82,978
 Proposed Production :
 Products
 S T M Total
 Selling price Rs. 30 40 30
 Variable cost 15 20 15
 Contribution p. u. 15 20 15
 P . V. ratio 50% 50% 50%
 Sales mix 50% 25% 25%
 Contribution per
 rupee of sales
 ( P. V. ratio x sales mix ) 25% 12.5% 12.5% 50%
 Proposed Sales Rs. 6,40,000
 Proposed contribution Rs. 3,20,000
 Less Fixed cost Rs. 1,80,000
 Profit Rs. 1,40,000
 1,80,000
 Break Even Sales ( in Rs. ) = ---------------- = Rs. 3,60,000
 50%
 It is advisable to replace product Y by M because profit increases by Rs. 38,000 and B. E. P. is brought down by Rs.
22,978.
PROBLEM 61
 Premier Ltd. manufactures and sells a product, the selling price and raw materials cost of
which have remained unchanged during the past two years. The following are the
relevant data :
 Particulars I Year II Year
 Quantity sold ( Kg . ) 100 150
 Sales Value Rs. 20,000 ?
 Raw material 10,000 ?
 Direct wages 3,000 ?
 Factory overheads 5,000 5,700
 Profit 2,000 2,550
 During the II Year direct wages rates increased by 50%, but there was a saving of
Rs. 300 in fixed factory overheads.
 What quantity ( in kg. ) the Company should have produced and sold in II Year in
order to maintain the same amount of net profit per kg. as it was earned during I year ?
 Solution :
 Statement of quantity to be produced
 I Year II Year
 Quantity sold 100 kg. 150 kg.
 per kg. Rs. per kg. Rs.
 Sales Rs. 200 20,000 200 30,000
 Less Variable cost :
 Material 10,000 15,000
 Wages 3,000 6,750
 V. factory O.H. 2,000 150 15,000 3,000 165 24,750
 ----------------------------------------------------------------------------------------------------------------------------
---------
 Contribution 50 5,000 35 5,250
 Less Fixed cost ( bal. fig ) 30 3,000 ( bal. fig ) 15
 -----------------------------------------------------------------------------
 Profit 20 2,000 20
 II year :
 To maintain the same amount of profit per kg ( i.e., Rs.
20 ) as in the I year, the company should produce 180 kgs
which is calculated as follows :
 If Rs. 15 is the fixed cost, 1 kg, can be produced
 If Rs. 2,700 is the fixed cost, No. of kgs to be
produced
 2,700
 = ---------- = 180 kgs.
 15
 Working :
 (a) Calculation of Variable Factory Overhead :
 Factory overhead increases from Rs. 5,000 in the I year to Rs. 5,700 in the II year. If there was
no saving of Rs. 300 in the II year, the amount should have been Rs. 6,000.
 Factory Overhead in the II year Rs. 5,700
 Add saving 300
 6,000
 Less factory Overhead in the I year 5,000
 Net increases in the II year 1,000
 Increase in quantity sold ( 150 Kgs. – 100 Kgs. ) = 50 kgs.
 For 50 kgs, increase in factory overhead Rs. 1,000
 1,000
 For 1 kg, increase in factory overhead = ----------- = Rs. 20

 50
 Variable factory overhead = Rs. 20 per kg.
 For 150 kgs, Variable Factory OH = 150 x 20 = Rs. 3,000
 (ii) Calculation of fixed Factory Overhead :
Total Factory Overhead in II year = Rs. 5,700
 Less variable Factory Overhead =Rs. 3,000
 Fixed Factory Overhead in II year =Rs. 2,700
PROBLEM 62
 . The Profits for 98 and 99 are given together with expenses :
 1998 1999
 Rs. Rs.
 Materials consumed 1,00,000 1,40,000
 Wages 80,000 1,20,000
 Overheads : Fixed 30,000 32,000
 Variables 24,000 34,000
 Net Profit 10,000 20,500
 The wages rate was increased by 20% in 1999than 1998.
Similarly material prices were higher by 10%. Sales prices were increased
by 10% in 1999. Analyse the causes of increases in profits in 1999.
 Solution :
 Statement showing Reconciliation of Profit earned in 1998 with that earned in 1999
 Rs. Rs.
 Profit earned during 1998 10,000
 Add : Increase in profit in 1999due to :
 1. Increase in sales price 31,500
 2. Increase in sales volume 11,640
 3. Saving in materials usage 1,827
 4. Saving in wages due to
 improvement in labour
 efficiency in 1999 3,280 48,247


