CA Sunil Keswani 539

Chapter 14
Marginal Costing
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Marginal Cost • It is 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.
• In other words, it is the incremental cost of production for producing one
additional unit of product.
• In other words, with the increase in one unit of output the total cost is
increased and this increase in total cost due to change in the volume of
output is known as marginal cost.

Marginal Costing • It is the ascertainment of marginal costs and of the effect on profit of
changes in volume or type of output, by differentiating between the fixed
costs and variable cost.
• Marginal costing is a technique which presents management with
required information enabling it to measure the profitability of an
undertaking by considering the behavior of costs.
• It is a costing system where products or services and inventories are
valued at variable cost only.

Characteristics of • All elements are classified into fixed and variable components.
Marginal costing • The variable costs are treated as the cost of product.
• Value of finished goods and work-in-progress is valued at marginal cost
basis only.
• Fixed cost are treated as period costs.
• Profitability is determined with reference to their contribution margin.

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Advantages of • Help in managerial decisions – The most important advantage of

Marginal Costing variable costing is the assistance that it renders to management in taking
many valuable decisions.
• Cost Control – Greater control over cost is possible. This is so because
by classifying costs in fixed and variable, the management can
concentrate more on the control of variable cost which are generally
controllable and pay less attention to fixed costs which may be controlled
only by the top management and that too, to a limited extent.
• Constant cost per unit – Marginal costing takes into account only
variable costs which remain the same per unit of product irrespective of
the volume of output. It therefore avoids the effect of varying cost per
unit as it ignores fixed costs which are incurred on a time basis and have
no relation with the size of production.
• No under and over-absorption of overheads – In marginal costing,
there is no problem of under-or-over absorption of overheads.
• Aid to profit planning – To aid profit planning marginal costing
technique enables data to be presented to management is such a way as
to show cost-volume-profit relationship.
• Simple technique – Variable costing is comparatively simple to operate
because it avoids the complications involved in allocation, apportionment
and absorption of fixed overheads which is, in fact, arbitrary division of
indivisible fixed costs.
• Realistic valuation of stocks – In marginal costing, stocks of work-in-
progress and finished goods are valued only at variable costs. Thus, no
fictitious profits can arise due to fixed cost being absorbed and capitalized
in unsold stock. Stock valuation in marginal costing, is, therefore more
realistic and uniform.
• Valuable addition to other technique – Marginal costing is a valuable
addition to standard costing and budgetary control.

Limitations of • Difficulty in classifying fixed and variable elements - It is difficult to

Marginal Costing classify exactly the expenses into fixed and variable category. Most of
the expenses are neither totally variable nor wholly fixed. For example,
various amenities provided to workers may have no relation either to
volume of production or time factor.
• Dependence of key factors - Contribution of a product itself is not a
guide for optimum profitability unless it is linked with the key factor.

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• Ignores time factor and investment - Marginal costing ignores time
factor and investment. For example, the marginal cost of two jobs may be
the same but the time taken for their completion and the cost of machines
used may differ. The true cost of a job which takes longer time and uses
costlier machine would be higher. This fact is not disclosed by marginal
costing.
• Unpredictable nature of cost - Some of the assumptions regarding the
behavior of a various costs are not necessarily true in a realistic situation.
For example, the assumption that fixed cost will remain static throughout
is not correct. Fixed cost may change from one period to another. For
example, salary bill may go up because of annual increments or due to
change in pay rate etc.
• Faulty valuations - Overheads of fixed nature cannot altogether be
excluded particularly in large contracts, while valuing the work-in-
progress. In order to show the correct position, fixed overheads have to
be included in work-in-progress.
• Scope for low profitability - Sales staff may mistake marginal cost for
total cost and sell at a price; which will result in loss or low profits. Hence,
sales staff should be cautioned while giving marginal cost.

Absorption • It is an approach to product costing in which all manufacturing costs,

Costing variable costs and fixed costs are charged to the cost of goods
manufactured and inventories.
• In absorption costing all manufacturing costs—variable and fixed—are
charged to products, material and labour costs by direct measurement
while indirect manufacturing costs by some methods of apportionment.

Difference between
absorption and Basis Absorption Costing Marginal Costing
marginal costing 1. Calculation of Absorption rate includes, Marginal costing rate
manufacturing both fixed and variable includes only variable
overhead rates manufacturing manufacturing
overheads. overhead.
2. Valuation of Valuation is on Product Valuation will be at
inventory cost i.e. Prime cost + Prime cost + applied
applied fixed and variable manufacturing
variable manufacturing overhead.
overhead.

