13.marginal costing and break even analysis

Financial and Management Accounting Unit 13

Sikkim Manipal University 264

Unit 13 Marginal Costing and Break Even Analysis

Structure 13.1 Introduction

Objectives

13.2 Concept

Self Assessment Questions 1

13.3 Fixed cost


13.4 Variable Cost


13.5 Marginal cost

13.6 CVP analysis


13.7 Break Even Chart


13.8 Break Even Analysis


13.9 Break Even Point


13.10 Contribution margin


13.11 Equation approach


13.12 Target profit


13.13 Margin of safety


13.14 Application


13.15 Limitation


13.16 Useful equation




Terminal Questions

Answer to SAQs and TQs

13.1 Introduction Information is a commodity. It can be purchased, produced and consumed. It can be of high or

low quality, timely or late, appropriate for its intended use or utterly irrelevant like all other goods

and services. Information entails both costs and benefits. While costs refer to other cost of

purchase, cost of compensation, cost of operating computers, cost of time spent by the

information users to read, understand and utilize the information, the benefits include improved

decisions, more effective planning, and greater efficiency of operations at lower costs and better

direction and control of operations.

Learning Objectives:

After studying this unit, you should be able to understand the following

1. Understand the concept of marginal cost.

2. Distinguish between fixed cost, Variable cost and Marginal Cost.

3. Familiarize with break even chart, break even analysis and break even point.

4. Understand the contribution marginal approach, equation approach, target profit

and margin of safety.

5. Practice the concepts in real life situations.

13.2. Concept Of Marginal Cost According to C.I.M.A. London, “Marginal Cost means 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”. Thus, marginal cost is the amount by which total cost changes when there is a change in

output by one unit. Marginal cost per unit remains unchanged irrespective of the level of activity

or output. It is also known as Variable Cost. Marginal cost is the sum total of direct material cost,

direct labor cost, variable direct expenses and all variable overheads. The marginal cost is the

same as the variable cost.


1. Marginal cost is sum total of ________.



13.3 Fixed Cost It involves the way a cost changes in relation to changes in the activity of an organization. The

activity refers to a measure of the organization’s output of products and services example number

of contact classes conducted, number of students passed in MBA, number of cars manufactured

by an Automobile industry, number of meals served by a hotel. The activities that cause costs to

be incurred are called “Cost Drivers”. A fixed cost remains unchanged in total as the level of

activity (cost drivers) varies. If activity increases or decreases say by 20 %, the total fixed costs

remain the same e.g. depreciation, property tax, rent to landlord. But fixed costs per unit will

change.

Self Assessment Questions 2 1. Fixed cost remains constant _________.

2. Fixed cost varies with ______________.

3. Variable cost remains constant with ____________.

13.4 Variable Cost A variable cost changes in total in direct proportion to a change in the level of activity or cost

driver. If activity increases, say by 20%, total variable cost also increases by 20 %. The total

variable cost increases proportionately with activity. Variable cost fixed per unit but varies in total.

Self Assessment Questions 3 1. Variable cost varies with _______________.

2. MC is extra cost incurred ________________.

13.5 Marginal Cost It is extra cost incurrent when one more unit is produced. It typically differs across different

ranges of production quantities because the efficiency of the production process changes. The

marginal cost of producing a unit declines as output increases. It is much more efficient to

produce more than to make only one.

13.6 Cost Volume Profit (CVP) Analysis This technique summarizes the effects of changes in an organization’s volume of activity on its

costs, revenue and profit. CVP analysis can be extended to cover the effects on profit of

changes in selling prices, service fees, costs, incometax rates and the organization’s mix of

products or services. It provides management with a comprehensive over view of the effects on

revenue and costs of all kinds of short run financial changes



Although, the word “profit” appears in the term, CVP analysis is not confined to profit seeking

enterprises. Managers in non profit organizations also routinely use CVP analysis to examine the

effects of activity and other short run changes on revenue and costs. It is being used as a regular

organizational tool. . In CVP analysis, it is necessary that expenses should be categorized

according to their cost behavior that is fixed or variable.

Self Assessment Questions 4 1. CVP refers to change in ________________.

