12

Marginal Costing

BASIC CONCEPTS AND FORMULAE

Basic Concepts
1. Absorption Costing: a method of costing by which all direct cost and applicable overheads
are charged to products or cost centers for finding out the total cost of production. Absorbed
cost includes production cost as well as administrative and other cost.
2. Break even chart: A mathematical or graphical representation, showing
approximate profit or loss of an enterprise at different levels of activity within a
limited range.
3. Break Even Point: This is the level of activity there is neither a profit nor a loss.
4. Cash Break Even Point: It is the level of activity where there is neither a cash profit
nor a cash loss.
5. Cost Breakeven Point: It is the level of activity where the total cost under two
alternatives are the same. It is also known as Cost indifference point.
6. Differential Costing: It is a technique used in the preparation of adhoc information
in which only cost and income differences in between alternative courses of action
are taken into consideration.
7. Direct Costing: This is a principle under which all costs which are directed related
are charged to products, processes, operations or services, of which they form an
integral part.
8. Marginal contribution: This is the difference between selling price and variable cost
of production.
9. Marginal Cost: This is the variable cost of one unit of product or a service.
10. Marginal Costing: It is a principle whereby variable cost are charged to cost units
and fixed cost attributable to the relevant period is written off in full against
contribution for that period.
11. Profit Volume Chart: It is a diagram showing the expected relationship between
costs, revenue at various volumes with profit being the residual.
12. Profit Volume ratio: It is the ratio establishing the relationship between the

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 12.2 Cost Accounting

contribution and the sales value.

13. Margin of Safety: This is the difference between the expected level of sales and the
break even sales
Basic Formulas
1. *S – V = F + P
By multiplying and dividing L.H.S. by S
S(S − V)
2. = F+P
S
S−V
3. S × P/V Ratio = F + P or Contribution (Q P/V Ratio = )
S
4. **BES × P/V Ratio = Fixed Cost (Q at BEP profit is zero)
Fixed Cost
5. BES =
P/V Ratio
Fixed Cost
6. P/V Ratio =
BES
7. S × P/V Ratio = Contribution (Refer to iii)
Contribution
8. P/V Ratio =
Sales
9. (BES + MS) × P/V Ratio = contribution (Total sales = BES + MS)
10. (BES × P/V Ratio) + (MS × P/V Ratio) = F + P
By deducting (BES × P/V Ratio) from L.H.S. and F from R.H.S. in x we get :
11. ***M.S. × P/V Ratio = P
Change in profit
12. P/V Ratio =
Change in sales
Change in contribution
13. P/V Ratio =
Change in sales
Contribution
14. Profitability =
Key factor
15. Margin of Safety = Total sales – BES.
16. BES = Total sales – MS

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 Marginal Costing 12.3

Total sales - BES

17. Margin of safety ratio =
Total sales
* S = Sales, V= Variable Cost, F= Fixed Cost, P= Profit
** BES = Break Even Sales, P/V Ratio = Profit Volume Ratio
***M.S = Margin of Safety

Question 1
A company produces single product which sells for ` 20 per unit. Variable cost is ` 15 per
unit and Fixed overhead for the year is ` 6,30,000.
Required:
(a) Calculate sales value needed to earn a profit of 10% on sales.
(b) Calculate sales price per unit to bring BEP down to 1,20,000 units.
(c) Calculate margin of safety sales if profit is ` 60,000.
Answer
(a) Suppose sales units are x then
S=V+F+P
S = Sales
V = Variable Cost
F = Fixed Cost
P = Profit
20x = 15x + 6,30,000 + 2x
20x – 17x = 6,30,000
6,30,000
∴ x= = 2,10,000 units
3
Sales value = 2,10,000 × 20 = ` 42,00,000
(b) Sales price to down BEP 1,20,000 units
F 6,30,000
S=V+ ∴S = 15 + ∴Rs. 20.25.
New BEP 1,20,000
Profit 60,000 C
(c) M S Sales = ∴ where P/ V = × 100.
P/ V ratio P/ V S