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3. Classification Overheads may be Overheads are
of Overhead classified as factory, classified as variable
administrative, selling and fixed.
and distribution
4. Operating Gross Profit Contribution
profit = Net sales – Prime cost - = Net sales – variable
fixed and variable manufacturing cost of
manufacturing overheads goods sold – variable
administrative selling
and distribution
overhead
5. Net operating Net operating profit Net operating profit
profit = Gross profit – = Contribution - fixed
administrative selling manufacturing
and distribution overhead – fixed
overheads (fixed and administrative
variable) overhead – fixed
selling and distribution
overhead
6. Effect of stock The difference in the The difference in the
valuation magnitude of opening magnitude of opening
and closing stock affect and closing stock
the unit cost ofdoesn’t affect the unit
production. cost of production.
7. Decision It distorts decision It aids decision making
Making making
Difference in profit • No Opening or closing stock – Both profit/loss will be equal.
under Marginal • When opening stock is equal to closing stock – Both profit/loss will be
and Absorption equal provided fixed cost in both stock is same.
costing • When closing stock is more than opening stock – Profit as per
absorption will be more than marginal.
• When opening stock is more than closing stock – Profit in marginal
will be more than absorption.

Cost-Volume- • It studies the variations in cost and profit in relation to change in the
Profit (CVP) volume of output and sales though a large number of internal and external
Analysis factors influence e.g. the amount of profit, the volume of output etc.
• The three factors of CVP analysis are interlinked and interdependent.

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Importance and • Profit Planning - In profit planning it becomes essential to know the
uses of CVP relationship between cost, volume and profit. The most important feature
Analysis of C-V-P analysis is the manner in which it relates cost, selling price and
volume and enable calculation to be made to show the effect of change in
[TRICK – Profit these on profit. Accordingly, the management can plan profit with
Decision depend on reference to C-V-P analysis.
Cost Budget] • Decision Making - C-V-P analysis is very useful in taking managerial
decisions like make or buy, pricing, selection of a product mix, selection
of best method of production, etc.
• Cost Control - In the field of cost control C-V-P analysis is of great
assistance to the management. The effect of cost of change in the volume
can be evaluated for the purpose of reviewing profits earned and cost
incurred.
• Preparation of Flexible Budget - C-V-P analysis is of special help in
the preparation of fixed budget which indicates cost and profit at different
levels of activity.

Assumption • All costs can be divided into fixed and variable category.
underlying CVP • This analysis relates to the given capacity i.e., it is basically a short- term
Analysis analysis.
• It assumes that variable cost fluctuates with volume proportionally.
• This analysis presumes that fixed cost remains constant over a given
volume.
• Selling price per unit remains constant.
• Costs and revenues are influenced only by the volume of output and sales.
• Production technology and level of efficiency remains constant.
• This analysis relates to a single product-mix which remains constant.
• This analysis also presumes that prices of input factors will remain
constant.
• All stocks, both opening and closing are valued at variable cost.

Methods for • Levels of output compared to levels of expenses method – The output
Segregation of at two different levels is compared with corresponding level of expenses.
Semi-variable Since the fixed expenses remain constant, the variable overheads are
overheads arrived at by the ratio of change in expenses to change in output.
-ℎ"*.' $* ")/0*+ /1 '23'*4'4
!"#$"%&' '&')'*+ =
5"6$*. $* "7+$6$+8 /# /0+30+

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CA Sunil Keswani 544
• Range method – This method is similar to the previous method except
that only the highest and lowest points are considered out of various
levels. This method is also designated as ‘high and low’ method.

• Degree of variability method – In this method, degree of variability is

noted for each item of semi-variable expenses. Some semi-variable items
may have 30% variability while others may have 70% variability. The
method is easy to apply but difficult is faced in determining the degree
of variability.

Contribution • The difference between selling price and variable cost (i.e. the marginal
cost) is known as ‘Contribution’ or ‘Gross Margin’.
• The idea is that after deducting the variable costs from sales, the figure
remaining is the amount that contributes to fixed costs, and once fixed
costs are covered, then to profits.
Contribution = Selling price – Variable cost = Fixed cost + Profit

Profit/Volume • Profit-volume ratio establishes a relationship between the contribution

Ratio (P/V Ratio) and the sales value.
• It is an indicator of the rate at which profit is being earned.
• This ratio can also be called as ‘Contribution/Sales’ ratio.
• This ratio can also be known by comparing the change in contribution to
change in sales or change in profit to change in sales.
• This ratio would remain constant at different levels of production.
-/*+#$%0+$/* 5"&'4 − !"#$"%&' -/4+4
9/! ;"+$/ = =
5"&'4 5"&'4
-ℎ"*.' $* 7/*+#$%0+$/* -ℎ"*.' $* 3#/1$+
= =
-ℎ"*.' $* 5"&'4 -ℎ"*.' $* 5"&'4

Improvement in • It can be improved by widening the gap between sales and variable cost.
P/V Ratio This can be achieved by:
• Increasing the selling price
• Reducing the variable cost
• Changing the sales mix, i.e., selling more of those products which
have larger P/V ratio, thereby improving the overall P/V ratio

Break-even • In its narrow sense it is concerned with finding out the break- even point.
Analysis • Break-even-point is the point at which total revenue is equal to total cost.
• In other words, it is the point of no profit or no loss.