2. CVP provides _________________.

3. CVP is not ______________ concept.

4. CVP focuses on ________________ cost.

13.7 Break Even Chart It is a graphic or visual presentation of the relationship between costs, volume and profit. It

indicates the point of production at which there is neither profit nor loss. It also indicates the

estimated profit or loss at different levels of production. While constructing the chart, the

following assumption is normally considered.

a) Costs are classified into fixed and variable costs

b) Fixed costs shall remain fixed during the relevant volume range of graph.

c) Variable cost per unit will remain constant during the relevant volume range of graph

d) Selling price per unit will remain constant

e) Sales mix remains constant.

f) Production and sales volume are equal

g) There exists a linear relationship between costs and revenue.

h) Linear relationship is indicated by way of straight line.

Self Assessment Questions 5 1. BEP chart is ______________.

2. Its relation is between ________________.

3. It indicates the estimated ____________.

13.8 Break Even Analysis It is an extension of or even part of marginal costing. It is a technique of studying cost volume

profit relationship. Basically, the break even analysis is aimed at measuring the variations of cost



with volume. It is a simple method of presenting the effect of changes in volume on profits. It is

also known as CVP analysis. The various assumptions are:

a) All costs can be classified into fixed and variable

b) Sales mix will remain constant.

c) There will be no change in general price level

d) The state of technology, Methods of production and efficiency remain unchanged.

e) Costs and revenues are influenced only by volume

f) Cost and revenues are linear.

g) Stocks are valued at marginal cost

h) Unit produced and sold are same.


1. BEP studies ____________________ relationship.

13.9 Break Even Point BEP is the volume of activity where the organization’s revenues and expenses are equal. At a

particular amount of sales, the organizations have no profit or loss: it normally breaks even.

Self Assessment Questions 7 1. BEP is a ______________________.

Example DR sells 8,000 pens at Rs.16 per pen. The variable expenses amount to Rs.10 per pen. The

total fixed expenses are Rs.48, 000. Prepare an Income statement.

Solution

No. of pens produced 8,000

No. of pens sold 8,000

Unit selling price per pen Rs.16

Unit variable cost per pen Rs.10

Sales Revenue (Quantity sold x unit selling price)

8000 x Rs.16 1, 28,000

Less Variable Cost (8000x Rs.10) (80,000)

Less: Fixed expenses (48,000)



Profit or Loss Zero

Note that the income statement highlights the distinction between variable and fixed expenses.

13.10 Contribution Margin Approach The contribution margin approach refers to the total sales revenue minus the total variable

expenses. This is the amount of revenue that is available to contribute to covering fixed

expenses after all variable expenses have been covered or recovered.

DR’s firm will break even when the organization’s revenue from pen sales is equal to its

expenses. How many pens must be sold during one month for DR to breakeven?

Each pen sells for Rs.16, but Rs.10 of this is used to cover the variable expense per pen. This

leave Rs...6 per pen to contribute to covering the fixed expenses of Rs.48, 000. When enough

pens have been sold in one month so that these Rs.6 contributions per pen add up to Rs.48, 000,

the organization will break even for the month. The break even can be computed as follows:

Breakeven in Fixed Expenses

Units = __________________________________________________

Contribution of each pen towards covering fixed expenses

Rs.48, 000 / Rs.6 or 8,000 pens

The Rs.6 amount that remains of each pen’s price after the variable expenses are covered is

called the “Unit contribution margin”. The general formula for computing the break even sales

volume in units is:

BEP (in units) : Fixed expenses / unit contribution margin Sometimes, the management prefers that the BEP be expressed in sales rupees rather than unit.

The formula is:

BEP in Rupees: Fixed expenses / Contribution sales ratio The Contribution Sales Ratio is popularly known as “Marginal Contribution Sales Ratio – MCSR “.