-------------------------------------------------------
 58,247
 Less : Decrease in Profit in 1999 due to :
1. Increase in material price 12,727
 2. Increase in wage rate 20,000
 3. Increase (Disproportionate ) in
 variable overhead 3,020
4. Increase in fixed overhead 2,000
---------------
37,747
---------------
Net Profit earned during 1999 20,500
 Working :
 1998 1999
 Rs. Rs.
 Materials 1,00,000 1,40,000
 Wages 80,000 1,20,000
 Variable Overheads 24,000 34,000
 Total Variable Cost 2,04,000 2,94,000
 Fixed Overheads 30,000 32,000
 Total Cost 2,34,000 3,26,000
 Profit 10,000 20,500
 2,44,000 3,46,500
 1. Sales Prices have gone up by 10% in 1999 over 1998 :
 If 1999 Sales is Rs. 110 increase is Rs. 10
 If 1999 Sales is Rs. 3,46,500 increase is
 10
 = 3,46,500 x ------- = 31,500
 110
 Increase in profit due to increase in Sales price = Rs.31,500
 Sales in 1999 3,46,500
 Sales in 1998 2,44,000
 Increase in Sales 1,02,500
 (-) Increase due to price rise 31,500
 Increase due to increase in Volume 71,000
 Percentage of volume increase over 1998
 71,000
 = ------------- x 100 = 29.1%
 2,44,000
 2. Increase in Profit due to increase in Sales Volume
 = 29.1% of Contribution for 1986
 = 29.1% of Rs. 40,000 = Rs. 11,640
 3. Material price was higher by 10% in 1999 over 1998
 If material price is Rs. 110 increases in Rs. 10
 If material price is Rs. 1,40,000 increase in
 10
 = 1,40,000 x ---- = Rs. 12,727
 110
 Decrease in profit due to rise in material Price = Rs. 12,727
 Material Consumed in 1999 Rs. 1,40,000

 Material Consumed in 1998 Rs. 1,00,000

 Increase in Material Consumption 40,000
 (-) Increase due to price rise 12,727
 Increase in Consumption due increase
 in volume 22,273
 Increase in Volume is 29.1% Hence,
 Material consumption should have gone
 up by 29.1% of 1,00,000 29,100
 Savings in material consumption Rs. 1,827
 4. Wages rate has gone by 205 in 1999 over 1998
 If 1999 Wages is Rs. 120 increases in Rs. 20
 If 1999 Wages is Rs. 1,20,000 increase in
 20
 = 1,20,000 x = Rs. 20,000
 120
 Wages in 1999 Rs. 1,20,000

 Wages in 1998 Rs. 80,000

 Increase in Wages 40,000
 (-) Increase due to increase in Volume 20,000
 Increase due to wages rise increase 20,000
 Increase in Volume is 29.1% Hence,
 Wages, should have gone up by
 29.1% of 80,000 23,280
 Savings in Wages Rs. 3,280
 5. Variable overhead in 1999 Rs. 34,000
 Variable overhead in 1998 24,000
 Increase over 1998 10,000
 Variable O.H. should have gone up
 29.1% due to increase in
 volume i.e. 29.1% of 24,000 6,984
 Increase in variable O.H. due to Rs. 3,016 (or)
 increase in volume 3,020
 6. Fixed Overhead in 1999 Rs. 32,000
 Fixed Overhead in 1998 30,000
 Increase in fixed overhead Rs. 2,000