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• In other words, it is the level at which contribution is just able to recover
the fixed cost.
• In its broad sense, break-even analysis refers to a system of analysis that
can be used to determine the probable profit/loss at any level of
production.
B$2'C -/4+
>#'"? − '6'* 9/$*+(0*$+4) =
-/*+#$%0+$/* 3'# 0*$+
B$2'C -/4+
>#'"? − '6'* 9/$*+($* 4"&'4 6"&0') =
9/! ;"+$/

Assumptions • Fixed Costs remain unchanged at all levels of activity.

underlying Break- • Variable cost change in direct proportion to the volume of output.
even-analysis • Costs can be classified into fixed and variable elements.
• Selling price remains constant irrespective of volume or production or
sales changes.
• Price of raw materials, labour rate etc., remain constant.

Cash Break-even • It is the level of output or sales where there will be “no cash profit and
Point no cash loss”.
• In other words it is that activity level where the cash inflows will be just
equal to cash required to meet immediate cash liabilities.
• At this point, cash contribution equals the cash fixed cost, i.e. fixed cost
excluding depreciation and deferred expenses.
• For this purpose, the fixed costs are divided into two categories: (i) Fixed
Costs which do not require immediate cash outlay e.g. depreciation,
deferred expenses, and (ii) Fixed Costs which require immediate cash
outlay, e.g. rent, salaries, etc.
-"4ℎ B$2'C -/4+
-"4ℎ >#'"? − '6'* 9/$*+(0*$+4) =
-"4ℎ -/*+#$%0+$/* 3'# 0*$+
-"4ℎ B$2'C -/4+
-"4ℎ >#'"? − '6'* 9/$*+($* 6"&0') =
9/! ;"+$/

Angle of Incidence • This is the angle formed at the break-even point at which the sales line
cuts the total cost line.
• This angle of incidence indicates that profits are being made.
• Large angle of incidence is an indication that profits are being made of
rupee at higher rate.
• A small angle of incidence shows a low rate of profit and suggests that
variable cost forms the major part of cost of production.

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CA Sunil Keswani 546
• A large angle of incidence with a high margin of safety indicates the most
favorite position of a business and even the existence of monopoly
conditions.

Margin of Safety • It may be defined as the difference between actual sales and sales at
(M/S) break-even point.
• Margin of safety may be expressed in absolute money terms or as a
percentage of sales.
• The size of the margin of safety indicates soundness of a business.
• When margin of safety is large it means the business can still make
profits after a serious fall in sales.
• When margin of safety is low, any loss of sales may be a matter of serious
concern.
D"#.$* /1 5"1'+8($* ;4. ) = F7+0"& 4"&'4 − >#'"? '6'* 5"&'4
D"#.$* /1 5"1'+8($* 0*$+4) = F7+0"& 4"&'4 − >#'"? '6'* 5"&'4
!"#$%&
D"#.$* /1 5"1'+8($* ;4. ) = !/( *+&%#
!"#$%&
D"#.$* /1 5"1'+8($* 0*$+4) = ,#-&"%./&%#- 01" /-%&

Application of • Identification of problem

CVP Analysis in • Identification of options
Decision Making • Evaluation of the options
• Selection of the option

Relevant Cost • A cost is treated as relevant only if it is a future cost and it differs under
two options under consideration.

Example of • Historical cost – Irrelevant e.g. book value of machinery

Relevant and • Sunk cost – Irrelevant e.g. cost of drawing, blueprint
Irrelevant Cost • Committed cost – Irrelevant e.g. salary cost to employees
• Opportunity cost – Relevant
• Notional or imputed cost – Relevant e.g. notional interest
• Shut down cost – Relevant

Key Factor • The factor which may limit the activity level of a firm is known as the
‘key factor’.
• In most of the cases ‘sales’ is the key factor. Some other factor such as
labour; machine capacity, material, etc. may not be available in requisite
quantity will be a key factor as well.

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• Key factor governs the decision “how much to produce”.
• The ‘maximizing contribution per unit of the limiting factor’ rule can be
of value, but can only be used where there is a single binding constraint
and where the constraint is continuously divisible i.e. it can be altered
one unit at a time.

Question – 1 [May19]
What are the limitations of marginal costing?
Answer
(i) Difficulty in classifying fixed and variable elements: It is difficult to classify exactly the
expenses into fixed and variable category. Most of the expenses are neither totally variable nor
wholly fixed. For example, various amenities provided to workers may have no relation either
to volume of production or time factor.
(ii) Dependence on key factors: Contribution of a product itself is not a guide for optimum
profitability unless it is linked with the key factor.
(iii) Scope for Low Profitability: Sales staff may mistake marginal cost for total cost and sell at a
price; which will result in loss or low profits. Hence, sales staff should be cautioned while giving
marginal cost.
(iv) Faulty valuation: Overheads of fixed nature cannot altogether be excluded particularly in large
contracts, while valuing the work-in- progress. In order to show the correct position fixed
overheads have to be included in work-in-progress.
(v) Unpredictable nature of Cost: Some of the assumptions regarding the behaviour of various
costs are not necessarily true in a realistic situation. For example, the assumption that fixed cost
will remain static throughout is not correct. Fixed cost may change from one period to another.
For example, salaries bill may go up because of annual increments or due to change in pay rate
etc. The variable costs do not remain constant per unit of output. There may be changes in the
prices of raw materials, wage rates etc. after a certain level of output has been reached due to
shortage of material, shortage of skilled labour, concessions of bulk purchases etc.
(vi) Marginal costing ignores time factor and investment: The marginal cost of two jobs may be
the same but the time taken for their completion and the cost of machines used may differ. The
true cost of a job which takes longer time and uses costlier machine would be higher. This fact
is not disclosed by marginal costing.
(vii) Understating of WIP: Under marginal costing stocks and work in progress are understated.