Its traditional name is: ‘P/V Ratio. ’

Note: Kindly avoid using the term P / V Ratio and only use the modern concept “MCSR” MCSR = Contribution / Sales x 100

Where Contribution = Sales value minus variable expenses


1. Contribution margin is _______________.



2. BEP in units is _________________.

3. BEP in rupees is ___________________.

4. Contribution is ___________.

13.11 Equation Approach This approach is based on the profit equation. Income or profit is equal to sales revenue minus

expenses. If expenses are separated into variable and fixed expenses, the essence of income or

profit statement is captured by the following equation:

Sales minus Variable Cost = Fixed Cost + Profit S – V = F + P

The contribution margin and equation approaches are two equivalent techniques are two

equivalent techniques for finding g the BEP. Both the methods reach the same conclusion,

hence personal preference dictates which approach should be used.

Self Assessment Questions 9 1. Equation approach is based on ____________.

2. Sales – VC = _______________

3. SV = _________

4. SV = C _________________.

5. C = _______________.

6. C _______ = P.

13.12 Target Profit Based on the experiences gained, an organization may intend to increase the production and

sales. When an organization was to be on its optimum level, a direction will be provided to

achieve the maximum level. In this connection, if one intends to increase the current year

production to higher levels, no variable expenses would be incurred. A target net profit or income

may be decided in advance. To achieve this profit, efforts will be made to effect sales. The

problem of computing the volume of sales required to earn a particular target net profit is very

similar to the problem of finding the break even point. After all, the break even point is the

number of unit sales required to earn a target net profit of zero. The target net profit is known as

“desired profit”. The formula is:



Number of units to be sold: Fixed expenses + Desired or Target profit / Contribution per

unit

Example: Calculate sales in units and in rupees: Units produced 60,000. Selling price per unit

Rs.15. Profits to be earned is Rs.87, 500.

Solution: Sales required in units : Fixed expenses + target profit / contribution per unit or

1,50,000 + 87,500 / 15 10 or 47,500 units or Rs.47,500 x Rs.15 or Rs.7,12,500.


1. Number of units to be sold is _________.

2. Desired profit is also known as ____________.

3. A target profit is set ____________.

13.13 Margin Of Safety The safety margin of an enterprise is the /difference between the budgeted sales revenue and the

break even sales revenue. The safety margin gives management a feel for how close projected

operations are to the organization’s break even point. The formula is:

MOS = Profit / MCSR

Example: Calculate BEP and MOS: Sales at present 50,000 units per annum. Selling price Rs.6 per unit, Prime cost Rs.3 per unit.

Variable overheads Re.1 per unit. Fixed cost Rs.75, 000 per annum.

Solution: BEP = Fixed cost / (SP VC) per unit or 75,000 / 6 4 or 75,000 / 2 or 37,500 units. BEP in rupees: BEP in units x selling price per unit or 37,500 x Rs.6 or Rs.2, 25,000

MOS: Actual Sales – BEP Sales or (50,000 x 6) – 2, 25,000 or Rs.75, 000

Self Assessment Questions 11 1. MOS is ________________

2. MOS is calculated as _______________.

13.14 Applications Of Marginal Costs The marginal costing helps the management in taking many policy decisions. The vital areas

where these concepts are applied directly are as follows:

Level of activity planning: Normally, the managements will consider different levels of

production or selling activities to decide optimum level of activity. Such periodic exercise shall put



the organization in the right tract to achieve its goal. Since the optimum level of activity results in

the maximum contribution per unit, the planning can become a perfect execution tool.

Alternative methods of production: With the help of marginal costing techniques, it’s possible

to undertake decision about the alternate methods of production. All the decisions should be

focused at the greater contribution so that profit can be maintained at a balanced level.

Make or buy decision: Depending upon the situational ambience, the management can have a blue print on a vital decision. Management can think of outsourcing the production activities or to

undertake it within its purview. Based on the comparative statement of cost of manufacture with

the purchase price, decisions can be taken.

Fixation of Selling Price: While pricing a product, the marginal costing techniques can come

handy. While fixing a price for a product, it is prudent to take into account the recovery of

marginal cost in addition to get a reasonable contribution to cover fixed overheads. Pricing will be

at ease once the marginal cost and overall profitability of the concern are known.

Selection of optimum sales mix: The product mix plays an important role when a firm produces more than one product. The main focus will on profit maximization. With the help of marginal

costing techniques, it is possible to decide the best product mix which will result in maximum

profits to the firm.