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 12.4 Cost Accounting

5
Or, × 100 = 25%
20
60,000
∴ × 100 = 2,40,000 Or
25
Question 2
Explain and illustrate cash break-even chart.
Answer
In cash break-even chart, only cash fixed costs are considered. Non-cash items like depreciation
etc. are excluded from the fixed cost for computation of break-even point. It depicts the level of
output or sales at which the sales revenue will equal to total cash outflow. It is computed as under:
Cash Fixed Cost
Cash BEP (Units) =
Cost per Units

Hence for example suppose insurance has been paid on 1st January, 2006 till 31st December,
2010 then this fixed cost will not be considered as a cash fixed cost for the period 1st January,
2008 to 31st December, 2009.
Question 3
A company has fixed cost of ` 90,000, Sales ` 3,00,000 and Profit of ` 60,000.
Required:
(i) Sales volume if in the next period, the company suffered a loss of ` 30,000.
(ii) What is the margin of safety for a profit of ` 90,000?

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 Marginal Costing 12.5

Answer
Contribution ⎛ 1,50,000 ⎞
P/V ratio = × 100 = ⎜ × 100 ⎟ = 50%
Sales ⎝ 3,00,000 ⎠
(i) If in the next period company suffered a loss of ` 30,000, then
Contribution = Fixed Cost ± Profit
= ` 90,000 – ` 30,000 (as it is a loss) = ` 60,000.
Contribution 60,000
Then Sales = or = ` 1,20,000
P / V ratio 0.50
So, there will be loss of ` 30,000 at sales of ` 1,20,000.
Pr ofit 90,000
(ii) Margin of safety = or = ` 1,80,000
PV ratio 0.50
Alternative solution of this part:
Fixed Cost 90,000
Break-even Sales = = = ` 1,80,000
PV Ratio 0.5
Fixed Cost + Profit
Sales at profit of ` 90,000 =
PV Ratio
90,000 + 90,000 1,80,000
= = = ` 3,60,000.
0.5 0.5
Margin of Safety = Sales – Break-even Sales
= 3,60,000 – 1,80,000 = ` 1,80,000
Question 4
ABC Ltd. can produce 4,00,000 units of a product per annum at 100% capacity. The variable
production costs are ` 40 per unit and the variable selling expenses are ` 12 per sold unit.
The budgeted fixed production expenses were ` 24,00,000 per annum and the fixed selling
expenses were ` 16,00,000. During the year ended 31st March, 2008, the company worked
at 80% of its capacity. The operating data for the year are as follows:
Production 3,20,000 units
Sales @ ` 80 per unit 3,10,000 units
Opening stock of finished goods 40,000 units
Fixed production expenses are absorbed on the basis of capacity and fixed selling expenses
are recovered on the basis of period.

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 12.6 Cost Accounting

You are required to prepare Statements of Cost and Profit for the year ending 31st March,
2008:
(i) On the basis of marginal costing
(ii) On the basis of absorption costing.
Answer
(i) Statement of Cost and Profit under Marginal Costing
for the year ending 31st March, 2008
Output = 3,20,000 units
Particulars Amount Amount
(`) (`)
Sales: 3,10,000 units @ ` 80 2,48,00,000
Less: Marginal cost / variable cost:
Variable cost of production (3,20,000 × ` 40) 1,28,00,000
Add: Opening stock 40,000 units @ ` 40 16,00,000
1,44,00,000
Less: Closing Stock
[(3,20,000 + 40,000 – 3,10,000) @ ` 40
= 50,000 units @ ` 40] 20,00,000
Variable cost of production of 3,10,000 units 1,24,00,000
Add: Variable selling expenses @ ` 12 per unit 37,20,000 1,61,20,000
Contribution (sales – variable cost) 86,80,000
Less: Fixed production cost 24,00,000
Fixed selling expenses 16,00,000 40,00,000
Actual profit under marginal costing 46,80,000

(ii) Statement of Cost and Profit under Absorption Costing

for the year ending 31st March, 2008
Output = 3,20,000 units
Particulars Amount Amount
(`) (`)
Sales: 3,10,000 units @ ` 80 2,48,00,000
Less: Cost of sales:

