Cost-Volume-Profit Relationship

 Nature of relationship

Linear
 Assumptions under this concept are as
follows-
 Costs are classified under fixed and variable
costs.
 Selling price remains constant.
 Only one product is manufactured.
 What is Marginal Cost?
“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” ICMA, London

“The ascertainment of marginal costs and of the

effect on profit or changes in volume or type of
output by differentiating between fixed costs and
variable costs” ICMA, London
Characteristics of Marginal costing
 Difference between product and period cost.
 Considered only those manufacturing costs
that are dependant on the production volume.
 Prices are determined by adding the
contribution with the marginal cost.
 It is helpful in decision-making.
 llustration
 Arrive at the marginal cost from the following
information.
No. of units produced   = 200

Variable Cost     = Rs. 200/- unit.

Fixed Cost    =Rs. 2,50,000

  2,50,000 +(200 × 200)

=

Total Cost = 2,90,000

 If we increase the number of units to 201,
the variable costs will be = 201 × 200 =
40,200
Therefore, the total cost =  40200+ 250000

  =  290200

Marginal Cost
=  290200-290000

      =  Rs. 200/-

Break Even Analysis
Traditional Break Even Chart
Contribution Break Even chart
 Mathematical representation of
BEP
Mathematically B.E.P. can be calculated by using the following formulae:-
BEP(Units) = (Fixed cost) / (Selling price per unit – Variable cost per unit)
or
(Fixed cost) / (Contribution per unit)
or
(Break-even sales (Rs) / (Selling price per unit)

BEP (Rs) = (Fixed costs × Sales) / (Sales – Variable cost)

or
(Fixed cost × selling price per unit) / (Selling price per unit- variable cost
per unit)
or
(Fixed cost × selling price per unit) / (contribution per unit)
or
Fixed cost/ PV ratio
 Illustration
 Output: 6000 units
 Selling price per unit Rs.40
 Variable cost per unit Rs.30
 Total Fixed cost Rs.25000

From the above information, calculate the

break-even point in units and sales value