New Product introduction: When a firm intends to diversify its activities or to expand its

existing markets, with the help of marginal costing techniques. By fixing the time horizon to

recover the fixed costs and profit, decisions can be taken for the introduction of new products.

Balancing of profits: As the economic trends gets changed on account of government fiscal policies and regulations, competition at the regional, national, and international levels, marginal

costing techniques can aid to bring out facts with regard to maintaining a desired level of profits.

Final balancing decisions: If the sales of the product were not encouraging to cover the fixed costs, it is quite natural that the firm may decide about its continuance. This may lead to

dovetailing or completely closing down the operations. Marginal costing helps the management

to take a sound decision.


1. The application is as _______________.

13.15 Limitations Of Marginal Costing There are certain limitations which can be described as follows:



Suitability: The techniques of marginal costing cannot be applied to all the concerns. When a

concern needs to carry large stocks by way of workinprogress, the technique becomes

redundant In addition; the marginal costing techniques are not suitable to industries working on

contract basis.

Inventory valuation difficulties: Since the work in progress and the closing inventories are

valued at marginal cost basis, it will not be a sound decision from the Balance Sheet point of

view. The main focus on the ‘true and fair value’ concept gets diluted and the very purpose of

exhibiting the financial position will get defeated.

Segregation of costs: Though the marginal costing principles call for the differentiation of costs

into fixed and variable, in actual practice it becomes difficult to classify them precisely. Many

overheads which are appear to be fixed and variable may not exactly align at various levels of

production. There is no logical method to segregate semivariable expenses into fixed and

variable.

Time factor: The marginal costing ignores the time factor which is very important for any costing

purposes. Ignoring the time would naturally relate to unreliable and incomplete basis for

comparing two alternative jobs.

Sales emphasis: Marginal costing principles are basically a salesoriented concept. While the

selling function gets the prominence, other functions are not given equal weight age. This would

be a major set back.

Self Assessment Questions 13 1. Limitation include ________________.

13.16 Useful Equations Of Marginal Costing

Some of the useful equation of marginal costing are as follows :

Basic equation : Sales Revenue – Variable Expenses = Fixed Expenses + Profit

Other derivations are as follows

Sales Revenue – Variable Expenses – Fixed Expenses = Profit

Sales – Variable cost s = Contribution

Contribution – Fixed costs = Profit

Sales – Contribution = Variable costs



Marginal Contribution Sales Ratio (MCSR) = Contribution / Sales x 100

MCSR also can be found out : Change in profit / change in sales x 100

MCSR x Sales = Contribution

Sales = Contribution / MCSR

Number of units to be sold = Fixed expenses + Desired Profit / Contribution per unit

Sales required to earn target net profit in Rupees : Fixed expenses + Profit / Marginal

contribution

BEP in units = Fixed expenses / MCSR contribution per unit

BEP in Rupees : BEP in units x Selling price per unit or

Fixed costs x Total sales / Total Sales Variable costs

Margin of Safety : Total Sales – Break Even sales OR

Profit / MCSR where Profit = Sales – Total Costs


1. Basic equation of M.C is __________.

2. Profit is __________.

Problem 1: Find the contribution and profit earned. Selling price per unit Rs.25. Variable cost

per unit Rs.20. Fixed Cost Rs.3,,05,000. Output 80,000 units.

Solution: Contribution = Sales – variable cost . Rs.25 – Rs.20 or Rs.5 or 80,000 x 5 =

Rs.4,00,000

Profit =Contribution – Fixed Cost or 4,00,000 – 3,05,000 = Rs.95,000

Problem 2: Calculate the profit earned. Fixed cost Rs.5,00,000. Variable cost R.10 per unit.

Selling price Rs.15 per unit. Output 150,000 units

Solution : S – V = F + P or ( 1,50,000 x 15) – (1,50,000 x 20 ) = 5,00,000 + Profit

Profit = 22,50,000 – 15,00,000 – 5,00,000 = Rs.2,50,000

Problem 3: Find the fixed costs : Sales Rs.2,00,000. Variable Cost Rs.40,000. Profit Rs.30,000

Solution : S – V = F + P or 2,00,000 – 40,000 = Fixed Cost + 30,000 Fixed Cost = 2,00,000 – 40,000 – 30,000 = Rs.1,30,000

Problem 4: Calculate the variable cost : Sales Rs.1,50,000. Profit Rs.40,000. Fixed cost Rs.30,000. Find the amount of variable cost.