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 Marginal Costing 12.7

Variable cost of production

(3,20,000 @ ` 40) 1,28,00,000
Add: Fixed cost of production absorbed
3,20,000 units @ ` 6 (1) 19,20,000
1,47,20,000
1,47,20,000 18,40,000
Add: Opening Stock: 40,000×
3,20,000
1,65,60,000
1,47,20,000 23,00,000
Less: Closing Stock: 50,000×
3,20,000
Production cost of 3,10,000 units 1,42,60,000
Selling expenses:
Variable: ` 12 × 3,10,000 units 37,20,000
Fixed 16,00,000 1,95,80,000
Unadjusted profit 52,20,000
Less: Overheads under absorbed: (2)

Fixed production overheads 4,80,000

Actual profit under absorption costing 47,40,000
Workings:
` 24,00,000
1. Absorption rate for fixed cost of production = = ` 6 per unit
4,00,000 units
2. Fixed production overhead under absorbed = ` (24,00,000 – 19,20,000) =
` 4,80,000.
Question 5
PQ Ltd. reports the following cost structure at two capacity levels:
(100% capacity)
2,000 units 1,500 units
Production overhead I ` 3 per unit ` 4 per unit
Production overhead II ` 2 per unit ` 2 per unit
If the selling price, reduced by direct material and labour is ` 8 per unit, what would be its
break-even point?

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 12.8 Cost Accounting

Answer
Computation of Break-even point in units:
2,000 units 1,500 units
Production Overhead I: Fixed Cost (`) 6,000 6,000
(2,000 unit × ` 3 per unit) (1,500 unit × ` 4 per
unit)
Selling price – Material and labour (`) (A) 8 8
Production Overhead II (Variable
Overhead) (B) 2 2
Contribution per unit (A) – (B) 6 6
Fixed cost 6,000
Break - even point = = = 1,000 units
Contribution per unit 6
Question 6
Product Z has a profit-volume ratio of 28%. Fixed operating costs directly attributable to
product Z during the quarter II of the financial year 2009-10 will be ` 2,80,000.
Calculate the sales revenue required to achieve a quarterly profit of ` 70,000.
Answer
P/V ratio = 28%
Quarterly fixed Cost = ` 2,80,000
Desired Profit = ` 70,000
Sales revenue required to achieve desired profit
Fixed Cost + Desired Pr ofit 2,80,000 + 70,000
= = = ` 12,50,000
P / V ratio 28%

Question 7
A Company sells two products, J and K. The sales mix is 4 units of J and 3 units of K. The
contribution margins per unit are ` 40 for J and `20 for K. Fixed costs are ` 6,16,000 per
month. Compute the break-even point.
Answer
Let 4x = No. of units of J
Then 3x = no. of units of K
⎛ Fixed Cost ⎞ ` 616000
BEP in x units = ⎜ ⎟=
⎝ Contribution ⎠ 4(40) + 3(20)

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 Marginal Costing 12.9

616000
Or =2800 units
220
Break even point of Product J = 4 × 2800 = 11200 units
Break even point of Product K = 3 × 2800 = 8400 units
Question 8
Mega Company has just completed its first year of operations. The unit costs on a normal
costing basis are as under:
(`)
Direct material 4 kg @ `4 = 16.00
Direct labour 3 hrs @ `18 = 54.00
Variable overhead 3 hrs @ `4 = 12.00
Fixed overhead 3 hrs @ `6 = 18.00
100.00
Selling and administrative costs:
Variable `20 per unit
Fixed `7,60,000
During the year the company has the following activity:
Units produced = 24,000
Units sold = 21,500
Unit selling price = `168
Direct labour hours worked = 72,000
Actual fixed overhead was `48,000 less than the budgeted fixed overhead. Budgeted variable
overhead was ` 20,000 less than the actual variable overhead. The company used an
expected actual activity level of 72,000 direct labour hours to compute the predetermine
overhead rates.
Required :
(i) Compute the unit cost and total income under:
(a) Absorption costing
(b) Marginal costing
(ii) Under or over absorption of overhead.
(iii) Reconcile the difference between the total income under absorption and marginal
costing.

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 12.10 Cost Accounting

Answer
(i) Computation of Unit Cost & Total Income
Unit Cost Absorption Costing Marginal Costing
(` ) (` )
Direct Material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead 12.00 12.00
Fixed Overhead 18.00 -
Unit Cost 100.00 82.00
Income Statements
Absorption Costing
Sales 36,12,000
(21500 × `168)
Less: Cost of goods sold (21500 × 100) 21,50,000
Less: Over Absorption 28,000 21,22,000
14,90,000
Less: Selling & Distribution Expenses 11,90,000
Profit 3,00,000

Marginal Costing
Sales 36,12,000
Less: Cost of goods sold (21500×82) 17,63,000
Add: Under Absorption 20,000 17,83,000
18,29,000
Less: Selling & Distribution Expenses 4,30,000
Contribution 13,99,000
Less: Fixed Factory and Selling & Distribution
Overhead (38,400 + 7,60,000) 11,44,000
Profit 2,55,000
(ii) Under or over absorption of overhead:
Budgeted Fixed Overhead (`)
72,000 Hrs. × `6 4,32,000
Less: Actual Overhead was less than Budgeted Fixed Overhead 48,000
Actual Fixed Overhead 3,84,000

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 Marginal Costing 12.11

Budgeted Variable Overhead

72,000 Hrs. × `4 2,88,000
Add: Actual Overhead was higher than Budgeted 20,000
Budgeted 3,08,000
Both Fixed & Variable Overhead applied
72,000 Hrs × ` 10 7,20,000
Actual Overhead (3,84,000 + 3,08,000) 6,92,000
Over Absorption 28,000
(iii) Reconciliation of Profit
Difference in Profit: ` 3,00,000 – 2,55,000 = `45,000
Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing
not in Marginal Costing.
Therefore,
Difference in Profit = Fixed Overhead Rate (Production – Sale)
18 (24,000 – 21,500) = `45,000
Question 9
What do you understand by Key factor? Give two examples of it.
Answer
Key factor is a factor which at a particular time or over a period limits the activities of an
undertaking. It may be the level of demand for the products or service or it may be the shortage of
one or more of the productive resources.
Examples of key factors are:
(a) Shortage of raw material.
(b) Shortage of Labour.
(c) Plant capacity available.
(d) Sales capacity available.
(e) Cash availability.
Question 10
Following information are available for the year 2008 and 2009 of PIX Limited:
Year 2008 2009
Sales ` 32, 00,000 ` 57, 00,000
Profit/(Loss) (` 3,00,000) ` 7, 00,000
Calculate –(a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of
` 12,00,000.

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 12.12 Cost Accounting

Answer
Change inprofit
(a) P/V Ratio = ×100
Change insales
7,00,000 + 3,00,000 10,00,000
= ×100 = × 100 = 40%
(57,00,000 − 32,00,000) 25,00,000

(b) Total fixed cost = Total contribution - Profit

=(Sales × P/V ratio) – Profit
40
= (`57, 00,000 × ) = `7, 00,000
100
=`22, 80,000 – `7, 00,000 =`15, 80,000
(c) Contribution required to earn a profit of `12, 00,000 = Total fixed cost + Profit required
=`15, 80,000 + 12, 00,000 = `27, 80,000
27,80,000 27,80,000
Required Sales = = = `69, 50,000
P / V Ratio 40%

Question 11
MNP Ltd sold 2,75,000 units of its product at ` 37.50 per unit. Variable costs are ` 17.50 per
unit (manufacturing costs of ` 14 and selling cost ` 3.50 per unit). Fixed costs are incurred
uniformly throughout the year and amount to ` 35,00,000 (including depreciation of
`15,00,000). there are no beginning or ending inventories.
Required:
(i) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
(ii) Estimate the P/V ratio.
(iii) Estimate the number of units that must be sold to earn an income (EBIT) of ` 2,50,000.
(iv) Estimate the sales level achieve an after-tax income (PAT) of ` 2,50,000. Assume 40%
corporate Income Tax rate.
Answer
Fixed cos t ` 35,00,000
(i) Break even Sales Quantity = = =1,75,000 units
Contribution margin per unit ` 20

Cash Fixed Cost ` 20,00,000

Cash Break even Sales Qty= = =1, 00,000 units.
Contribution margin per unit ` 20

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 Marginal Costing 12.13

Contribution / unit 20
(ii) P/V ratio = ×100 = × 100 = 53.33 %
Selling Pr ice / unit 37.50

(iii) No. of units that must be sold to earn an Income (EBIT) of ` 2, 50,000
Fixed cost + Desired EBIT level 35,00,000 + 2,50,000
= = 187500 units
Contribution margin per unit 20

