1 Marginal Costing
1 Marginal Costing
1 Marginal Costing
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CA Megh Raj Aryal Gurukul CA
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CA Megh Raj Aryal Gurukul CA
Q.1. Following information are available for A Ltd. Fixed cost Rs 500,000. Output level 150,000 units . Variable cost Rs 10 per
unit. Selling price Rs 15 per unit. Using marginal costing technique Calculate:-
i) PV Ratio ii) BEP Sales value iii) BEP Sales (units) iv) Margin of safety
v) Margin of safety ratio vi) Amount of profit Earned. vi) Sales required earning Rs 300,000.
[Ans:- PV Ratio=33.33%, BEP Sales Value=Rs 1500,000, BEP Sales Units =100,000 units, MOS=50,000 Units, MOS
Ratio=33.33%, Profit=Rs 250,000, Required Sales=Rs 24,00,000]
Q.2. A company had incurred fixed expenses of Rs 450,000 with sales of Rs 15,00,000 and earned a profit of Rs 300,000 during the
first half year. In the second half, it suffered a loss of Rs 150,000.
Calculate:
i) The profit Volume ratio, Breakeven point and margin of safety for the first half year.
ii) Expected sales- volume for the second half year assuming that selling price, Variable cost per unit and fixed
expenses remain unchanged during the second half year.
iii) The Breakeven point and margin of safety for the whole year.
[Ans:-i) PV Ratio=50%, BEP Ist half=Rs 900,000, MOS Ist half=Rs 600,000, ii) Sales in 2nd Half=Rs 600,000, iii) BEP
Whole year =Rs 18,00,000, MOS Whole year=Rs 300,000]
Q.3. Titan Engineering is operating at 70 percent capacity and presents the following information;
Breakeven Point Rs 200 crores
P/V Ratio 40%
Margin of Safety Rs 50 crores
Titan’s management has decided to increase capacity level to 95 percent with the following modifications:-
i) The selling price will be reduced by 8 percent.
ii) The variable cost will be reduced by 5 percent on sales.
iii) The fixed cost will increase by Rs 20 crores, including depreciation on additions, but excluding interest on additional capital.
iv) Additional capital of Rs 50 crores will be needed for capital expenditure and working capital.
Required:
a) Indicate the sales figure, with the working, that will be needed to earn Rs 10 crores over and above the present profit and
also meet 20 percent interest on the additional capital. [Ans:- Required Sales=Rs 311.11 crores]
b) What will be the revised?
i) Break Even point [Ans:- Revised BEP=244.44 Crores]
ii) P/V Ratio [Ans:- Revised PV Ratio=45%]
iii) Margin of Safety [Ans:- Revised MOS=Rs 66.67 Crores]
Q.4. Quality products ltd manufactures and markets a single product. The following data are available:
Rs per unit
Materials 16
Conversion costs(variable) 12
Dealer’s Margin 4
Selling Price 40
Fixed Cost Rs 5 lakhs
Present Sales: 90,000 units
Capacity utilization: 60 percent
There is acute competition. Extra efforts are necessary to sell. Suggestion has been made for increasing sales:
a) By reducing sales price by 5 percent
b) By Increasing dealer’s margin by 25 percent over the existing rate.
Which of these two suggestions you would recommend, if the company desires to maintain the present profit. .
[Ans:- Sales required to earn present profit Rs 220,000 under Ist alternative= 120,000 units,
Sales required to earn present profit Rs 220,000 under 2nd alternative=102,857 units,
Hence 2nd alternative is selected]
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CA Megh Raj Aryal Gurukul CA
Q.5. A Japanese soft drink company is planning to establish a subsidiary company in India to produce mineral water.
Based on the estimated annual sales of 40,000 bottles of the mineral water, cost studies produces the following estimates for the
Indian subsidiary.
Total Annual Costs Percent of total Annual
Rs cost which is variable
Material 210,000 100%
Labour 150,000 80%
Factory OH 92,000 60%
Administration Exp 40,000 35%
The Indian production will be sold by manufacturers representatives who will receive a commission of 8% of the sale price.
No portion of the Japanese office expenses is to be allocated to the Indian subsidiary.
Required to :-
I) Compute the sale price per bottle to enable the management to realize an estimated 10% profit on sale proceeds in
India. [Ans:- Selling price per bottle=Rs 15/unit]
II) Calculate the break even point in Rupee sales, also in number of bottles for the Indian subsidiary on the assumption
that the sale price Rs 14 per bottle. [Ans:- BEP Rs 14,48,000, BEP Bottles =32,000 bottles]
Q.6. A single product company sells its products at Rs 60 per unit. In 1996 the company operated at a margin of safety of 40%. The
fixed costs amounted to Rs 360,000 and the variable cost ratio to sales was 80%.
In 1997, it is estimated that the variable cost will go up by 10% and the fixed costs will increase by 5%.
a) Find the selling price required to be fixed in 1997 to earn the same PV Ratio as on 1996.
b) Assuming the same selling price of Rs 60 per unit in 1997, find the number of units required to be produced and sold to
earn the same amount of profit as in 1996.
[Ans:- New SP =Rs 66, Required Sales units=85,833.33 units]
Q.9. If M.S Ratio is changed from 30% to 60% (Sales remaining the same), how will the profitability be affected, taking 20% PV
Ratio? [Ans: Profitability will increase by 100%]
Q.10. PV ratio of a business is 30%, BEP is 40% of the capacity, Capital turnover is 2.5 and profit is 15% on capital employed. At
what level (percent of the capacity) the business is operating? (Capital turnover = Sales /C.E)
[Ans: 50% capacity]
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CA Megh Raj Aryal Gurukul CA
Q.11. At the budgeted activity level of 75% of total capacity, a company earns a P/V ratio of 25% and a profit of 10% on sales. During
the course of the year, they had to reduce the price by 10% due to recession. The company was able to produce and sales
equivalent to 50% of its total capacity. The sales volume at this level was Rs 13,50,000 at the reduced price of Rs 9. Due to
recession in production the actual variable cost went up by 2% of the budget. Find P/V Ratio and BEP in value in changed
situation. [Ans; PVR= 15%, BEP = Rs 22,50,000]
Q.12. Frazer Ltd manufactures and sells a product, the selling price and raw material cost of which have remained unchanged during
the past two years. The following are the relevant data:-
Year 1 Year 2
Quantity Sold (Kgs) 100 150
Rs Rs
Sales Value 20,000 ?
Raw material 10,000 ?
Direct wages 3,000 ?
Factory Overheads 5,000 5,700
Profit 2,000 2,550
During the year 2, direct wages rates increased by 50% but there was a saving of Rs 300 in fixed factory overheads.