Solution : S – V = F + P or 1,50,000 – V = 30,000 + 40,000 or 1,50,000 – 30,000 – 40,000 =

Rs.80,000

Problem 5: Calculate MCSR or P / V Ratio : Marginal cost Rs.24,000. Sales Rs.60,000

Solution: Contribution : Sales – Marginal Cost or 60,000 – 24,000 or 36,000

MCSR = Contribution / Sales x 100 or 36,000 / 60,000 x 100 or 60 %

Problem 6: The sales turn over and profit during two periods are as under: Period 1 Period 2

Sales Rs.20,000 Rs.30,000

Profit Rs.2,000 Rs.4,000

Calculate the MCSR.

Solution : MCSR = Change in Profit / Change in Sales x 100 or 4,000 2,00,000 / 30,000

20,000 x 100

2,000 / 4,000 x 100 or 20 %

Problem 7 : Calculate : MCSR. Total Sales Total Costs

Year ending 31 st December 2006 22,23,000 19,83,600

Year ending 31 st December 2007 24,51,000 21,43,200

Solution: Profit = Total Sales – Total Costs or For the year 2006 = 22,23,000 – 19,83,600 = 2,39,400

For the year 2007 = 24,51,000 – 21,43,200 = 3,07,800

MCSR = Change in profit / change in sales x 100 or 68,400 / 2,28,000 x 100 or 30 % Problem: 8 : Calculate the selling price if marginal cost is Rs.2,400 and MCSR is 20 %.

Solution: MCSR = 20%, therefore the variable cost is 100 – 20 = 80 %

Variable cost given is Rs.2,400 : Therefore, Selling price is 24000 / 80 %

Or Rs.3,000.

Problem 9 : Find, Contribution and MCSR. Variable cost per unit Rs.40. Selling price per unit

Rs.80. Fixed expenses Rs.2,00,000. Output 10,000 units.

Solution: Contribution : Sales – variable costs or (10,000 x Rs.80) – (10,000 x Rs.40)

8,00,000 – 4,00,000 or Rs.4,00,000.

MCSR = Contribution / MCSR or 4,00,000 / 8,00,000 x 100 or 50 %



Problem 10. Calculate Break even point. Fixed costs Rs.80,000. Variable cost per unit Rs.4.

Sales Rs.2,00,000. The number of units involved coincides with expected volume of output.

Each unit sells at Rs.20.

Solution: BEP in units : Fixed expenses / contribution per unit Contribution = S – V or Rs.20 – Rs.4 or Rs.16

Rs.80,000 / Rs.16 or 5,000 units.

Problem 11: Calculate the Break even point : Sales Rs.2,00,000. Fixed expenses Rs.50,000. Variable expenses.Rs.1,00,000.

Solution: Since no information about the number of units produced and costs per unit is given, only Break even point in value can be ascertained.

BEP in Rs. = Fixed costs x Total sales / Total Sales – Variable costs

50,000 x 2,00,000 / 2,00,000 – 1,00,000 or Rs.1,00,000

Problem 12: Calculate MCSR and Break Even Point : Sales Rs.5,00,000. Fixed Costs Rs.1,00,000. Profit Rs.1,50,000.

Solution: MCSR = Contribution / Sales

Contribution = Fixed Costs + Profit or Rs.1,00,000 + Rs.1,50,000 = Rs.2,50,000

MCSR = 2,50,000 / 5,00,000 = 50%

BEP in Rs. = Fixed Costs / MCSR or 1,00,000 / 50 % or Rs.2,00,000.

Problem 13: Find BEP. Variable cost per unit Rs.12. Selling price per unit Rs.20. Fixed expenses Rs.60,000. What will be the selling price per unit if the BEP is brought down to 6000 units?

Solution: BEP in units : FC / CPU where CPU S V 20 – 12 or Rs.8, 60,000/8 or 7,500 units 7,500 units x Rs.20 = Rs.1,50,000.