(iv) After Tax Income (PAT) = `2, 50,000

Tax rate = 40%
`2,50,000
Desired level of Profit before tax = ×100 = `4,16,667/-
60
FixedCost + DesiredPr ofit
Estimate Sales Level =
P / V ratio
`35,00,000 + ` 4,16,667
= = `73,43,750/-
53.33%
Question 12
The P/V Ratio of Delta Ltd. is 50% and margin of safety is 40%. The company sold 500 units
for ` 5,00,000. You are required to calculate:
(i) Break even point, and
(ii) Sales in units to earn a profit of 10% on sales
Answer
(i) P/V Ratio - 50%
Margin of Safety - 40%
Sales 500 Units for ` 5,00,000
Sales Per Unit - ` 1000
Calculation of Break Even Point (BEP)
Sales − BEP
Margin of Safety Ratio = × 100
Sales
5,00,000 − BEP
40 = × 100
5,00,000
BEP = ` 3,00,000
BEP Per Unit = 3,00,000/1000 = 300 Units

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 12.14 Cost Accounting

(ii) Sales in units to earn a profit of 10 % on sales

Fixed Cost + Desired Pr ofit
Sales =
P / VRatio
Let the sales be x
Profit = 10% of x i.e. 0.1X.
Thus -
⎛ 1,50,000 + 0.1X ⎞
x = ⎜ ⎟
⎝ 50% ⎠
or x = ` 3,75,000
To find out sales in units amount of sales ` 3,75,000 is to be divided by Selling Price Per
unit
Thus -
3,75,000
Sales (in units ) = = 375 Units
1000
Working Notes
1. Selling price = ` 5,00,000/` 500 = ` 1000 per unit
2. Variable cost per unit
Selling Price - (Selling Price x P/V Ratio)
1000 – (1000 x 50%) = ` 500
3. Profit at present level of sales
Pr ofit
Margin of Safety =
P / V Ratio
Margin of Safety = 40% of ` 5,00,000 = ` 2,00,000
Pr ofit
2,00,000 =
50%
Profit = ` 1,00,000
4. Fixed Cost
= (Sales x P/V Ratio) – Profit
= 5,00,000 x 50% – 1,00,000 = `1,50,000
Note: Alternative ways of calculation of ‘Break Even Point’ and required sales to earn a
profit of 10% of sales’ can be adopted to solve the problem.

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 Marginal Costing 12.15

Question 13
Write short notes on Angle of Incidence
Answer
This angle is formed by the intersection of sales line and total cost line at the break-
even point. This angle shows the rate at which profits are being earned once the break-
even point has been reached. The wider the angle the greater is the rate of earning
profits. A large angle of incidence with a high margin of safety indicates extremely
favourable position.
Question 14
Discuss basic assumptions of Cost Volume Profit analysis.
Answer
CVP Analysis:-Assumptions
(i) Changes in the levels of revenues and costs arise only because of changes in the
number of products (or service) units produced and sold.
(ii) Total cost can be separated into two components: Fixed and variable
(iii) Graphically, the behaviour of total revenues and total cost are linear in relation to
output level within a relevant range.
(iv) Selling price, variable cost per unit and total fixed costs are known and constant.
(v) All revenues and costs can be added, sub traded and compared without taking into
account the time value of money.
Question 15
The following figures are related to LM Limited for the year ending 31st March, 2012 :
Sales - 24,000 units @ ` 200 per unit;
P/V Ratio 25% and Break-even Point 50% of sales.
You are required to calculate:
(i) Fixed cost for the year
(ii) Profit earned for the year
(iii) Units to be sold to earn a target net profit of ` 11,00,000 for a year.
(iv) Number of units to be sold to earn a net income of 25% on cost.
(v) Selling price per unit if Break-even Point is to be brought down by 4,000 units.

