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Marginal

Costing
C-V-P Analysis
Unit II

Prof. Smarjeet Das

Definition:
According to ICMA, London "Marginal cost
is the amount at any given volume of
output, by which aggregate costs are
charged, if the volume of output is
increased or decreased by one unit."

Meaning:
Marginal cost is the cost nothing but a
change occurred in the total cost due
to changes taken place on the level
of production i.e., either an
increase / decrease by one unit of
product..

Fixed Cost
It is a cost remains constant or fixed
irrespective level of production.
Example: Rent Rs 5,000 is to be paid
irrespective level of production. It
remains constant/ fixed irrespective
of changes taken place on the level
of production.

Variable Cost
It is a cost which varies with level of production.
The following are the various components of variable cost.
Direct Materials: Materials cost consumed for the
production of goods
Direct Labour: Wages paid to the labourers who directly
involved in the production
of goods.
Direct Expenses: other expenses directly involved in the
production stream.
Variable portion of Overheads: Generally the
overheads can be classified into two categories. VizVariable overheads and Fixed overheads.

Variable Cost + Fixed Cost =


Total Cost

Semi-Variable Cost
Another
major
classification is semi
variable/fixed cost
whichisacostpartly
fixed/variabletothe
certain level of
production
or
consumption
eg
Electricity charges,
telephone
charges
andsoon.

Marginal Costing
Marginal Costing is defined as "the ascertainment
of marginal cost and of the effect on profit of
changes in volume or type of output by
differentiating between fixed and variable costs."
In marginal costing, the change in the level of cost
of operation is equivalent to variable cost due to
fixed cost component which is fixed irrespective
level of outputs.

Importance of Marginal costing:


The costs are classified into two categories viz
fixed and variable cost.
Variable cost per unit is considered as marginal
cost of the product.

Marginal costing profitability


statement
Sales
Less: Variable cost
-------------------Contribution
Less: Fixed Cost
-------------------Profit

BEP

C-V-P Analysis
Practical Problems

Prof. Smarjeet Das

Q. 1. In its budget for next month, McGwire


Company has revenues of Rs. 500,000, variable
costs of Rs. 350,000, and fixed costs of Rs.
135,000.
a. Compute contribution margin percentage.
b. Compute total revenues needed to break
even.
c. Compute total revenues needed to achieve a
target income of Rs. 45,000 before tax.
d. Compute total revenues needed to achieve a
target net income of Rs. 48,000, assuming the
income tax rate is 40%.

Q. 2. Valdosta Manufacturing Co.


produces and sells two products:
T U
Selling price (Rs.) 25 16
Variable costs per unit (Rs.) 20 13

Total fixed costs are Rs.40,500.


Compute the breakeven point in units,
assuming the sales mix is five units
of U for each unit of T.

Q. 3. Dallas Corporation wishes to


market a new product at a selling price
of Rs.1.50 per unit. Fixed costs for this
product are Rs.100,000 for less than
500,000
units
of
output
and
Rs.150,000 for 500,000 or more units
of output. The contribution-margin
percentage is 20%.
Compute how many units of this
product must be sold to earn a target
operating income of Rs.100,000.

Q. 4. The Graves Company makes three products.


The cost data for these three products is as follows:
Product AProduct BProduct C
Selling price Rs. 10 Rs. 20 Rs. 40
Variable costs Rs. 7 Rs. 12 Rs. 16

Total annual fixed costs are Rs. 840,000. The firm's


experience has been that about 20 percent of sales
come from product A, 60 percent from B, and 20
percent from C.
Required:
a. Compute break-even in sales.
b. Determine the number of units to be sold at the
break-even point.

Q. 5. Anderson Company produces and sells two products:


A and B in the ratio of 3A to 5B. Selling prices for A and
B are, respectively, Rs. 1,200 and Rs. 240; respective
variable costs are Rs. 480 and Rs. 160. The company's
fixed costs are Rs. 1,800,000 per year.
Compute the volume of sales in units of each product
needed to:

Required:
a. break even Sales.
b. earn Rs. 800,000 of income before income taxes.
c. earn Rs. 800,000 of income after income taxes,
assuming a 30 percent tax rate.
d. earn 12 percent on sales revenue in before-tax
income.
e. earn 12 percent on sales revenue in after-tax income,
assuming a 30 percent tax rate.