Selling price if BEP is 6000 units : FC / CPU or FC / (SP – VP) per unit or 60,000 / (x – 12)

Let selling price be Rs .x

6,000 = 60,000 / x – 12 or 6000 (x – 12) = 60,000 or x = Rs.22 on simplification.

Problem 14: Calculate MCSR. (2) Profit when sales are Rs.20,000 (3) New BEP if selling price

is reduced by 20 %. Given Fixed expenses Rs.4,000 and Break even point Rs.10,000.

Solution: Basis BEP sales : BEP in volume : FC / MCSR

Cross multiplying, MCSR = FC / BEP Sales or 40,000 / 10,000 x 100 or 40 %.

Profit Calculate the contribution first; where MCSR = C/Sales

40 % x 20,000 = Contribution or Rs8,000



C = F + P or 8,000 = 4,000 + P or Profit = Rs.4,000.

New BEP is SP is reduced by 20 % : Let the original SP be Rs.x. Therefore, at 20 % reduction,

the Revised SP would become 20 % of x or .2x. Hence the revised SP would be x – 0.2x or 0.8x

New contribution is S – V or x – (60 % of x ) = C or 0.8x – 0.6x = 0.2x. SR = 0.2x / 0.8x or 0.25

BEP in volume = 4,000 / o.25 or Rs.16,000

Problem 15: Given fixed cost is Rs.8,000. Profit earned Rs.2,000 and BEP sales Rs.40,000. Find the actual sales.

Solution: MCSR is based on BEP sales : BEP sales = FC / MCSR = FC / BEP sales or 8,000 / 40,000 = 0.2

Actual sales = FC + desired profit / MCSR or 8,000 + 2,000 /0.2 or Rs.50,000

Terminal Questions: 1. A factory is manufacturing sewing machines. The variable cost of each machine is Rs.200

and each machine is sold for Rs.250. Fixed costs are Rs.12,000. Calculate the BEP for

output.

2. Calculate break even point and margin of safety. Fixed cost Rs.1,60,000. Variable cost per

unit Rs.2 and Selling price per unit Rs.18. Also compute the margin of safety if the company

is earning a profit of Rs.36,000.

3. Calculate the breakeven point and turnover required to earn a profit of Rs.3,600. Fixed

overheads Rs.1,80,000. Variable cost per unit Rs. Selling price Rs.20. If the company is

earning a profit of Rs.36,000, express the margin of safety available to it.

4. Given variable cost Rs.6,00,000. Fixed cost Rs.3,00,000. Net profit Rs.1,00,000. Sales

Rs.10,00,000. Find (a) MCSR (b) BEP (c) Profit when sales amounted Rs.12,00,000 (d)

sales required to earn a profit of Rs.2,00,000.

5. Given : Fixed costs Rs.4,000. Break even sales Rs.20,000. Profit Rs.1,000. Selling price per

unit Rs.20. Calculate (a) sales and marginal cost of sales (b) new break even point if selling

price is reduced by 10 %.

6. Find the margin of safety if profit is Rs.20,000 and MCSR is 40 %.

7. Calculate Break even sales and margin of safety. Given Sales Rs.10,00,000.Fixed costs

Rs.3,00,000 and Profit Rs.2,00,000.

8. Given Sales Rs.20,000. Total Costs Rs.16,000 and Variable Costs Rs.12,000. Compute

Break even sales, Margin of safety and sales to earn a profit of Rs.4,000.



Answer Self Assessment Questions

Self Assessment Questions 1 1. DMC, DLC, variable overheads

Self Assessment Questions 2 1. In total.

2. Per unit.

3. Per unit


1. Total

2. With one more unit of production.


1. Cost, revenue and profits.

2. Comprehensive

3. Profit seeking

4. Categorization of

Self Assessment Questions 5 1. A visual presentation

2. Cost, volume and profit.

3. Profit or loss Self Assessment Questions 6 1. Cost, volume, profits.

Self Assessment Questions 7 1. No profit, no loss


1. Sales – TVC

2. FC / unit contribution margin

3. FC / MCSR

4. Sales – VC

Self Assessment Questions 9 1. Profit equation

2. FC + profit

3. F + P



4. Contribution

5. F + P

6. FC

Self Assessment Questions 10 1. FC + DP / MCSR

2. Target profit in advance.

Self Assessment Questions 11 1. Difference between Budget – BEP sales.

