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

Select the better alternative. Also calculate the sales volume required to maintain the Thus 2
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

Q.3 Page
6 Last year a company earned 20% pre tax profit on sales turnover of Rs.100 lakhs.To
681 Ravi
improve its profitability and competitiveness, the management has decided to reduce selling New Profir
price by 10% and increase output by 20%.Cuts are proposed to be effected on variable and 25.30i.e
26.5 %
fixed costs at 5% and 20% respectively. Increase
What effect will these steps have on the company’s profit this year ?
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. Ill.18
7 5 each. It operates at 50% of the machine capacity at 50,000 units. The cost of each CMA-F
unit is as 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?

Ill-5
8 P. Co. Ltd., has an overall P/V Ratio of 60%. If the variable cost of a product is Rs. 20, what will
be its selling price? CMA-I
Ill-9
9 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, CMA-I
indicate the number of units to be sold if the proposed reduction in selling price is:
(a) 5%; (b) 10%; (c) 15%.
The following additional information is available: