SYLLABUS:

Unit UNITProfit
2 Cost Volume 4 Analysis

 2.1 BEP Analysis

 2.2 Key factors and Safety Margin

 2.3 Managerial Decision Making Areas – Product Mix,

Make or Buy
 2.4 Pricing Decisions
Variable Cost : These are the costs that vary as the total cost to the
organization when the output (number of items or services produced
by the unit/business) varies. In other words, we say that a variable
cost varies in exactly the same proportion as the output varies.

Fixed Cost: A cost that doesn’t change in a short term, irrespective of

how the volume of production or the sales may change is the fixed
cost.
Earnings Before Interest & Tax ( EBIT) :
Sales = No. of Unit sold * S.P / unit = 1,00,000 Capital Borrowed Rs. 400000
(-) Variable Cost = 40,000
--------------------------------------------------------
= Contribution = 60,000 1 Lac
1 Lac 1 Lac
Debt 1 Lac PSC
Debent
(-) Fixed Cost = 10000 5%
Equity 5%Divi
dend ure 5%
------------------------------------------------------
= Earnings Before Interest & Tax (Operating
Profit) EBIT =50,000

(-) Interest= 10,000

---------------------------------------------------------- Equity Capital = 1000 Equity shares of Rs 100
Earnings Before Tax ( EBT) = 40000 Each
-Tax (50%) 20,000 = Outstanding Equity share 1000* Rs. 100
-----------------------------------------------------------
Earnings After Tax (EAT or PAT) = 20000
= Rs. 1,00,000
(-) Payment to Preferential share = 5000
----------------------------------------------------------- 15000
EPS = -------------------------------------
= Earnings 15000 1,000

= Rs. 15
Earnings
EPS= ---------------------------------------
No. of shares outstanding
Contribution:
The excess of Selling Price (S.P) over variable cost(V.C) is referred
as a contribution.
Contribution(C) = Selling Price - Variable Cost
Or
Contribution(C)-Fixed Cost (FC) =Profit or Loss
Profit Volume Ratio(P/V Ratio):
This ratio gives an idea of the relationship between cost, volume,
and profit . This ratio is also known as contribution margin ratio or
marginal income or variable profit ratio. P/V ratio is generally
expressed in percentage.
P/V ratio is the rate at which contribution margin increases with the
increase in volume.
P/V ratio = Marginal Contribution / Sales *100

P/V Ratio = Change in Profit / Change in Sales *100

Break Even Point(BEP):
BEP is that point where no profit or no loss condition is observed .
Every business always tries to keep himself beyond this point . When
he will reach at this point then he will be able to recover all the
expenses whatever he has incurred.

BEP is that point at which total revenue is equal to total cost. At this
point profit is about to start and all expenses are just recovered. BEP
is an important analysis which help the management in decision
making. BEP highlight the impact of increase or decrease in fixed and
variable cost on profit . It also help in price fixation.BEP can be
calculated by various formulae:
Margin of Safety(M/S):
The excess of present sales value over the break even sales is termed as
margin of safety. It shows the strength of a business . It indicate the
profitability. It is excess of actual sale of production volume over the
break even point.
If the margin of safety is large, the business prospect are strong whereas
if it is small the business prospect are weak.
1) Margin of Safety (M/S) = Actual Sales Unit- Break Even Sales Unit

Profit
2) Margin of Safety (M/S) =------------------------
P/V Ratio
Key Factor:
Key factor is that factor which is most important one for taking
decision about profitability of the concern. Key factor being limiting
factor, contributing in term of key factor is to be considered for
ascertaining the profitability and not simply maximization of total
contribution. The key factor may be sales , raw material, production
capacity, labour shortage and so on. When the key factor is operating,
the best position is reached when contribution margin per unit of key
factor is minimized.
Profit Volume Ratio: Break Even Point

1) PV Ratio: 1) BEP (Rs)

Marginal Contribution x 100

2) BEP ( in units)
--------------------------------------
Sales

2) P/ V Ratio

Change in Profit
-----------------------x 100 3) BEP (Rs)
Change in Sales

4) Break Even Point(Rs.) :

Margin of Safety 1) Profit when sales volume is given

1) Actual Sales- BEP Sales = { Sales x P/V ratio} - FC

2) Margin of safety ratio 2) Sales when profit is given

Actual Sales- BEP Sales FC + Desired Profit

----------------------------------* 100 -----------------------------
Actual Sales P/V ratio
Make or Buy:
Mangers of manufacturing companies are often faced with the
problem whether to manufacture a components, subassembly a
product or to purchase from outsider supplier . The cost accounting
system assist the manager in arriving at a correct decision by
presenting suitable analysis of the cost of production and comparing
it with the purchase price of product.
1) Sales Rs 6,00,000, Variable Cost Rs. 3,00000 , Fixed Cost Rs. 1,80,000
1) P/V Ratio 2) Break Even Point Sales:
Marginal Contribution Fixed Cost
= --------------------
-----------------------------*100
P/V ratio
Sales
180000
(600000-300000) = ----------------------
---------------------------*100 50/100
6,00,000
= 300000/600000*100 = Rs. 3,60,000
50%