Question – 2 [RTP – Jan25]

Discuss advantages of marginal costing.

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Answer
1) Simplified Pricing Policy: The marginal cost remains constant per unit of output whereas the
fixed cost remains constant in total. Since marginal cost per unit is constant from period to period
within a short span of time, firm decisions on pricing policy can be taken.
2) Proper recovery of Overheads: Overheads are recovered in costing on the basis of pre-
determined rates. If fixed overheads are included on the basis of pre-determined rates, there will
be under- recovery of overheads if production is less or if overheads are more. There will be
over- recovery of overheads if production is more than the budget or actual expenses are less
than the estimate. This creates the problem of treatment of such under or over-recovery of
overheads. Marginal costing avoids such under or over recovery of overheads.
3) Shows Realistic Profit: Advocates of marginal costing argues that under the marginal costing
technique, the stock of finished goods and work-in-progress are carried on marginal cost basis
and the fixed expenses are written off to profit and loss account as period cost. This shows the
true profit of the period.
4) How much to produce: Marginal costing helps in the preparation of break-even analysis which
shows the effect of increasing or decreasing production activity on the profitability of the
company.
5) More control over expenditure: Segregation of expenses as fixed and variable helps the
management to exercise control over expenditure. The management can compare the actual
variable expenses with the budgeted variable expenses and take corrective action through
analysis of variances.
6) Helps in Decision Making: Marginal costing helps the management in taking a number of
business decisions like make or buy, discontinuance of a particular product, replacement of
machines, etc.
7) Short term profit planning: It helps in short term profit planning by B.E.P charts.

Question – 3 [MTP – May21]

Discuss basic assumptions of cost volume profit analysis.
Answer
1) Changes in the levels of revenues and costs arise only because of changes in the number of
product (or service) units produced and sold – for example, the number of television sets
produced and sold by Sony Corporation or the number of packages delivered by Overnight
Express. The number of output units is the only revenue driver and the only cost driver. Just as
a cost driver is any factor that affects costs, a revenue driver is a variable, such as volume, that
causally affects revenues.
2) Total costs can be separated into two components; a fixed component that does not vary with
output level and a variable component that changes with respect to output level. Furthermore,
variable costs include both direct variable costs and indirect variable cost of a product. Similarly,
fixed costs include both direct fixed costs and indirect fixed costs of a product.

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3) When represented graphically, the behaviours of total revenues and total costs are linear
(meaning they can be represented as a straight line) in relation to output level within a relevant
range (and time period).
4) Selling price, variable cost per unit, and total fixed costs (within a relevant range and time
period) are known and constant.
5) The analysis either covers a single product or assumes that the proportion of different products
when multiple products are sold will remain constant as the level of total units sold changes.
6) All revenues and costs can be added, subtracted, and compared without taking into account the
time value of money.

Question – 4 [July21]
What is Margin of Safety? What does a large Margin of Safety indicate? How can you calculate
Margin of Safety?
Answer
The margin of safety can be defined as the difference between the expected level of sale and the
breakeven sales. The larger the margin of safety, the higher is the chances of making profits.

The Margin of Safety can be calculated by identifying the difference between the projected sales and
breakeven sales in units multiplied by the contribution per unit. This is possible because, at the
breakeven point all the fixed costs are recovered and any further contribution goes into the making of
profits.
Margin of Safety = (Projected sales Breakeven sales) in units ´ contribution per unit
!"#$%&
It also can be calculated as: Margin of Safety = !( *+&%#

Question – 5 [Nov20]
Differentiate between "Marginal and Absorption Costing".
Answer
S. No. Marginal Costing Absorption Costing
1. Only variable costs are considered for Both fixed and variable costs are
product costing and inventory valuation. considered for product costing and
inventory valuation.
2. Fixed costs are regarded as period costs. Fixed costs are charged to the cost of
The profitability of different products is production. Each product bears a
judged by their P/V ratio. reasonable share of fixed cost and thus the
profitability of a product is influenced by
the apportionment of fixed costs.
3. Cost data presented highlight the total Cost data are presented in conventional
contribution of each product. pattern. Net profit of each product is

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 CA Sunil Keswani 550
determined after subtracting fixed cost
along with their variable costs.
4. The difference in the magnitude of opening The difference in the magnitude of opening
stock and closing stock does not affect the stock and closing stock affects the unit cost
unit cost of production. of production due to the impact of related
fixed cost.
5. In case of marginal costing the cost per unit In case of absorption costing the cost per
remains the same, irrespective of the unit reduces, as the production increases as
production as it is valued at variable cost. it is fixed cost which reduces whereas the
variable cost remains the same per unit.

Question – 1 [SM]
By noting “PV will increase or PV will decrease or PV will not change”, as the case may be, state
how the following independent situations will affect the PV ratio:
(i) An increase in the physical sales volume
(ii) An increase in the fixed cost
(iii) An increase in the variable cost per unit
(iv) A decrease in the contribution margin
(v) An increase in selling price per unit
(vi) A decrease in the fixed cost
(vii) A 10% increase in both selling price and variable cost per unit
(viii) A 10% increase in the selling price per unit and 10% decrease in the physical sales volume.
(ix) A 50% increase in the variable cost per unit and 50% decrease in the fixed cost
(x) An increase in the angle of incidence

Question – 2
A factory manufacturing sewing machines has the capacity to produce 500 machines per annum. The
marginal (variable) cost of each machine is `200 and each machine is sold for `250. Fixed overheads
are `12,000 per annum. Calculate the break-even points for output and sales and show what profit
will result if output is 90% of capacity?
[Answer – 240 machines; `60,000; Profit = `10,500]

Question – 3
From the following data, calculate
(a) P/V Ratio
(b) Profit when sales are `20,000 and
(c) New Break-even point if selling price is reduced by 20%.

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 CA Sunil Keswani 551
Fixed expenses `4,000
Break-even point `10,000
[Answer – (a) 40%; (b) `4,000; (c) `16,000]

Question – 4
Given the following information:
Fixed cost = `4,000
Break even sales = `20,000
Profit =`1,000
Selling price per unit =`20
You are required to calculate:
(a) Sales and marginal cost of sales, and
(b) New break-even point if selling price is reduced by 10%
[Answer – (a) `25,000; `20,000; (b) `36,000]

Question – 5 [SM]
The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the capacity sales.
Find the capacity sales when fixed costs are `90,000. Also compute profit at 75% of the capacity
sales.
[Answer – Sales = `5,00,000; Profit = `22,500]

Question – 6 [SM]
SK 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 amounting to `35,00,000 (including depreciation of `15,00,000). There is
no beginning or ending inventories.

Required to compute breakeven sales level quantity and cash breakeven sales level quantity.
[Answer – 1,75,000 units; 1,00,000 units]

Question – 7
Following information are available for the year 2013 and 2014 of SK Limited:
Year 2013 2014
Sales `32,00,000 `57,00,000
Profit/(Loss) (`3,00,000) `7,00,000
Calculate – (a) PV ratio, (b) total fixed cost, and (c) Sales required to earn a profit of `12,00,000.
[Answer – (a) 40%; (b) `15,80,000; (c) `69,50,000]

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Question – 8 [SM] [Similar May22]
SK Ltd. sells its product at `15 per unit. During the quarter ending on 31st March, it produced and
sold 8,000 units and suffered a loss of `5 per unit. If the volume of sales is raised to 20,000 units, it
can earn a profit of `4 per unit.

You are required to calculate:

(a) Break-even point in rupees
(b) Profit if the sale volume is 25,000 units
(c) Minimum level of production where the company needs not to close the production if unavoidable
fixed costs is `75,000.
[Answer – (a) `1,80,000; (b) `1,30,000; (c) 4,500 units]

Question – 9 [SM]
SK Ltd. maintains margin of safety of 37.5% with an overall contribution to sales ratio of 40%. Its
fixed costs amount to `5,00,000. Calculate the following:
(a) Break-even sales
(b) Total sales
(c) Total variable cost
(d) Current profit
(e) New ‘margin of safety’ if the sales volume is increased by 7.5%.
[Answer – (a) `12,50,000; (b) `20,00,000; (c) `12,00,000; (d) `3,00,000; (e) 41.86%]

Question – 10
SK Ltd. reports the following cost structure at two capacity levels:
2,000 units 1,500 units
(100% capacity)
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?
[Answer – 1,000 units]

Question – 11 [SM]
SK Ltd. has furnished the following data for the two years:
2017 2018
Sales `8,00,000 ?
Profit/volume ratio (P/V Ratio) 50% 37.5%
Margin of safety sales as % of total sales 40% 21.875%

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 CA Sunil Keswani 553
There has been substantial savings in the fixed cost in the year 2018 due to the restructuring process.
The company could maintain its sales quantity level of 2017 in 2018 by reducing the selling price.
You are required to calculate the following:
(a) Sales for 2018 in `
(b) Break-even sales for 2018 in `
(c) Fixed cost for 2018
[Answer (a) `6,40,000; (b) `5,00,000; (c) `1,87,500]

Question – 12
The following figures are related to SK Limited for the year ending 31st March:
Sales - 24,000 units @ `200 per unit;
P/V Ratio 25% and Break-even Point 50% of sales.
You are required to calculate:
(a) Fixed cost for the year
(b) Profit earned for the year
(c) Units to be sold to earn a target net profit of `11,00,000 for a year.
(d) Number of units to be sold to earn a net income of 25% on cost
(e) Selling price per unit if Break-even Point is to be brought down by 4,000 units.
[Answer – (a) `6,00,000; (b) `6,00,000; (c) 34,000 units; (d) 60,000 units; (e) `225]

Question – 13 [RTP – May24]

A Ltd. manufacture and sales its product R-9. The following figures have been collected from cost
records of last year for the product R-9:
Elements of Cost Variable Cost Portion Fixed Cost
Direct Material 30% of Cost of Goods Sold -
Direct Labour 15% of Cost of Goods Sold -
Factory Overheads 10% of Cost of Goods Sold `2,30,000
General & Administration Overheads 2% of Cost of Goods Sold `71,000
Selling & Distribution Overhead 4% of Cost of Sales `68,000
Last Year 5,000 units were sold at `185 per unit. From the given data find the followings:
(a) Break-even Sales (in rupees)
(b) Profit earned during last year
(c) Margin of safety (in %)
(d) Profit if the sales were 10% less than the actual sales.
(Assume that administration overheads are related with production activity)
[Answer – (a) `6,90,882; (b) `1,25,000; (c) 25.31%; (d) `75,600]

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 CA Sunil Keswani 554
Question – 14
SK Ltd. manufactures a product “SK”. In the month of March, 14,000 units of the product “SK”
were sold, the details are as under:
(`)
Sale Revenue 2,52,000
Direct Material 1,12,000
Direct Labour 49,000
Variable Overheads 35,000
Fixed Overheads 28,000
A forecast for the month of April, has been carried out by the General manger of SK Ltd. As per the
forecast, price of direct material and variable overhead will be increased by 10% and 5% respectively.
Required to calculate:
(a) Number of units to be sold to maintain the same quantum of profit that made in March.
(b) Margin of safety in the month of March and April.
[Answer – (a) 18,212 units; (b) `1,26,000; `1,63,902.44]

Question – 15
SK Ltd. is operating at 80 % capacity and presents the following information:
Break-even Sales `400 crores
P/V Ratio 30 %
Margin of Safety `120 crores
SK’s management has decided to increase production to 95 % capacity level with the following
modifications:
(a) The selling price will be reduced by 10%.
(b) The variable cost will be increased by 2% on sales
(c) The fixed costs will increase by `50 crores, including depreciation on additions, but
excluding interest on additional capital.
Additional capital of `100 crores will be needed for capital expenditure and working capital.
Required:
(i) Indicate the sales figure, with the working, that will be needed to earn `20 crores over and
above the present profit and also meet 15% interest on the additional capital.
(ii) What will be the revised
(a) Break-even Sales
(b) P/V Ratio
(c) Margin of Safety
[Answer – (i) `860.71 crores; (ii) (a) `660.71 crores; (b) 28%; (c) `200 crores]

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 CA Sunil Keswani 555
Question – 16 [SM]
SK Ltd. a chocolate and 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 produced the following estimates for the India subsidiary:
Total Annual Per cent of Total Annual
Costs (`) cost that is variable
Material 1,93,600 100%
Labour 90,000 70%
Overhead 80,000 64%
Administration 30,000 30%
The Indian production will be sold by manufacturer’s representatives who will receive a commission
of 8 per cent of the sale price. No portion of the British Office expenses is to be allocated to the Indian
subsidiary. It is required to:
(a) Compute the sale price per bottle to enable management to realize an estimated 10 per cent profit
on sale proceeds in India, and;
(b) Calculate the break-even point in rupee sales for the Indian subsidiary on the assumption that the
sale price is `11 per bottle.
[Answer – (a) `12; (b) `3,84,000]

Question – 17
SK Ltd. manufactures only pencils where the marginal cost of each pencil is `3. It has fixed costs of
`25,000 per annum. Present production and sales of pencils is 50,000 units and selling price per pencil
is `5. Any sale beyond 50,000 pencils 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 of
`1,00,000. How many pencils must be produced and sold if the target is to be achieved?
[Answer – 75,000 pencils]

Question – 18 [RTP – Nov23]

A dairy product company manufacturing baby food with a shelf life of one year furnishes the following
information:
(i) On 1st January, 2019, the company has an opening stock of 20,000 packets whose variable cost
is `180 per packet.
(ii) In 2018, production was 1,20,000 packets and the expected production in 2019 is 1,50,000
packets. Expected sales for 2019 is 1,60,000 packets.
(iii) In 2018, fixed cost per unit was `60 and it is expected to increase by 10% in 2019. The variable
cost is expected to increase by 25%. Selling price for 2019 has been fixed at `300 per packet.
You are required to calculate the Break-even volume in units for 2019.

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 CA Sunil Keswani 556
[Answer – 93,600 units]

Question – 19 [SM]
A company has a P/V ratio of 40%. Compute by what percentage must sales be increased to offset:
20% reduction in selling price? Also find the required change in sales quantity level.