Required:-
What quantity (Kgs) the company should have produced and sold in year 2 in order to maintain the same amount of net profit per
kg as it earned during year 1? [Ans:- Required Sales Quantity = 180 kg]
Q.13. Forward Ltd is manufacturing and selling two products A & B at selling price of Rs 3 and Rs 4 respectively. The following sales
strategy has been outlined for the year 1989:-
I) Sales planned for year will be Rs 7.20 Lakhs in the case of A and Rs 3.50 lakhs in the case of B.
II) To meet competition the selling price of A will be reduced by 20% and that of B by 12.5%.
III) Break even planned at 60% of the total sales of each product.
IV) Profit for the year to be achieved is planned as Rs 69,120 in the case of A and Rs 17,500 in the case of B. This
would be possible by reducing the present annual fixed expenses of Rs 135,000 allocated as Rs 108,000 to A and Rs
27,000 to B.
You are required to calculate:-
a) Number of units of A & B to be sold during the year.[Ans:- 300,000 units, B-100,000 units]
b) Number of units of A & B to be sold to break even. [Ans:- 180,000 units, B=60,000 units]
c) Reduced product wise fixed expense. [Ans:- Reduced Fixed expenses of A=Rs 103,680, B=Rs 26,250]
Q.14. The Laila Shoe company sells five different styles of ladies, chappals with identical purchase costs and selling price. The
company is trying to find out the profitability of opening another store, which will have the following expenses and revenues:-
Per Pair
Selling price 30.00
Variable cost 19.50
Sales man commission 1.50
Total Variable Cost 21.00
Annual Fixed Expenses are :- Rs
Rent 60,000
Salaries 200,000
Advertising 80,000
Other fixed expenses 20,000
360,000
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CA Megh Raj Aryal Gurukul CA
Required:-
a) Calculate the annual break-even point in units and in value. Also determine the profit or loss if 35,000 pairs of chappals
are sold. [Ans:- BEP units= 40,000 units, BEP Rs 12,00,000, Loss 45,000]
b) The sales commissions are proposed to be discontinued, but instead a fixed amount of Rs 90,000 is to be incurred in
fixed salaries. A reduction in selling price of 5% is also proposed. What will be the break even points in units ?
[Ans:- Revised BEP units =50,000 units]
c) It is proposed to pay the store manager 50 paisa per pair as further commission. The selling price is also proposed to be
increased by 5%. What would be the break even point in units ?
[Ans:-Revised BEP units=36,000 units]
d) Refer to the original data. If the store manager were to be paid 30 paisa commission on each pair of chappal sold in
excess of the break even point, what would be the store’s net profit if 50,000 pairs were sold?
[Ans:- Profit 87,000]
Note:- Consider each part of the question separately.
Q.15. You are given the following information for the coming year of PCT Ltd.
Sales (units) 2,000
Selling price per unit Rs 10
Marginal cost per unit Rs 4
Fixed Cost Rs 9,600
Income tax rate 50%
You are required:-
i) To evaluate the effect of 10% decrease in selling price accompanied by a similar decrease in the variable cost but
20% increase in physical sales volume.[Ans:- Profit after tax=Rs 1680]
ii) To evaluate the effect of 10% increase in selling price accompanied by a similar increase in the variable costs but
20% decrease in physical sales volume. [Ans:- Profit after tax=Rs 480]
iii) To compute the sales (in units) as well as sales ( in Rs) to earn Rs 12000 after income taxes.
[Ans:- Sales Units 5,600 units , Sales value =Rs 56,000]
iv) To compute the sales (in units & Rs) to earn Rs 11520 after income taxes if there is 10% increase in fixed cost.
[Ans:- Sales Units 5,600 units , Sales value =Rs 56,000]
v) To compute the sales (in units & Rs ) to earn 20% on sales after income tax.
[Ans:- Sales Units 4,800 units, Sales value Rs 48,000]
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CA Megh Raj Aryal Gurukul CA
Q.17. Metalica Trading Ltd makes and sells a single product. The company’s trading result for the year 2010 are as follows:-
Rs 000
Sales 3000
Direct materials 900
Direct labour 600
Overheads 900 2400
Profit 600
For the year 2011, the following are expected.
i) Reduction in the selling price by 10%.
ii) Increasing in the quantity sold by 50%.
iii) Inflation of direct material cost by 8%.
iv) Price inflation in variable overhead by 6%.
v) Reduction of fixed overhead expenses by 25%.
It is also known that,
i) In 2009, overhead expenditure totaled to Rs 800,000.
ii) Total overhead cost inflation for 2010 has been 5% more than in 2009.
iii) Production and sales volume have been 25% higher in 2010 than in 2009.
Required:-
i) Prepare a statement showing the estimated trading results for 2011.
ii) Calculate the break-even point for 2010 and 2011.
iii) Comment on the BEP and profits of the 2010 and 2011.
[Ans:- 2011 profit Rs 765, BEP 2010 Rs 1500, 2011 Rs 1500]
Q.18. The board of Director of Ray Brand Battery Company Ltd is working for launching a new re-chargeable battery. An expert team
on preliminary study made breakdown of revenues and costs for one year projecting Rs 15,00,000 initial investment.
1s tsix month (Rs) 2nd six month (Rs)
Sales 15,000 batteries 12,00,000
25,000 batteries 20,00,000
Cost of goods sold 850,000 12,50,000
Administrative, Selling and distribution overheads 377,000 537,000
Pre-tax profit (27,000) 213,000
Tax @ 40% Nil 85,200
After tax profit (27,000) 127,800
Required :
a) Variable cost ratio [Ans:- 70%]
b) Annual fixed costs [Ans:- Rs 774,000]
c) BEP sales in number of batteries for a year [Ans:- 32,250 batteries]
d) The sales volume in rupee to earn 15% return on investment. [Ans:- Required Sales =Rs 33,30,000]
e) Income statement showing annual sales revenue, variable costs, contribution margin, fixed costs, pre-tax-profit, tax on
profit and after tax profit by incorporating the recently Conducted consumers opinion survey outcomes that indicates Rs
60,000 outlay for advertisement with 3 percent reduction in sales price with 20 percent sales volume up.
[Ans:-Profit after tax=Rs 121,680]
f) Safety margin % under the existing preliminary study outcomes and under the survey outcomes.
[Ans:- Existing =19.37%, Under Survey=19.56%]
g) Which option is desirable and why?
[Ans:- Option Survey outcome is desirable because of higher profit 121,680 vs 100,800]
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Q.19. Shivam Company manufactures and sells a specialized ball pen for engineering college. The company‘s contribution
format income statement for the most recent year is given below:
Total (Rs.) Per Unit (Rs.) Percent of Sales
Sales (20,000 units) 1200,000 60 100%
Variable expenses 900,000 45 ?%
Contribution margin 300,000 15 ?%
Fixed expenses 240,000
Net operating income 60,000
Management is anxious to increase the analysis of company‘s profit and has asked for a number of items.