3) Margin of Safety: 4) Actual Sale- BEP Sales

---------------------------------------*100
= Actual Sales – BEP Sales Actual Sales

= Rs. 600000- Rs. 360000 = 2,40,000

-----------------x 100
= Rs. 2,40, 000 6,00,000

= 40 %
2) Sales Rs 2,00,000, Variable Cost Rs. 1,20,000 , Fixed Cost Rs. 40,000
1) P/V Ratio 2) Break Even Point Sales:
Marginal Contribution Fixed Cost
= --------------------
-----------------------------*100
P/V ratio
Sales
40000
(2,00,000-1,20,000) = ----------------------
---------------------------*100 40/100
2,00,000
= 80000/200000*100 = Rs. 1,00,000
40%
3) Margin of Safety: Margin of Safety Ratio
Actual Sale- BEP Sales
= Actual Sales – BEP Sales ------------------------------------*100
Actual Sales
= Rs. 200000- Rs. 100000
= 1,00,000
= Rs. 1,00, 000 -----------------x 100
2,00,000

= 50 %
VARIABLE COST OF PRODUCTION IS RS 6 AND FIXED COST IS RS. 400 PER
YEAR

1) P/V Ratio: 2) Break Even Sales:

Fixed Cost
Contribution ----------------
----------------- *100 P/V Ratio
Sales
400
10-6 4 --------
-------*100= ----------*100 = 40%
40/100
10 10

Rs. 1000

Sales to earn a profit of Rs. 500 Profit amount at sales of Rs. 3000

FC + Desired Profit
= { Sales * P/V ratio} - FC
----------------------------- ={3000*40/100}
P/V ratio
= Rs 800
400+500
------------= 900/40*100= Rs 2250
40%
 FROM THE FOLLOWING INFORMATION FIND OUT A) BEP B)
PROFIT FOR SALES VOLUME OF RS 50000 C) THE VOLUME OF
SALES TO MAKE NET PROFIT OF RS 10000

i) Fixed Cost- Rs 13,000

ii) Variable Cost –Rs. 15,000
iii) Total Cost – Rs. 28,000
iv) Net Profit Rs. 2,000
v) Net Sales – Rs. 30,000
Sales- Rs. 30,000 a) P/V ratio =
Variable Cost Rs.15000 Contribution
-------------------- *100
----------------------------------
Sales
Contribution= Rs. 15000
15,000
Fixed Cost = Rs. 13,000
--------------*100= 50%
---------------------------------- - 30,000

b) Profit for sales volume of Rs 50000 c) The volume of sales to make net profit of Rs
10000
= { Sales * P/V ratio} - FC FC + Desired Profit
-----------------------------
= ( 50000*50/100) – 13000
P/V ratio
= 25000-13000
= 12000 13000+10000
------------------------
50/100

= Rs. 46000
The sales and profit during two years were:
Year Sales Profit
2014 150000 20000
2015 170000 25000

You are required to calculate

1) P/V Ratio
2) Break Even Point
3) Sales required to earn profit of Rs.
40000
4) The profit made when sales are
Rs. 250000
5) Margin of safety
1) P/V ratio Now Sales = Rs 150000
(-) Variable Cost= x
Change in Profit ------------------------------------
-------------------------*100 Contribution = Rs. 37500
Change in Sales (-) Fixed Cost = Rs. y
---------------------------------------
5000
--------*100 Profit = Rs 20000
20000
Therefore Variable cost will be Rs 1,12,500
25 %

Fixed Cost Rs. 17500

Now P/V ratio is 25/100 it means

Contribution 25
-------------------= -------------
Sales 100

Therefore when sales is 150000 then contribution

is 25% of sales
= Rs. 37500
Break Even Point Sales Required to earn profit of Rs 40000

Fixed Cost FC + Desired Profit

= ------------------- -----------------------------
P/V ratio P/V ratio

17500
17500+ 40000
= ----------
25/100 -------------------
25 /100
= Rs 70,000
57500
-------------*100
25

Rs. 230000
The profit made when sales Margin of safety
are Rs. 250000 = Actual Sale – BEP sales

= { Sales * P/V ratio} - FC = Rs. 170000- Rs 70000

= (250000* 25/100) -17500 = Rs 1,00,000

= Rs. 62500- Rs. 17500

= Rs. 45000