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Application of “Marginal Costing Technique”

---In Fixation of “Selling Price”


Sr No.  Ans
Problems  & Remark

1  The Following data is given wrt Prestige Pvt Ltd which manufactures Pressure Cookers.The  Q.20.8 
Company has drawn up the following budget for the year 2016‐17:  Page‐
20.28  of 
Raw Materials ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐   Rs.20,00,000  MN 
 Labour ,Stores,Power and other Variable Costs‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐            6,00,000  Arora 
Manufacturing Overheads‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐          7,00,000  Book 
 
Variable Distribution Costs‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐           4,00,000  Ans: 
General Overheads including  Selling‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐         3,00,000  GM 
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐  Profit: 
14,75,000 
                                        Total Costs‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐40,00,000  Sales 
Income From Sales‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐50,00,000  Mngr 
Proft: 
Budgeted Profit‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐10,00,000  14,00,000 
The General Manager suggests to reduce selling prices by 5% and expects to achieve an 
additional  volume  of  50%.There  is  sufficient  manufacturing  capacity.More  intensive 
manufacturing  programme  will  involve  additional  costs  of  Rs.50,000  for  production 
planning .It will also be necessary to open an additional sales office at a cost of Rs.1,00,000 
p.a  
The Sales Manager ,on the other hand, suggests to increase selling price by 10% which is 
estimated  to  reduce  sales  volume  by  10%.At  the  same  time  ,saving  in  manufacturing 
overheads  and  general  overheads  at  Rs.50,000  and  Rs.1,00,000  p.a,  respectively,  is 
expected on this reduced volume. 
Which of these two proposals would you accept and why ? 
Q.2[a] 
2  Gupta Enterprise is operating at 60% capacity level producing and selling 60,000 units @  June‐12 
Rs. 50 per unit. Other relevant particulars are as follows : [2008] 
CM Exam 
                                                                                                   Cost Per Unit  Ans: 
1.Existing 
Material                                                                                           Rs. 20  Profit: 
3,00,000 
Conversion Cost (variable)                                                            Rs. 10  st
1  Option: 
PV Ratio: 
Dealer’s margin (10% of sales)                                                      Rs. 5  15% 
BEP  Sales‐
Fixed cost for the period is                                                      Rs. 6,00,000  40,00,000 
As there is a stiff competition it is not possible to sell all the products at the existing cost  2‐Option:  PV 
price structure. The following alternative proposals are considered : Ratio:20% 
BEP Sales 
(i) Decrease selling price by 20%        (ii) Increase dealer’s margin from 10% to 20% 30,00,000 
nd
Thus  2  
Select  the  better  alternative.  Also  calculate  the  sales  volume  required  to  maintain  the  Option  is 
same  amount  of  profit  under  the  alternative  which  is  considered  better  assuming  that  Better  Required 
volume of sales will not be a limiting factor under such alternative.   Sales 
Volume: 
Also assume that Fixed Cost will remain constant.  45,00,000
Q.17.08 
3  The Following data is given:  Page‐17.46 
               Selling Price ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐Rs.20 per unit.  Arora 
Ans: 
               Variable Manufacturing Costs‐‐‐‐‐‐‐‐‐‐‐‐‐11 per unit  26,40,000 
                Variable Selling Costs‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐3 Per unit  1,42,000 
units 
                Fixed Factory overhead‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐5,40,000 p.a  1,98,000 
                Fixed Selling Costs‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐2,52,000 p.a  units  
You are required to compute: 
a.Break Even Point expressed in amount of sales in rupees. 
b.Number of units that must be sold to earn a profit of Rs.60,000 per year. 
c.How many units must be sold to earn a net income of 10% of sales ?
Q.23  Page‐
4  The ratio of Variable Cost to  Sales is 70%. 643 Ravi 
The Break Even Point occurs at 60% of the capacity sales.  Capacity 
Sales=Rs.5,
Find  the capacity  sales when fixed costs are Rs.90,000.  00,000 
BEP=Rs.3,0
Also compute profit at 75% of the capacity sales.  0,000 
Profit 
@75%  of 
Capacity 
Sales=Rs22,
500. 
Dec‐14 
5  Set‐2 
[2008] 
Q.4[a] 
Profit 
Planning 
Ans: 
i)5000 
motors 
ii)7000 
motors 
iii)7500 
motors 

 
Last year a company earned 20% pre tax profit on sales turnover of Rs.100 lakhs.To Q.3  Page 
6  681 Ravi 
improve its profitability and competitiveness, the management has decided to reduce selling New 
price by 10% and increase output by 20%.Cuts are proposed to be effected on variable and Profir 
25.30i.e 
fixed costs at 5% and 20% respectively. 26.5  % 
What effect will these steps have on the company’s profit this year ? Increase 
 
The company was having a fixed cost of Rs.25 Lakhs p.a last year.
A company manufactures “Product A” and sells them at Rs. 20 each with a profit of Rs. 5 Ill.18 
7  each. It operates at 50% of the machine capacity at 50,000 units. The cost of each unit is as CMA‐F 
under:-----------------------  
Direct Material Rs. 6
Direct Labour Rs. 2
Works Overheads Rs. 5 (50% fixed ) Sales Expenses Rs. 2 (25% variable)
It is anticipated that next year material cost will go up by 5%, labour by 20% and fi xed
expenses by 10%. There will be no change, however, in the selling price per unit. The
company has received anadditional order for 20,000 unit in the next year.
What will be the lowest price it can quote so as to earn the same profit as current year?

P. Co. Ltd., has an overall P/V Ratio of 60%. If the variable cost of a product is Rs. 20, what will Ill‐5 
8  be its selling price? CMA‐I 
A company produces and markets industrial containers and packing cases. Due to competition, the Ill‐9 
9  company proposes to reduce the selling price. If the present level of profit is to be maintained, CMA‐I  
indicate the number of units to be sold if the proposed reduction in selling price is:
(a) 5%; (b) 10%; (c) 15%.
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