Required:
a) Compute the company‘s contribution margin ratio and variable expense ratio. [Ans: 25%, 75%]
b) Compute the company‘s break-even point in both units and sales rupees. [Ans: 16,000 units, Rs 960,000]
c) Assume that sales increase by Rs. 400,000 next year. If cost behavior patterns remain unchanged, by
how much will the company‘s net operating income increase? [Ans: Rs 100,000]
d) Refer to the original data. Assume that next year management wants the company to earn a profit of
at least Rs. 90,000. How many units will have to be sold to meet this target profit? Compute by using
both equation method and formula method. [Ans: 22,000 units]
e) Refer to the original data. Compute the company‘s margin of safety in both rupees and percentage form.
[Ans: Rs 240,000, 20%]
f)
i) Compute the company’s degree of operating leverage at the present level of sales.[Ans: DOL 5]
ii) Assume that through a more intense effort by the sales staff, the company’s sales increase by 8%
next year. By what percentage would you expect net operating income to increase? Use the degree
of operating leverage to obtain your answer.[Ans : 40%]
iii) Verify your answer to (ii) by preparing a new contribution format income statement showing an 8%
increase in sales.
g) In an effort to increase sales and profits, management is considering the use of a higher-quality ink. The
higher-quality ink would increase variable costs by Rs.3 per unit, but management could eliminate one
quality inspector who is paid a salary of Rs. 30,000 per year. The sales manager estimates that the
higher-quality ink would increase annual sales by at least 20%.
i) Assuming that changes are made as described above, prepare a projected contribution format income
statement for next year. Show data on a total, per unit, and percentage basis.
[Ans: Net profit Rs 78,000]
ii) Compute the company’s new break-even point in both units and rupees of sales. Use the formula
method. [Ans: 17,500 units, Rs 1050,000]
iii) Would you recommend that the changes be made? [Ans: Yes]
Q.20. Dokomo makes and sells a single product “ Product X”. It is currently producing 112,000 units per month, and is operating at
80% of full capacity. Total monthly costs at the current level of capacity are Rs 611,000. At 100% capacity, total monthly costs
would be Rs 695,000. Fixed Costs would be the same per month at all levels of capacity between 80% and 100%. At the normal
selling price for product X, the contribution/sales ratio is 60%. A new customer has offered to buy 25,000 units of product X each
month, at 20% below the normal selling price. Dokomo estimates that for every five units that is sells to this customer, it will lose
one unit of its current monthly sales to other customers.
Required:-
a) Calculate the variable cost per unit of product X and total fixed costs per month.
b) Calculate the current normal sales price per unit, and the contribution per unit at this price.
c) Calculate the effect on total profit each month of accepting the new customers offer, and selling 25,000 units per month
to this customer. Recommend whether the customer’s offer should be accepted.
[Ans- VC/unit =Rs 3, Fixed cost = Rs 275,000, b) SP/unit=Rs 7.5, Contribution/unit =Rs 4.5,
c) Yes accept the offer, profit increase Rs 52,500]
Q.21. Management of Kabra Limited is alarmed at the high under utilization of installed capacity. The workers of Kabra Ltd. have a
very strong union. Any attempt by management to increase production is opposed by the union on the ground that the workers are
working as per normal standards and that extra unit produced does not fetch any rewards to workers. The management having
realized that there is capacity puts forth incentive scheme, which rewards the workers, staff as well as management.
As per the proposed scheme, the after -tax incremental profit will be shared by all as follows:
- 30% to be ploughed back.
- 40% to be shared by workers, and
- 30% to be shared by staff.
In case there is a loss, no reward will be given to anyone.
Presently the company is producing 1 lakh units. The current cost structure is as follows:
Rs. (Per 1,000 units)
Prime Cost 15,003
Works Overheads 7,490
Administrative overhead 2,650
Selling overheads 99
Sale value 25,150
The above figures include fixed cost to the extent 20% of works overheads, 30% of administration overheads and 100% of selling
expenses.
The Company pays 50% tax. However the reward under the scheme given to workers (not staff) is tax deductible.
You are required to calculate the annual share in absolute amounts for each of the beneficiary at various levels at an interval of
1% to 8% increase in production over present target.
Ans:
Sharing Upto 104000 units 105000 units 106000 units 107000 units 108000 units
- Workers No profit [ Nil] Rs 575 Rs 1150 Rs 1725 Rs 2300
- Staff Rs 431.25 Rs 862.5 Rs 1293.75 Rs 1725
- Management Rs 431.25 Rs 862.5 Rs 1293.75 Rs 1725
BEP /REQUIRED SALES IF THERE IS OPPORTUNITY COST INVOLVED
• If opportunity cost is variable type- add in variable cost per unit
• If opportunity cost is fixed type- add in Fixed cost.
Q.22. A newspaper presently sells 100,000 copies of its morning daily. It wants to publish evening daily. Particulars are :-
Q.23. From the following data, calculate cash break even point.
Selling price per unit Rs 10
Variable cost per unit Rs 6
Fixed Cost Rs 10,000 including Rs 3000 as depreciation.
[Ans:- Cash Break even point =1750 units]
Q.25. Following information are provide to you regarding performances of B Ltd during first two quarters of 1194.
Is t Quarter 2ND Quarter
Sales (Rs) 25 lacs 15 Lacs
Total Cost (Rs) 23 Lacs 17 Lacs
Calculate i) PV Ratio ii) Fixed Cost iii) BEP Sales
[Ans: PV Ratio=40%, Fixed Cost=Rs 8 lakh, BEP Sales=Rs 20 lakh]
Q.26. A company has three factories situated in North, East and South with its Head office in Mumbai. The management has received
the following summary report on the operations of each factory for a period.
(Rs in ‘000’
Sales Profit
Actual Over/(Under Budget) Actual Over/(Under Budget)
North 1100 (400) 135 (180)
East 1450 150 210 90
South 1200 (200) 330 (110)
Calculate for each factory and for the company as a whole for the period:
i) The fixed costs ii) Break-Even Sales
[Ans:- Factory PV Ratio Fixed Cost BEP
location Sales
North 45% Rs 360 Rs 800
East 60% Rs 660 Rs 1100
South 55% Rs 330 Rs 600
Total Rs 1350 Rs 2500
Q.27. ABC Ltd sells its products at Rs 15 per unit. In a period, if it produces and sells 8,000 units, it incurs a loss of Rs 5 per unit. If
the volume is raised to 20,000 units, it earns a profit of Rs 4 per unit. Calculate break even point both in terms of rupees as well as
in units . [Ans: BEP Rs=180,000, BEP units=12,000 units]
BEP IN CASE OF OPENING STOCK
Q.28. A company has an opening stock of 6,000 units of output. The production planned for the current period is 24,000 units and
expected sales for the current period amount to 28,000 units. The selling price per unit is Rs 10. Variable cost per unit is expected
to be Rs 6 per unit while it was only Rs 5 per unit during the previous period. What is the break even volume for the current
period if the total fixed costs for the current period is Rs 86,000? Assume that the first is first out system is followed.