2. Profit / MCSR.

Self Assessment Questions 12 1. Activity planning.


1. Suitability, segregation of cost.


1. S – V = F + P

2. S – V – F

Answer for Terminal Questions

1. Contribution = S –V or 250 – 200 or Rs.50 : Therefore BEP = FC / Contribution or 12,000 /

500 or 240 units.

2. Contribution = S – V = 18 – 2 = 16. BEP in units = Fixed costs / contribution per unit or

1,60,000 / 16 or 10,000 units.

Margin of safety = Actual Sales less Breakeven sales :

The formula for actual sales is : fixed Cost + Desired profit / contribution per unit or 1,60,000

+ 36,000 / 16 or 12,250 units.

Therefore, margin of safety is 12,250 10,000 units or 2,250 units.

3. Contribution per unit = S – V or 20 – 2 = 18. BEP in Units : FC / CPU or

1,80,000 / 18 = 10,000 units.

Break even sales : BEP in units x Selling price = 10,000 x Rs.20 = Rs.2,00,000

Turnover required to earn a profit of Rs.36,000



Total Fixed overheads + Profit desired / CPU = 1,80,000 + 36,000 / 18 = 12,000 units or in

terms of rupees units x selling [rice = 12,000 x Rs.20 = Rs.2,40,000.

Margin of safety = Actual sales – Break even sales = Rs. 2,40,000 – Rs.2,00,000 =

Rs.40,000 or in terms of units 12,000 – 10,000 units = 2,000 units.

4. MCSR = Contribution / Sales x 100 = Contribution = S – V or Rs.4,00,000.

4,00,000 / 10,00,000 x 100 or 40%

Break even point = FC / MCSR = 3,00,000 / 0.4 = Rs.7,50,000

Profit when sales amounted to Rs.12,00,000 . Contribution 40 % Therefore total contribution

12,00,000 x 40 % = Rs.4,80,000 Less fixed costs Rs.3,00,000 = Rs.1,80,000, being profit.

Sales to earn a profit of Rs.2,00,000 = FC + Desired profit / MCSR or 3,00,000 + 2,00,000 /

40 % = Rs.12,50,000.

5. BEP = Fixed costs / MCSR = 20,000 = 4,000 / MCSR or MCSR = 4,000 / 20,000 x 100 =

20%

Contribution : Fixed cost – Profit = 4,000 + 1,000 = Rs.5,000.

MCSR = Contribution / Sales x 100 or 20 = 5,000 / Sales x 100 = Rs.25,000

Marginal cost of sales = Sales – Contribution or 25,000 – 5,000 = Rs.20,000

(b) If selling price is reduced by 10 % : New selling price = 20 – 2 = Rs.18

Variable cost = Rs.16 (20 – 20% of 20) = Rs.2

New MCSR = 2 /18 x 100. Therefore new break even sales = FC /SR or 4,000 / 100 or

Rs.36,000.

6. Margin of safety = Profit / 40 % = Rs.50,000

7. MCSR = Contribution / sales = 5,00,000 / 10,00,000 = 50 %.

Break even sales : Fixed costs / MCSR = 3,00,000 / 50 % = Rs.6,00,000

Margin of safety = Profit / MCSR = 2,00,000 / 50 % = Rs.4,00,000

8. Sales 20,000, Variable cost Rs.13,000, Total Cost Rs.16,000. Therefore, Fixed cost = Total

cost – variable cost = 16,000 – 12,000 = Rs.4,000. Profit = Contribution – Fixed Cost = 8,000

– 4,000 = 4,000. MCSR = Contribution / sales = 8,000 / 20,000 = 40 %.BEP in units : FC /

MCSR = 4,000 / 40% = 10,000.

Margin of safety = Profit / MCSR = 400 / 40 % = 10,000

Sales to earn a profit of Rs.4,000 = FC + Desired profit / MCSR = 4,000 + 4,000 / 40 % =

Rs.20,000.

13.marginal costing and break even analysis

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