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 12.16 Cost Accounting

Answer
Break even point (in units) is 50% of sales i.e. 12,000 units
Hence, Break even point (in sales value) is 12,000 units x ` 200 = ` 24,00,000
Fixed Cost
(i) We know that Break even sales =
P/V ratio
Fixed Cost
or ` 24,00,000 =
25%
or Fixed Cost = ` 24,00,000 x 25%
= ` 6,00,000
So Fixed Cost for the year is ` 6,00,000
(ii) Contribution for the year =(24,000 units x ` 200) x 25%
= ` 12,00,000
Profit for the year = Contribution – Fixed Cost
= ` 12,00,000 - ` 6,00,000
= ` 6,00,000
(iii) Target net profit is ` 11,00,000
Hence, Target contribution = Target Profit + Fixed Cost
= ` 11,00,000 + ` 6,00,000
= ` 17,00,000
Contribution per unit = 25% of ` 200 = ` 50 per unit
` 17,00,000
No. of units = = 34,000 unit
` 50 per unit
So, 34,000 units to be sold to earn a target net profit of ` 11,00,000 for a year.
(iv) Net desired total Sales (Number of unit x Selling price) be Χ , then desired profit is
25% on Cost or 20% on Sales i.e. 0.2 Χ
Fixed Cost + Desired Profit
Desired Sales =
P/V ratio
6,00,000 + 0.2Χ
Χ =
25%
or, 0.25 Χ = 6,00,000 + 0.2 Χ
or, 0.05 Χ = 6,00,000

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 Marginal Costing 12.17

or, Χ = ` 1,20,00,000
1,20,00,000
No. of units to be sold - = 60,000 units
200
(v) If Break even point is to be brought down by 4,000 units then Breakeven point will be
12000 units – 4000 units = 8000 units
Let selling price be ` X and fixed cost and variable cost per unit remain unchanged
i.e. ` 6,00,000 and ` 150 respectively.
Break even point: Sales revenue = Total cost
8,000 X = 8,000 x ` 150 + ` 6,00,000
Or, 8,000 X = ` 12,00,000 + ` 6,00,000
` 18,00,000
Or, X = =` 225
8,000
∴ Selling Price should be ` 225
Hence, selling price per unit shall be ` 225 if Breakeven point is to be brought
down by 4000 units.

EXERCISE

Questions for Practice

1. TAJ Ltd. manufactures a single product, MAHAL. The following figures relate to MAHAL for a one-year period:
Activity Level 50% 100%
Sales and production (units) 400 800
` lakhs ` lakhs
Sales 8.00 16.00
Production costs:
Variable 3.20 6.40
Fixed 1.60 1.60
Selling and administration costs:
Variable 1.60 3.20
Fixed 2.40 2.40
The normal level of activity for the year is 800 units. Fixed costs are incurred evenly throughout the year, and
actual fixed costs are the same as budgeted. There were no stocks of MAHAL at the beginning of the year.

In the first quarter, 220 units were produced and 160 units were sold.

Required:
(a) What would be the fixed production costs absorbed by MAHAL, if absorption costing is used?
(b) What would be the under/over-recovery of overheads during the period?

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 12.18 Cost Accounting

(c) What would be the profit using absorption costing?

(d) What would be the profit using marginal costing?
Answer
a. ` 44000
b. ` 4000
c. ` 40,000
d. ` 28000
2. You are given the following data for the year 2007 of Rio Co. Ltd:
Variable cost 60,000 60%
Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%
Find out (a) Break-even point, (b) P/V ratio, and (c) Margin of safety. Also draw a break-even chart showing
contribution and profit.

Answer
a. ` 75000, b. 40% c. ` 25,000
3. An Automobile manufacturing company ‘Bharti’ produces different models of cars. The budget in respect of model
1000 for the month of September, 2006 is as under:
Budgeted output 40,000 units
Variable Costs: (` Lakhs)
Materials 264
Labour 52
Direct expenses 124 440
Fixed costs:
Specific fixed costs 90.00
Allocated fixed costs 112.50 202.50
Total costs 642.50
Add: Profit 57.50
Sales 700.00
Calculate:
(i) Profit with 10% increase in selling price with a 10% reduction in sales volume.
(ii) Volume to be achieved to maintain the original profit after a 10% rise in material costs, at the originally
budgeted selling price per unit.
Answer
(i) 94.50 lakhs
(ii) 44521 units
4. Mr. X has ` 2,00,000 investments in his business firm. He wants a 15 per cent return on his money. From an
analysis of recent cost figures, he finds that his variable cost of operating is 60% of sales, his fixed costs are `
80,000 per year. Show computations to answer the following questions:

(i) What sales volume must be obtained to break even?

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 Marginal Costing 12.19

(ii) What sales volume must be obtained to get 15 per cent return on investment?