Question – 20 [SM]
(a) You are given the following data for the coming year for a factory:
Budgeted output 8,00,000 units
Fixed expenses `40,00,000
Variable expenses per unit `100
Selling price per unit `200
Draw a break-even chart showing the break-even point.
(b) If price is reduced to `180, what will be the new break-even point?
[Answer – (a) 40,000 units; (b) 50,000 units]

Question – 21
A company sells two products, S and K. The sales mix is 4 units of S and 3 units of K. The contribution
margins per unit are `40 for S and `20 for K. Fixed costs are `6,16,000 per month. Compute the
break-even point.
[Answer – 11,200 units; 8,400 units]

Question – 22 [SM]
CT Ltd. manufactures and sells a single product X whose selling price is `100 per unit and the variable
cost is `60 per unit.
(a) If the Fixed Costs for this year are `24,00,000 and the annual sales are at 60% margin of safety,
Calculate the rate of return on sales, assuming an income tax level of 40%.
(b) For the next year, it is proposed to add another product line Y whose selling price would be `150
per unit and the variable cost `100 per unit. The total fixed costs are estimated at `28,00,000.
The sales mix of X : Y would be 5 : 3. Compute the breakeven sales in units for both the products.
[Answer – (a) 14.40%; (b) 40,000 units; 24,000 units]

Question – 23 [SM]
Prepare a profit graph for products S, K and M and find break-even point from the following data:
Particulars S K M Total
Sales (`) 7,500 7,500 3,750 18,750
Variable cost (`) 1,500 5,250 4,500 11,250
Fixed cost (`) - - - 5,000

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 CA Sunil Keswani 557
Question – 24
A, B and C are three similar plants under the same management who want them to be merged for
better operation. The details are as under:
Plant A B C
Capacity operated 100% 70% 50%
(`in lakhs) (`in lakhs) (`in lakhs)
Turnover 300 280 150
Variable cost 200 210 75
Fixed cost 70 50 62
Find out:
(a) the capacity of the merged plant for break-even
(b) the profit at 75% capacity of the merged plant
(c) the turnover from the merged plant to give a profit of `28 lakhs.
[Answer – (a) 52%; (B) `80,50,000; (c) `6,00,00,000]

Question – 25 [SM]
A company can make any one of the 3 products X, Y and Z in a year. It can exercise its option only
at the beginning of each year. Relevant information about the products for the next year is given below:
X Y Z
Selling Price (`/ unit) 10 12 12
Variable costs (`/ unit) 6 9 7
Market Demand (unit) 3,000 2,000 1,000
Production capacity (unit) 2,000 3,000 900
Fixed costs (`) 30,000
Required to compute the opportunity costs for each of the products.
[Answer - `6,000; `8,000; `8,000]

Question – 26
SK Ltd. has an annual production of 90,000 units for a component. The component cost structure is
as below:
Material `270 per unit
Labour (25% fixed) 180 per unit
Variable expenses 90 per unit
Fixed expenses 135 per unit
675 per unit
(a) The purchase manager has an offer from a supplier, who is willing to supply the component at
`540. Should the component be purchased and production stopped?
(b) Assume the resources now used for this component manufacture are to be used to produce another
new product for which the selling price is `485. In the latter case material price will be `200 per

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 CA Sunil Keswani 558
unit. 90,000 units of this product can be produced at the same cost basis as above for labour and
other expenses. Discuss whether it would be advisable to direct the resources to manufacture the
new product, on the footing that the component presently being produced would, instead of being
produced, be purchased from the market.
[Answer – (a) Manufacture; (b) Manufacture new product]

Question – 27 [SM]
SK Ltd. manufactures three different products and the following information has been collected from
the books of accounts:
Products
S T U
Sales Mix 35% 35% 30%
Selling Price `300 `400 `200
Variable Cost `150 `200 `120
Total Fixed Costs `18,00,000
Total Sales `60,00,000
The company has currently under discussion, a proposal to discontinue the manufacture of Product U
and replace it with Product M, when the following results are anticipated:
Products
S T M
Sales Mix 50% 25% 25%
Selling Price `300 `400 `300
Variable Cost `150 `200 `150
Total Fixed Costs `18,00,000
Total Sales `64,00,000
Required:
(a) Compute the PV ratio, total contribution, profit and Break-even sales for the existing product mix.
(b) Compute the PV ratio, total contribution, profit and Break-even sales for the proposed product
mix.
(c) State whether the proposed sales mix is accepted or not?
[Answer – (a) BES = `38,29,787; (b) BES = `36,00,000; (c) Accept]

Question – 28
The following particulars are obtained from costing records of a factory:
Product A Product B
Particulars
(per unit) (`) (per unit) (`)
Selling Price 400 1000
Material (`40 per litre) 80 320
Labour (`20 per hour) 100 200

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 CA Sunil Keswani 559
Variable Overhead 40 80
Total fixed overheads = `30,000.
Comment on the profitability of each product when:
(a) Raw material is in short supply
(b) Production capacity is limited
(c) Sales quantity is limited
(d) Sales value is limited
(e) Only 1,000 litres of raw material is available for both the products in total and maximum sales
quantity of each product is 300 units.
[Answer – (a) A; (b) B; (c) B; (d) A; (e) A = 300; B = 50]