[Ans:- BEP 20000 Units]
BEP IN CASE OF OPENING STOCK OF PERISHABLE GOODS
Q.29. A pharmaceutical company produces formulations having a shelf life one year. The company has an opening stock of 30,000
boxes on 1st January 2005 and expected to produce 130,000 boxes as was in the just ended year of 2004. Expected sales would be
150,000 boxes. Costing department has worked out escalation in cost by 25% on variable cost and 10% on fixed cost. Fixed cost
for the year 2004 is Rs 40 per unit. New price announced for 2005 is Rs 100 per box. Variable cost on opening stock is Rs 40 per
box. You are required to compute Breakeven volume for the year 2005. [Ans:-108400 units]
Q.32. Design Pens Ltd manufactures only pens where the marginal cost of each pen is Rs 3. It has fixed costs of Rs 25,000 per annum.
Present production and sales of pens is 50,000 units and selling price per pen is Rs 5. Any sale beyond 50,000 pens is possible
only if the company reduces 20 % of its current selling price.
However, the reduced price applies only to the additional units. The company wants a target profit after tax of Rs 50,000. How
many pens the company must produce and sell if the target profit is to be achieved if tax rate is 50 %?[Ans: 75,000 pens]
BEP IN CASE OF STEP TYPE COST [SEMI VARIABLE COST]
Q.33. Calculate Break-even level of students from the following information:
Picnic charges per student Rs 820
Cost of snacks per student Rs 140
Entrance fee per student Rs 550
Cost of costumes per student Rs 60
Rent per bus Rs 1300
Special permit fee Rs 100 per bus
Prizes to students for games Rs 520
Allowance to each teacher Rs 100
Maximum capacity of a bus 50 (excluding 2 seats reserved for the teachers accompanying the students). [Ans: 54 students]
Q.34. FC=Rs 108,000, SP=Rs 200 per unit VC =120 per unit, SVC =Rs 400 for each 50 units.
a) Calculate BEP [Ans:-1505 units]
b) Calculate Required sales units to earn Rs 20000 [Ans:-1780 units]
Q.35. X ltd manufactures a semiconductor for which the cost and price structure is given below:
Rs per unit
Selling price 500
Direct material 150
Direct labour 100
Variable overhead 50
Fixed cost = Rs 200,000
The product is manufactured by a machine, whose spare part costing Rs 2,000 needs replacement after every 100 pieces of output.
This is in addition to the above costs. Assume that no defectives are produced and that the spare part is readily available in the
market at all times at Rs 2,000.
a) Prepare the profitability statement for production levels of 2,000 units and 3,000 units. [Ans: Rs 160,000, Rs 340,000]
b) What is the break - even point for the above data? [Ans: 1120 units]
c) Comment on the BEP, if the fixed cost can be reduced to Rs 1,80,000 from the existing level of Rs 2 lacs.
[Ans: 1010 units]
Q.36. Swastik Enterprises are leading exporters of Kid’s toys. A co. of USA has approached Swastik Enterprises for exporting a
special toy. The order will be valid for next three years at 3,000 toys per month. The export price of the toy will be 4$. Assume
that the average conversion rate is Rs 50 per $.
Cost data per toy is as follows:
Particulars Rs
Materials 60
Labour 25
Variable overheads 20
Primary packing of the toy 15
The toys will be packed in lots of 50 each. For this purpose a special box, which will contain the 50 toys will have to be
purchased, cost being Rs 400 per box.
Swastik Enterprises will also have to import a special machine for making the toys. The cost of the machine is Rs 24,00,000 and
duty thereon will be at 12 %. The machine will have an effective life of 3 years and depreciation is to be charged on straight line
method. Apart from depreciation, annual fixed overheads is estimated at Rs 4,00,000 for the first year with 6 % increase in the
second year. Fixed overheads are incurred uniformly over the year.
a) Prepare a monthly and yearly profitability statement for the first year and second year assuming the production at 3,000
toys per month. [Ans: 1st Year Rs 108,000, Rs 12,96,000,2nd year Rs 106,000, Rs 12,72,000]
b) Compute a monthly and yearly break – even units in respect of first year. [Ans:1,505 toys, 18,005 toys]
c) In what contingency can there be second break – even point for the month and for the year as a whole?
d) Have you any comments to offer on the above?
Q.37. Kalyan University conducts a special course on “ Computer Applications” for a month during summer. For this purpose it invites
applications from graduates. An entrance test is given to the candidates and based on the same, a final selection of a hundred
candidates is made. The entrance test consists of four objective type of examination and is spread over four days, one examination
per day. Each candidate is charged a fee of Rs 50 for taking up the entrance test. The following data was gathered for the past two
years:
Kalyan University
Statement of Net Revenue from the Entrance test for the course on “ Computer Applications”:
1985 1986
Rs Rs
Gross Revenue (Fees Collected) 100,000 150,000
Costs
Valuation 40,000 60,000
Question Booklets 20,000 30,000
Hall Rent at Rs 2000 per day 8,000 8,000
Honorarium to Chief Administrator 6,000 6,000
Supervision Charges (One supervisor for every
100 candidates at the rate of Rs 50 per day) 4,000 6,000
General Administration Expenses 6,000 6,000
Total Cost 84,000 116,000
Net Revenue 16,000 34,000
You are require to Compute :
a) The budgeted net profit if 4,000 candidates take up the entrance test in 1987. [Ans: Rs 52,000]
b) The break even number of candidates [Ans: 1120 candidates]
c) The number of candidates to be enrolled if the net income desired is Rs 20,000. [Ans: 2230 candidates]
Q.38. Happy Holidays Company contracts to take children on excursion trips. Relevant information for a proposed excursion trip is
given below:
Particulars Rs
Revenue per trip per child 4,000
Expenses that have to be incurred:
Train fare per child per trip 1,700
Meals per child per trip 300
Craft materials per child per trip 600
Room rent per trip (4 children per room) 760
Local Vehicle (6 children per vehicle) 1200 (per vehicle)
Fixed costs that are required to be covered 518,130
Find the minimum number of children to cross the break - even point and start earning profit. [Ans: 514 child]
BEP IN CASE OF SEMI FIXED COST [MULTIPLE BEP’S]
Q.39. A hospital operates a 40 bed capacity special health care department. The said department levies a charge of Rs 425 per bed day
from the patient using its services. The data relating to fees collected and costs for the year 2008 are as under :
Particulars Rs
Fees collected during the year 34,95,625
Variable costs based on patient days 13,57,125
Department fixed costs 622,500
Apportioned costs of the hospital administration charges Rs 10,00,000. Besides the above, nursing staff were employed as per the
following scale at Rs 48,000 per annum per nurse.
Annual Patient Days No. of nurses required
Less than 5000 3
5000 – 7000 4
7001 – 9000 6
Above 9000 8
The occupancy of the bed capacity is not likely to increase in 2009 and consequently the management is actively considering a
proposal to close down the department.
