Unit 4

Marginal Costing

Sales XXXX

Less Variable Cost XXXX

Contribution XXXX

Less Fixed Cost XXXX

Profit XXXX

Concept Formulae
Contribution Sales- Variable Cost
Contribution Fixed Cost+ Profit(minus Loss)
P/V ratio Sales-Variable Cost/Sales
P/V ratio Contribution/Sales
P/V ratio Change in Profit/Change in sales
P/V ratio Change in Contribution/Change in sales
P/V Ratio Fixed Cost/Break Even sales
Break Even Sales(in Rs) Fixed Cost/PV ratio
Break Even Sales(in units) Fixed Cost/Contribution per Unit
Total Sales Break Even Sales+ Margin of safety
Margin of safety Total sales- Break even sales
Margin of safety Profit/PV ratio
Margin of safety ratio (Total sales- Break even sales)/Total sales
PV Ratio Profit/margin of safety ratio
Sales to Earn Desired Profit S=( Fixed Cost+ Desired Profit)/ PV ratio

Problems
1.Pepsi Company produces a single article. Following cost data is given about its product:‐
Selling price per unit Rs.40
Variable cost per unit Rs.24
Fixed cost per annum Rs. 16000
Calculate:

a) Contribution [Ans : Rs 16]

b) P/V ratio[Ans : 40 %]

c) break even sales [Ans : Units:1000; Value: 40,000]

d) sales to earn a profit of Rs. 2,000 [Required Sales : Rs 45000]

e) Profit at sales of Rs. 60,000 [Rs 8000]

f) New break even sales, if price is reduced by 10%.

Find out
(a) P/V Ratio, B.E.P and Margin of Safety
(b) Evaluate the effect of on PV ratio , BEP & Margin of safety
(i) 20% increase in physical sales volume
(ii) 20% decrease in physical sales volume
(iii) 5% increase in variable costs
(iv) 5% decrease in variable costs
(v) 10% increase in fixed costs
(vi) 10% decrease in fixed costs
(vii) 10% decreases in selling price and 10% increase in sales volume
(viii) 10% increase in selling price and 10% decrease in sales volume

(ix) ` 5,000 variable cost decrease accompanied by ` 15,000 increase in fixed costs.

3.. A Company produces single unit with selling price Rs 20 per unit .Variable cost is Rs 15
per unit and Fixed overhead is Rs 630,000/-
Required
1.Sales value to earn a profit of 10% on sales
2.Sales Price to bring down BEP to 120,000units
3.Calculate margin of safety if profit is Rs 60,000.

4.Two businesses AB Ltd and CD Ltd sell the same type of product in the same market. Their
budgeted profits and loss accounts for the year ending 30th June, 2016 are as follows:
AB Ltd CD Ltd
Sales 150,000 150,000
Less Variable Cost 120,000 100000
Contribution 30000 50,000
Less FC 15000 35000
Profit 15000 15000

You are required to calculate the B.E.P of each business and state which business is likely to
earn greater profits in conditions.
(a) Heavy demand for the product
(b) Low demand for the product.

5.The sales turnover and profit during two periods were as follows:
Period Sales (`) Profit (`)
1 2,00,000 20,000
2 3,00,000 40,000
1.What is PV ratio in the given situation.
2.What would be probable trading results with sales of `1,80,000?
3.What amount of sales will yield a profit of ` 50,000?

6.A factory is currently working to 40% capacity and produces 10,000 units. At 50% the
selling price falls by 3%. At 90% capacity the selling price falls by 5% accompanied by
similar fall in prices of raw material. Estimate the profit of the company at 50% and 90%
capacity production.
The cost at present per unit is:
Material ` 10
Labour ` 3
Overheads ` 5(60% fixed)
The selling price per unit is ` 20/- per unit.

7.A factory is currently working to 40% capacity and produces 10,000 units. At 50% the
selling price falls by 3%. At 90% capacity the selling price falls by 5% accompanied by
similar fall in prices of raw material. Estimate the profit of the company at 50% and 90%
capacity production.
The cost at present per unit is:
Material ` 10
Labour ` 3
Overheads ` 5(60% fixed)
The selling price per unit is ` 20/- per unit.
[Ans :Rs 20000, Rs 25000,Rs 71250]

8.) MFN ltd started its operation in 2017 with total production capacity of Rs 200000/- units.
Following data for two years is made available.
2017 2018
Sales Units 80,000 120,000
Total Cost 34,40,000 45,60,000
There is no change in cost structure and selling price and same is expected to continue in
2019 also. Selling Price per unit is Rs 40/-
i) BEP in (units)
ii) Profit at 75% of total capacity in 2019.
[Ans:100000 units, Rs 600000/-]