Q. 6
T
Ltd. provides you the following
information:
Fixed Expenses Rs. 4,000, B.E.P. Rs.
10,000.
You are required to calculate:
a. P/V Ratio
b. Profit when sales are Rs. 20,000
c. Sales to earn a profit of Rs. 6,000
d. New Break Even Point if selling price is
reduced by 20%
e. Break Even Point if variable cost is
increased by 25%

Q. 7
PCT Ltd. provides you the following information for the year 2014.
Particulars First half (Rs) Second half (Rs)
Sales 20,000 30,000
Profit 7,200 13,200

You are required to calculate the following, assuming that the fixed cost
remain constant during each of the half year.
A. The P/V Ratio, fixed cost, breakeven point and margin of safety for
first half, second half and for the whole year.

B. The amount of profit/loss when sales for the year are Rs. 60,000
C. The amount of sales required to earn a profit of Rs. 59040.
D. The amount of sales required to earn a profit of 10% on sales.
E. The amount of profit for the year 2012 assuming anticipated 10%
increase in selling price but 20% decrease in physical sales volume
and fixed cost.

Q. 8.
P/V Ratio 40%, Margin of Safety 60%,
Sales Rs. 1,50,000. Calculate Break
Even Sales, Fixed Cost and Net Profit.
Q. 9.
P/V Ratio 40%, Margin of safety 20%,
Breakeven point Rs. 200 crores.
Calculate total sales, fixed cost and
Profit.

Q.10. PCT Ltd. Provides you the following information for the year
ending 31st march 2012.
Normal capacity 2000units;
Production and sales- 2000 units;
Selling price per unit- Rs. 10
Direct material- Rs.2000
Direct wages- Rs. 2,000 &
Direct Expenses- Rs.1,600
Factory overheads(15% variable)- Rs. 4,000
Office and Admn. Expenses(80%fixed)- Rs.4,000
Selling and distribution expenses (75% fixed)- Rs. 4,000
Required to Calculate the following:a) Profit volume ratio (P/V ratio)
b) Break-even point (in units)
c) Break-even point (in Rs.)
d) Break-even point (in %)
e) Margin of safety (in units)
f) Margin of safety (in Rs.)
g) Margin of safety (in %)

Q. 11. The sales turnover and profit


during two years were as follows:
Year
Sales (Rs.)
Profit(Rs.)
1994
1,40,000 15,000
1995
1,60,000 20,000
You are required to calculate:
a) P/V ratio .
b) Sales required to earn a profit of Rs.
40,000.
c) Profit when sales are Rs. 1,20,000 .

Q. 12. The following figures of sales and


profit for two periods are available in
respect of a concern.
Particulars Sales (Rs.) Profit(Rs.)
Period I 1,00,00015,000
Period II 1,20,00023,000
You are required to find out:
P/V ratio
Fixed cost
Break-even point
Profit at on estimated sale of Rs. 1,25,000
Sales required to earn a profit of Rs. 20,000

Q. 13. The turnover and profits during the two


periods were as follows.
Particulars Sales Profit/loss(Rs.)
Period-I 7,000 units 10,000 loss
Period-II 9,000 units 10,000 profit
The selling price per unit Rs. 100
Calculate
a) Fixed cost.
b) P/V ratio.
c) Sales at break-even point.
d) The number of units to sold to earn a profit of Rs.
40,000.
e) Profit when sales are 20,000 units.

Q. 14
Sales Rs. 1,00,000
Profit Rs. 10,000
Variable cost 70%
Find out (i) P/V ratio, (ii) fixed cost (iii) sales
volume to earn a profit of Rs.40,000
Q. 15. Sales of a product amounts to 200
units per month at Rs. 10 per unit. Fixed
overhead cost is Rs.400 per month and
variable cost is Rs.6 per unit. There is a
proposal to reduce prices by 10 per cent.
Calculate present and future P/V ratio.
How many units must be sold to earn the
present total profits?