Required:
1. Present statement to show the profit of the department for the years 2008 and 2009. [Ans: Rs 228,000, (Rs 255,962)]
2. Calculate the
i) Break-even bed capacity for the year 2009
Ans:
Range BEP Remarks
1-4999 8611 bed days Invalid
5000-7000 8833 bed days Invalid
7001-9000 9277 bed days Invalid
Over 9000 9720 bed days Valid
ii) Increase in fee per bed day required to justify continuance of the department. [Ans: Rs 31.12]
Q.40. The recovery general hospital operates a separate department specifically for private health patients. In 2000, the patients paid a
fixed fee of Rs. 850 per day for the use of hospital facilities and this is expected to remain unchanged for the year 2001. In
addition the patients pay an extra fee to the physicians for their services. This is a private arrangement between the patient and the
physician, and has no effect on the finances of the hospital. For the year ending 31st December, 2000 the department received
revenue of Rs. 1,39,61,250 for private health care. Expenditure chargeable to the department for the year 2000 was as follows:
Particulars Basis of Allocation
Patient Days Bed Capacity
Rs. Rs.
Meals 20,00,000
Porters Salaries 120,000
Laundry 12,00,000
Laboratory 26,00,000
Maintenance 370,000
General Administrative Services 23,70,000
Other Expenses 200,000
Total 65,70,000 24,90,000
It is estimated that all costs will increase by 10% in the year 2001. In addition, rent and rates of Rs. 40,00,000 was charged
directly to the department, since it is the sole occupier of a separate building within the hospital grounds. This is expected to
increase to Rs. 50,00,000 for the year 2001.
The salaries of the nursing staff are charged to the department at the end of the year according to the following schedule:
Annual Patient Days Nurses Supplied
Less than 7,000 3
7,000-10,000 4
10,001-13,000 5
Over 13,000 8
The average salary of the nursing staff for the year 2001 is estimated at Rs. 70,000 per annum (actual for the year 2000 was Rs.
65,000 p.a.).The department has a maximum capacity of 60 beds, but in the year 2000 a number of beds were unoccupied because
of insufficient demand and there have been demand from a number of parties that the department is losing money and
should be closed down.
1. You are required to find out Break-even point to cover
i) All apportioned fixed costs for next year and
ii) Fixed cost specific to private department.
2. You are also required to find out the requisite fees patient day to break-even in the year 2001.
(Assuming demand same as in the year 2000) [Note: Please adopt 365 days to a calendar year.] [Ans: Rs 945.26 per bed day]
Q.41. The Columbus Hospital operates a general hospital and has separate entities for specialized areas such as a skin, pediatrics,
maternity, psychiatric, and so on.
For the entire year ended June 30, 1983, the Skin Department at Columbus Hospital charged each patient an average of Rs. 65 per
day, had a capacity of 60 beds operated 24 hours per day for 365 days and revenue of Rs.11,38,800.
Expenses charged by the hospital to the Skin Department for the year ended June 30, 1983 are in Table A.
The only personnel directly employed by the Skin Department are supervising nurses, nurses and assistant Requirements of
personal are given in Table B.
Q.45. X Ltd which makes only one product sells 20,000 units of its products making a contribution of Rs 100,000. The variable cost
per unit is Rs 10. The company has estimated the fixed costs as follows.-
Fixed cost p.a (Rs) 50,000 60,000 70,000 80,000 90,000
Probability 0.1 0.3 0.3 0.1 0.2
Required:
a) What is the probability that the company will break-even in the period? [Ans: Nil]
b) What is the probability that the company will continue to make losses? [Ans:- Nil]
c) What is the probability that the company will make a profit of at least Rs 25,000?[Ans:-70%]
COMPOSITE BREAK EVEN POINT /REQUIRED SALES IN CASE OF MULTIPLE PRODUCT
When the industry is selling multiple type of Products and Fixe cost is Joint, or fixed cost is not separable individually to each
product than the Composite BEP is calculated as under and allocated in the sales mix ratio.
Composite BEP(In units) =Total Fixed cost Composite contribution per unit= C1*W1+C2*W2+C3W3
Composite contribution per unit W1+W2+W3
Or Total contribution
Total sold units of all products
Individual products BEP(units )=P1=Total BEP(Units)*Mix ratio of P1
P2= Total BEP(Units)*Mix ratio of P2
P3= Total BEP(Units) *Mix ratio of P3
Note:- Similarly we can calculate the Required sales unit or Required sales Rs by adding required profit in numerator.
Q.46. X Co. Ltd manufactures and sells four products A,B,C,D. The total budgeted sales (100%) are Rs 600000 per month. The Fixed
costs are Rs 159000 per month.
Sales mix in value comprises of :-
Present % Proposed %
A 33.33% 25%
B 41.67% 40%
C 16.67% 30%
D 8.33% 5%
100% 100%
The operating cost as a percentage of selling price are :-
A-60%, B-68%, C-80%, D-40% .Calculate the Break even sales for the company for both the periods.
[Ans:- Present -Composite BEP Sales=Rs 454286, Proposed Composite BEP Sales Rs 500000]
Q.47. The budgeted results of A Ltd are as under:
Products Sales Value (Rs) P/V Ratio (%) Sales Mix (%)
X 250,000 50 20
Y 400,000 40 32
Z 600,000 30 48
Total 12,50,000 100
Q.49. Jayveeru Ltd makes and sells two products – Veeru and Jay. The budgeted selling price of Veeru is Rs 1,800 and that of Jay is
Rs 2,160. Variable costs associated with producing and selling of the Veeru are Rs 900 and with Jay Rs 1,800. Annual fixed
production and selling costs of Jayveeru Ltd. are Rs 88,000.
The company has two production and sales options. The Veeru and Jay can be sold either in the ratio of two Veerus to three Jays
or in the ratio of one Veeru to two Jays.
What will be the optimal mix and why? [Ans: Optimum Mix: 2 Veeru: 3 Jay]
Q.50. Hewtax manufactures two products- tape recorder and electronic calculators- and sell them nationally. The Hewtax management
is very pleased with the company's performance for the current fiscal year. Projected sales through January 1, 1987, indicate that
70,000 tape recorders and 140,000 electronics calculators will be sold this year. The projected earning statement, which appears
below shows that Hewtax will exceed its earning goal of 9 per cent on sales after taxes.
Hewtax Electronics projected Earnings Statement for the year ended-December 31, 1987.