Answer
(i) Break Even Point = ` 2,00,000
(ii) Sales Volume Required = ` 2,75,000
5. Two manufacturing companies which have the following operating details decide to merge:
Company I Company 2
Capacity utilization % 90 60
Sales (` lakhs) 540 300
Variable Costs (` lakhs) 396 225
Fixed Costs (` lakhs) 80 50
Assuming that the proposal is implemented, calculate:
(i) Break even sales of the merged plant and the capacity utilization at that stage.
(ii) Profitability of the merged plant at 80% capacity utilization.
(iii) Sales turnover of the merged Plant to earn a profit of ` 75 lakhs.
(iv) When the merged Plant is working at a capacity to earn a profit of ` 75 lakhs what percentage increase in
selling price is required to sustain an increase of 5% in fixed overheads.
Answer
(i) Break Even Point of the merged plant = ` 501.74 lakhs
(ii) Profitability of the merged plant at 80% capacity = 98 lakhs
(iii) Sales required to earn a profit of ` 75 lakhs = ` 791.20 lakhs
(iv) Percentage increase in S.P. to sustain 5% increase in F.O. (with ` 75 lakhs profit) = 0.8215%
6. Following is the data taken from the records of a concern manufacturing a special part ZED.
Selling price per unit ` 20
Direct material cost per unit ` 5
Direct labour cost per unit ` 3
Variable overhead cost per unit ` 2
Budgeted level of output and sales 80,000 units
Budgeted recovery rate of fixed overheads cost per unit ` 5
You are required to:
(a) Draw a break-even chart showing the break-even point.
(b) In the same chart show the impact of break-even point.
(c) (i) If selling price per unit is increased by 30% and (ii) if selling price per unit is decreased by 10%.
Answer

(a) B.E. Point = 40,000 units or ` 8,00,000

(c) (i) The B.E. Point at increased price (30% increase in SP) is 25,000 units or sales value of `
6,50,000.

© The Institute of Chartered Accountants of India

 12.20 Cost Accounting

(ii) The B.E. Point at reduced price (10% reduction in SP) is 50,000 units or sales value of ` 9,00,000.
7. The Ward Company sold 1,00,000 units of its product at ` 20 per unit. Variable costs are ` 14 per unit
(manufacturing costs of ` 11 and selling costs of ` 3). Fixed costs are incurred uniformly throughout the year and
amount to ` 7,92,000 (manufacturing costs of ` 500,000 and selling costs of ` 292,000). There are no beginning
or ending inventories.
Required:
Determine the following:
a. The break-even point for this product
b. The number of units that must be sold to earn an income of ` 60,000 for the year (before income taxes)
c. The number of units that must be sold to earn an after-tax income of ` 90,000, assuming a tax-rate of 40
percent.
d. The break-even point for this product after a 10 percent increase in wages and salaries (assuming labour
costs are 50 percent of variable costs and 20 percent of fixed costs).
Answer (a) 1,32,000 units
(b) 1,42,000 units
(c) 1,57,000 units
(d) 1,52,423 units
8. ABC Ltd is planning a concert in a remote village in India. The following costs have been estimated,
(`)
Rent of premises 1,300
Advertising 1,000
Printing of tickets 250
Ticket sellers , security 400
Wages of ABC Ltd personnel employed at the concert 600
Fee to artist 1,000
There are no variable costs of staging the concert. The company is considering a selling price for tickets at either
` 4 or ` 5 each.
Required:
(a) Calculate the number of tickets that must be sold at each price in order to breakeven.
(b) Recalculate, the number of tickets which must be sold at each price in order to breakeven, if the artist
agrees to change from a fixed fee of ` 1,000 to a fee equal to 25% of the gross sales proceeds.
(c) Calculate the level of ticket sales, for each price, at which the company would be indifferent as between the
fixed and percentage fee alternatives.
(d) Comment on the factors which you think the company might consider in choosing between the fixed fee and
percentage fee alternative.
Answer (a) At price of ` 4 BES = 1,138 tickets
At price of ` 5 BES = 910 tickets.
(b) At price of ` 4 BES = 1,183 tickets
At price of ` 5 BES = 947 tickets.
(c) 800 tickets.

© The Institute of Chartered Accountants of India