Tape recorder Electronic Calculator
Total Per Unit Total Rs. Per unit Total
Amount(000) Amount(000) Amount (000)
Sales Rs. 1050 Rs.15.00 Rs. 3150 22.5 Rs. 4200.00
Production Cost
Material 280 4.00 630 4.50 910.00
Direct labour 140 2.00 420 3.00 560.00
Variable Overhead 140 2.00 180 2.00 420.00
Fixed Overheads 70 1 00 210 1.50 280.00
Total production Cost 630 9.00 1540 11.00 2170.00
Gross margin Rs. 420 Rs.6.00 Rs.1610 Rs. 11.50 Rs. 2030
Fixed selling and 1040.00
Administrative
Net profit before Income 990.00
taxes
Income Taxes 55% 544.50
Net Income Rs. 445.50
The tape recorder business has been fairly stable in the last few years and the company does not intend to change the tape recorder
price. However the competition among manufactures of electronic calculators has been increasing. Hewtax's calculators have
been popular with consumers. In order to sustain the interest in their calculators and to meet the price reductions expected from
competitors, management has decided to reduce the wholesale price of its calculator from 22.50 to 20.00 per unit effective from
January 1, 1988. At the same time the company plans to spend an additional Rs. 57,000 on advertising during fiscal year 1988. As
a consequence of this action, management estimates that 80 per cents of its total revenue will be derived from Calculators sales as
compared to 75 per cent in 1987.
The total fixed production overhead costs will not change in 1988 nor will the variable overhead cost rates (applied on a direct
labour hour base). However, the cost of material and direct labour is expected to change. The cost of solid state electronic
components will be cheaper in 1988. Hewtax estimated that material costs will drop by 10 per cent for the tape recorders and 20
per cent for the calculators in 1988. However direct labour costs for both products will increase by 10 per cent in the coming year.
Required
1. How many tape recorder and electronic calculator units did Hewtax Electronic have to sell in 1987 to break even?
[Ans: 40,000 units of Tape recorder and 80,000 units of Electronic Calculator]
2. What value of sales is required if Hewtax Electronics is to earn a profit in 1988 equal to 9 per cent on sales after
taxes.[Ans: Rs 40,50,000, Tape recorder sales Rs 810,000, and Electronic Calculator sales Rs 32,40,000]
Q.51. The budgeted income statement by product lines of Hulas Biscuit Factory Private Limited for 2064/065 is as follows:-
Particulars Glucose Coconut Cream Cracker
Sales 20,00,000 50,00,000 30,00,000
Variable Costs
Cost of goods sold 900,000 27,00,000 15,00,000
Selling cost 300,000 900,000 450,000
Fixed Costs
Administration cost 360,000 900,000 540,000
Other Cost 160,000 400,000 240,000
Profit before tax 280,000 100,000 270,000
Income Tax @30% 84,000 30,000 81,000
Profit after Tax 196,000 70,000 189,000
All Products are manufactured in the same facilities under common administrative control. Fixed costs are allocated among the
products in proportion to their budgeted sales volume:
You are required to:
(i) Compute the budgeted break-even point of the company from the information provide above.
[Ans:- Rs 80,00,000]
(ii) What would be the effect of budgeted income if half of the budgeted sales volume of coconut is shifted to glucose
and cream cracker in equal rupee amount so that the total sales in rupee remain the same.
[Ans:- Profit increases to Rs 621,250 from Rs 455,000]
(iii) What would be the effect of the shift in the product mix suggested in (b) above on the budgeted break-even point of
the whole company? [Ans:- New BEP will reduced to Rs 74,55,197]
Q.52. Two manufacturing companies which have the following operating details decide to merge:-
Particulars Company I Company II
Capacity utilization 90 % 60 %
Sales (Rs in lakhs) 540 300
Variable cost (Rs in lakhs) 396 225
Fixed cost (Rs in lakhs) 80 50
In the merged company, it was decided to incur additional fixed cost of Rs 15 lacs. Expenses incurred on merger against
formation of new company was Rs 2 lacs.
Assuming that the proposal is implemented,
Calculate:-
a) Break even sales of the merged plant and the capacity utilization at that stage. [Ans: Rs 559.63 lakh, 50.87%]
b) Profitability of the merged plant at 80 % capacity utilization. [Ans: 83 lakhs]
c) Sales turnover of the merged plant to earn a profit of Rs 75 lakhs. [Ans: 849.09 lakh]
Q.52 Extension:-
Suppose the additional fixed cost of Rs 15 lacs is not given in question with requirement a),b),c) same and one additional
requirement as under:-
d). When the merged plant is working at a capacity to earn profit of Rs 75 lakh, what percentage increase in selling price is
required to sustain an increase of 5% in fixed cost.
Ans: a) 501.74 lakh, 45.61%]
b). 98 lakhs
c). 791.2 lakh
d) 0.8215%
INDEFFERENCE POINT
• Indifference point is the level of production at which total costs of two options are equal. The decision maker is indifferent as
to choose any options, since both options will result in the same cost and hence same profits.
• Indifference point may also be called COST BREAK EVEN POINT.
• There are two alternative methods of production and the fixed cost and variable cost per unit are different under both
alternatives .
➢ Under Ist alternative;- the fixed cost is more and variable cost per unit is less
➢ Under 2nd alternative :- the fixed cost is less but variable cost per unit is more.
Formula Cost Indifference point [Units] Profit indifference [Sales Units]
Indifference point (in units) Difference in Fixed cost OR Difference in fixed cost
Difference in Variable cost p.u Difference in Contribution p.u
Cost Indifference point [Rs] Profit Indifference [Sales Rs]
Indifference point (in Rs ) Difference in Fixed cost OR Difference in fixed cost
Difference in Variable cost ratio Difference in PV Ratio
Significance
Level of Sales Alternative to be chosen
Below Indifference point Select the option with lower fixed cost.
At indifference point Either options can be selected
Above Indifference point Select the option with
-Lower variable cost per unit
-Higher Cont per unit
-Lower VC Ratio
-Higher PVR
Q.53. A ltd is having a proposal to purchase two machines X& Y. The cost structure for the products with these two machines is as
follows:-
Machine X Machine Y
Variable cost per unit Rs 6.00 Rs 4.00
Fixed Cost Rs 200,000 Rs 300,000
Selling price per unit Rs 10 Rs 10
What is cost indifferent point? Which machine should be preferred and when ?
[Ans:-Indifference point=50,000 units, if demand < 50,000 units , select the machine with lower fixed cost, and
If demand> 50,000 units , select the machine with lower variable cost per unit]
Q.54. Nepal stores has an option of buying Machines A or Machine B. The following data is available:
Particulars Machine A Machine B
Actual output in units 10,000 units 10,000 units
Fixed costs Rs 30,000 Rs 16,000
Net profit ratio 30% 24%
The market price of the finished product is expected to be Rs 10 per unit.
You have to calculate:
a) Breakeven point for each of the machine (in value and units) [Ans:- BEP A=Rs 50,000, BEP B Rs 40,000]
b) The level of sales at which both the machines will earn equal profits. [Ans:- 7,000 units ]
Q.55. A company wants to buy a new machine to replace one, which is having frequent breakdown. It received offers for two models,
M1 and M2. Further details regarding these two models are given below.
Particulars M1 M2
Installed capacity [Units] 10,000 10,000
Fixed Overheads per annum Rs 240,000 Rs 100,000
Estimated profit at the above capacity Rs 160,000 Rs 100,000
The product manufactured using this type of machine, M1 or M2 . is sold at Rs 100 per unit.
Required:
a) Determine the break even level of sales for each model.
b) Calculate the level of sales at which both the models will earn the same profit.
[Ans:- BEP [M1]= 6000 Units, BEP [M2]=5000 Units, Rs 700000, or 7000 units]
Q.56. Two firms A& Co. and B & Co. sell the same type of product in the same market. Their budgeted profit and loss account for the
year ending 31st march 1996 are as follows:-
A & Co. B & Co.
Sales 500,000 600,000
Variable cost 400,000 400,000
Fixed cost 30,000 70,000
Net profit 70,000 130,000
Required:
1. Calculate at which sales volume both the firms will earn equal profit. [Ans: Rs 300,000]
2. State which firm is likely to earn greater profits in condition of :
I. Heavy demand for the product [Ans: Firm having low variable cost will earn higher profit.]
II. Low demand for the product [Ans: Firm having low Fixed Cost will earn higher profit.]
Give reasons
Q.57. Sales managers of two companies compare notes and find that their sales turnover for last year was the same viz, Rs 10 lakhs
and the profits they made also were the same being 10% of turnover. In one company the fixed cost were double the variable
costs while in the other, it was quite opposite- the variable costs were double the fixed costs. As an accountant, do you think that
they are equally profitable? If not, discuss their relative vulnerability to market conditions. [Ans:-No]
Q.58. XY ltd makes two products X and Y, whose respective fixed costs are F1 and F2. You are given that the unit contribution of Y is
one fifth less than the unit contribution of X, that the total of F1 and F2 is Rs 150,000, that the BEP of X is 1,800 units (for BEP
of X, f2 is not considered) and that 3,000 units is the indifference point between X and Y (i.e X and Y make equal profits at 3,000
unit volume, considering their respective fixed costs). There is no inventory build up as whatever is produced is sold. You are
required to find out the values of F1 and F2 and unit contribution of X and Y.
[Ans: F1 Rs 90,000 , F2 Rs 60,000, Unit Cont X=Rs 50, Unit Cont Y Rs 40]
Q.59. The following are the cost data for three alternative ways of processing the clerical work for cases brought before the LC court
System:-
Particulars A B C
Nature Manual Semi-automatic Fully automatic
Monthly fixed cost Rs 15,000 Rs 45,000 Rs 125,000
Variable cost per report Rs 240 Rs 140 Rs 40
1. Calculate the cost indifference points. Interpret your results.
Ans : Cases Machine
<300 A
300 A/B
>300, <800 B
800 B/C
> 800 C
2. If the present case load is 600 cases and it is expected to go up to 850 cases in near future, which method is the most
appropriate on cost considerations? [Ans: Machine B in present and Machine C in Future]
Q.60. Find Cost Breakeven points between each pair of plants whose cost functions are :-Plant A Rs 600,000+Rs 12x; Plant B Rs
900,000+Rs 10x; Plant C Rs 15,00,000+Rs 8x; (Where “x” is the number of units sold)? Which plant should be purchased?
Ans : Cases Plant
<150000 A
150000 A/B
<150000, <300000 B
300000 B/C
>300000 C
Advantages
1) Helps in Pricing Decisions.
2) Eliminates under or over recovery of overhead:- Since all the fixed cost are recognized as period cost and write-off
against the contribution there will not be any under or over recovery of OH.
3) Helps in Break- even analysis.
4) Helps to prepare budget.
5) Helps in business decision making such as – Make or Buy, Shut down or continue, acceptance of offer or not?
Q.3. What are the important factors to be considered in Marginal Costing Decision?
Ans:
In Marginal costing decisions, the following factors are to be considered.
a) Contribution:- Whether the product or option under consideration makes a contribution or not?
b) Specific fixed cost:- Whether there is any specific fixed cost between the alternatives or not?
c) CVP analysis:- The effect of increase in volume on profits and the rate of earning additional profits should be analysed.
d) Capacity :- Whether the acceptance of order, or additional product line is within the firms capacity or not?
e) Non cost factors:- Non cost factors should also be considered, wherever applicable.
Q.4. Explain the concept of Variable Cost, Fixed Cost and Semi Variable Cost.
Ans
Variable cost
• Varies directly with the volume of output.
• Variable OH per unit remains fixed and doesnot change with the change in the volume of output.
• Variable OH per unit is fixed and Total Variable OH unit Increases if output is increased.
Decreases if output is decreased.
Fixed cost
• Doesnot vary with the volume of output
• Total fixed OH is fixed and Fixed OH/unit Increases if output is decreased
Decreases if output is increased.
Semi –Variable Cost
• Overhead other than variable or fixed Overhead is known as Semi-Variable Overhead.
• Overhead in which one part is variable and another part is variable.
• Neither total semi Variable Overhead at different level of output is Fixed , nor semi Variable Overhead per unit at
different level of output is fixed. Hence Semi-Variable.
Types
1. Semi –Variable Cost – [Segregable into variable cost and Fixed cost]
2. Semi- Variable cost – [Not segregable, Batch size and Change in cost in same proportion]
3. Semi- Variable cost – [All other cases] Also known as Semi –Fixed cost
Q.5. List out the method of segregating Semi –Variable costs into fixed and variable costs.
1. Comparison by Period or Level of Activity Method:-
Under this method, the variable overhead /unit is determined by comparing two levels of output with the amount of expenses at
those levels.
Variable OH /unit = Change in amount of Semi-Variable Cost
Change in the level of output
Total Fixed OH= Total Semi variable overhead –(Level of Output*Variable OH/unit)
Note:- There are two assumption in deriving the above formula:- ie Variable OH/Unit and Fixed OH under both periods/levels
are same.
2. High and Low points Method/Range Method
When there are more than two levels of output and Semi- Variable Overhead, the comparison is done between high and low
points as under:-
Variable OH /unit = Difference between SV OH at highest and lowest volume of output
Difference between the highest and lowest volume of output
Total Fixed OH= Total Semi variable overhead –(Level of Output*Variable OH/unit)
3. Analytical Method:-
Under this method an experienced cost accountant (based on his past experience) tries to judge, what proportion of SV OH is
variable and what would be fixed. The degree of variability is ascertained for each item of semi- variable OH separately.
Q.6. Why should overheads be classified into fixed and variable?
Because of following advantages :-
a) Absorption of Overhead:- The classification of overhead into fixed and variable helps in determining separate
absorption rates for fixed and variable overheads.
The fixed cost is allocated over the department using the budgeted capacity(needed capacity ) as base.
The variable cost is allocated over the department using the actual usage as base.
b) Helps in budget preparation:- The classification of overhead into fixed and variable helps in the preparation of flexible
budget.
c) Helps in decision making:- The classification of overhead into fixed and variable helps in different forms of decision
making:-
For examples :- decision to make or buy, shut down or continue, technique of marginal costing, cost volume profit
analysis, break even analysis are all based on such segregation.
Q.7. Meaning of Contribution ?
1. Contribution is the excess of Sales Revenue over Variable Cost.
2. It is called so, since it initially contributes towards recovery of Fixed Costs and thereafter towards profit of the business.
The contribution earned by a business, forms a Fund For Fixed expenses and Profit.
Q.9. Meaning of Breakeven Point? Its Assumptions? Significance of BEP? Assumptions of Cost- Volume Profit Analysis ?
Limitation of Marginal Costing?
Meaning :- The breakeven point is the level of sales at which there is neither a Profit nor a Loss to the Firm (Total Revenue =
Total Costs). In other words, at this point, the total Contribution equals fixed costs.
Formula: BEP (Units)= Fixed cost
Cont/unit
BEP (Rs )= Fixed cost
PVR
Assumptions of BEP analysis/ Assumptions of CVP analysis/ Limitations of Marginal Costing
a) Total Costs can be easily classified Into Fixed and Variable categories.
b) Selling price per unit remains constant, irrespective of quantity sold.
c) Variable Costs per unit remain constant.
d) Fixed Costs remain the same irrespective of output.
e) Productivity of the factors of production will remain the same.
f) The company manufactures and sells a single product. In the case of multi- product company, the Sales –Mix Remains
unchanged.
Significance of BEP
BEP Represents the cut-off point for profit or loss of the business. At the BEP, the profit or loss equals Zero. The Significance of
BEP may be summarized as :-
Level of Sales Impact on Profits
Less than BEP Firm incurs losses. [contribution< Fixed Cost]
Equal to BEP No profit and No loss [Contribution =Fixed Cost]
Greater than BEP Firm earns Profits. [Contribution >Fixed Cost]
Q.10. Meaning of Margin of Safety? Significance of MOS? Improvements of MOS?
Meaning :- MOS represents the difference between the Sales at BEP and the Total Sales. It can be expressed as a percentage of
Total Sales, or in Value, or in terms of quantity.
Formula:- MOS = Total Sales – BEP Sales
MOS (Units) or Profit
Cont/unit
MOS (Rs )= Profit
PVR
Significance:-
a) Upto BEP, the contribution earned is sufficient only to recover Fixed costs. However beyond the BEP, the contribution
is called Profit (Since fixed costs are fully recovered by BEP Sales)
b) Profit is nothing but Contribution earned out of Margin of Safety sales.
Improvements in Margin of Safety
a) Increase in selling price.
b) Reduce the Variable cost
c) Reduce the Fixed cost.
d) Increase the sales volume.
e) Substitution or Introduction of a Product mix having higher PV Ratio.
Q.11. What is Cost –Volume Profit analysis? What are its objectives?
Ans: Cost Volume profit Analysis (CVP Analysis) is the analysis of three variables, viz- Cost , Volume and Profit, which
explores the relationship existing among Activity level, Revenue, Cost and the resulting profit.
Its objective is to measure variations of Costs and Profit with the variations of Volume, which is significant to business profit
planning.
Q.12. Explain how CVP based Sensitivity Analysis can help Managers cope with uncertainty?
Ans:
1. Sensitivity Analysis refers to analysis of the change in one factor on the other related factors. For example, what will be the
effect of a 10% increase in selling price, on Sales Volume and Profits?
2. Managers can study various combinations of changes in Selling prices , fixed costs, variable costs and product mix and can
react quickly.
3. CPV based Sensitivity analysis can be performed in a spreadsheet package, or some computerized CPV modules.
4. Therefore, use of CVP-based Sensitivity analysis, helps Managers to cope with uncertainty.
Q.13. What is Break Even Chart?
Ans: The Break-Even Chart is a graphical representation of Cost- Volume- Profit relationship. It shows the following:
1. Profitability of the firm at different levels of output
2. Break even point
3. Angle of Incidence
4. MOS
Assumptions/Limitations of BEP chart
1. While preparing a break-even chart, it is assumed that revenue and costs can be represented with the help of straight
lines. It may not always be true.
2. Total Costs can be easily classified Into Fixed and Variable categories.
3. Selling price per unit remains constant, irrespective of quantity sold.
4. Variable Costs per unit remain constant.
5. Fixed Costs remain the same irrespective of output.
6. Productivity of the factors of production will remain the same.
7. The company sells a single product. In the case of multi- product company, the Sales –Mix remains unchanged.
Q.14. Explain the Angle of Incidence in a Break-even chart. What is the significance to the Management?
Ans: The BEP chart exhibits two lines (i) Total sales line and (ii) Total cost line. The angle formed at the intersection point of
these two lines is referred as the Angle of Incidence. It is shown as angle θ (theta). This angle is an indicator of PVR. If the angle
is large, it indicates high PVR and vice versa.
Total Sales
Cost and Revenues (Rs)
Total Cost
θ [Angle of Incidence]
Total Fixed cost
Sales units
Q.15. Discuss the relationship between Angle of Incidence, BEP and MOS.
Ans
Low BEP and large AOI Fixe cost are low, Large MOS, High PVR.
Low BEP and small AOI Fixed cost are low, Large MOS, Low PVR. Here the firm break even quickly but it does
not have high rate of profit earning.
High BEP and small AOI Fixed cost high, Small MOS, Low PVR
High BEP and Large AOI Fixed cost high , Small MOS, High PVR.
Q.17. What is relevant range? What role does the relevant range concept play in explaining how costs behave?
Ans:
1. Relevant range is level of volume or level of activity within which a company is expected to operate.
2. According to this concept within a certain range of activity, total FC and VC/ unit will remain same and after that the
fixed cost will increase by like stair case and VC/ unit will decrease due to price discount due to bulk purchase. The
key point is to note that both fixed and variable costs maintain their characteristics over some particular range of
activity. After that Total Fixed cost increases and VC /unit start decreasing.
A nonlinear cost function is a cost function where, within the relevant range, the graph of total cost versus the level of a
single activity related to that cost is not a straight line. Example include economies of scale in advertising where an agenc y
can double the number of advertisements for less than twice the costs, step-cost functions, and learning-curve based costs.
Q.19. Difference Between Indifference point and Break-Even Point.
Particulars Indifference point Break-Even point
Definition Indifference point is the level of Sales at which total BEP is the level of sales at which there is neither a
costs and profits of two options are equal. profit nor a loss to the firm. At BEP, the total
contribution equals Fixed Costs.
Formula Difference in Fixed Cost Fixed Cost
Difference in Variable cost per unit Contribution per unit
Purpose Used to choose between two alternative option for Used for profit planning.
achieving the same objectives.