Question – 29 [SM]
SK Ltd. supplies spare parts to an air craft company MK Ltd. The production capacity of SK Ltd.
facilitates production of any one spare part for a particular period of time. The following are the cost
and other information for the production of the two different spare parts A and B:
Per unit Part A Part B
Alloy usage 1.6 Kg 1.6 Kg
Machine Time: Machine A 0.6 hrs. 0.25 hrs.
Per unit Part A Part B
Machine Time: Machine B 0.5 hrs. 0.55 hrs.
Target Price (`) 145 115
Total hours available Machine A – 4,000 hours
Machine B – 4,500 hours
Alloy available is 13,000 kg @ `12.50 per kg
Variable overheads per machine hours: Machine A – `80
Machine B – `100
Required:
(a) Identify the spare part which will optimize contribution at the offered price.
(b) If MK Ltd. reduces target price by 10% and offers `60 per hour of unutilized machine hour,
what will be the total contribution from the spare part identified above?
[Answer – (a) A; (b) `1,53,328]

Question – 30 [Nov22]
An agriculture based company having 210 hectares of land is engaged in growing three different
cereals namely, wheat, rice and maize annually. The yield of the different crops and their selling prices
are given below:
Wheat Rice Mazie
Yield (in kgs per hectare) 2,000 500 100
Selling price (`per kg) 20 40 250

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 CA Sunil Keswani 560
The variable cost data of different crops are given below:
(all figures in `per kg)
Crop Labour charges Packaging Materials Other variable expenses
Wheat 8 2 4
Rice 10 2 1
Maize 120 10 20
The company has a policy to produce and sell all the three kinds of crops. The maximum and minimum
area to be cultivated for each crop is as follows:
Crop Maximum Area (in hectares) Minimum Area (in hectares)
Wheat 160 100
Rice 50 40
Maize 60 10
You are required to:
(a) Rank the crops on the basis of contribution per hectare
(b) Determine the optimum product mix considering that all the three cereals are to be produced.
(c) Calculate the maximum profit which can be achieved if the total fixed cost per annum is
`21,45,000.
(assume that there are no other constraints applicable to this company)
[Answer – (a) II, I, III; (b) 50; 10; 150; (c) `4,30,000]

Question – 31 [SM]
SK Ltd. manufactures medals for winners of athletic events and other contests. Its manufacturing plant
has the capacity to product 10,000 medals each month. The company has current production and sales
level of 7,500 medals per month. The current domestic market price of the medal is `150.
The cost data for the month of August is as under:
(` )
Variable costs:
- Direct materials 2,62,500
- Direct labour costs 3,00,000
- Overhead 75,000
Fixed manufacturing costs 2,75,000
Fixed marketing costs 1,75,000
10,87,500
SK ltd. has received a special one-time order for 2,500 medals at `120 per medal. Required:
(a) Should SK ltd. accept the special order? Why? Explain briefly.
(b) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month. The special
order must be taken either in full or rejected totally. Analyse whether SK Ltd. should accept
the special order or not.
[Answer – (a) Accept; (b) Accept]

Marginal Costing
 CA Sunil Keswani 561

Question – 32
The profit for the year of RJ Ltd. works out to 12.5% of the capital employed and the relevant figures
are as under:
Sales `5,00,000
Direct Materials `2,50,000
Direct Labour `1,00,000
Variable Overheads `40,000
Capital Employed `4,00,000
The new Sales Manager who has joined the company recently estimates for next year a profit of about
23% on capital employed, provided the volume of sales is increased by 10% and simultaneously there
is an increase in Selling Price of 4% and an overall cost reduction in all the elements of cost by 2%.

Required to find out by computing in detail the cost and profit for the next year, whether the proposal
of Sales Manager can be adopted.
[Answer – Accept]

Question – 33 [SM]
The following are cost data for three alternative ways of processing the clerical work for cases brought
before the LC Court System:
[A] Manual (`) [B] Semi-Automatic [C] Fully-Automatic
(` ) (`)
Monthly fixed costs:
Occupancy 15,000 15,000 15,000
Maintenance - 5,000 10,000
contract
Equipment lease - 25,000 1,00,000
Unit variable costs
(per report):
Supplies 40 80 20
Labour 200 60 20
(5 hrs ´ `40) (1 hr ´ `60) (0.25 hr ´ `80)
Required:
(a) Calculate cost indifference points. Interpret your results.
(b) If the present case load is 600 cases and it is expected to go up to 850 cases in near future, select
most appropriate on cost considerations?
[Answer – (a) 300; 550; 800]

Marginal Costing
 CA Sunil Keswani 562
Question – 34 [SM]
SK Ltd. makes two products S and K, whose respective fixed costs are F1 and F2. You are given that
the unit contribution of K is one-fifth less than the unit contribution of S, that the total of F1 and F2 is
`1,50,000, that the BEP of S is 1,800 units (for BEP of S, F2 is not considered) and that 3,000 units
is the indifference point between S and K (i.e. S and K make equal profits at 3,000 units volume,
considering their respective fixed costs). There is no inventory build-up as whatever is produced is
sold.

Required to find out the values of F1 and F2 and units contributions of S and K.
[Answer – F1 = `90,000; F2 = `60,000; Contr. X = `50; Contr. Y = `40]

Question – 35
SK Ltd. supplies you the following standard cost per unit for one of its products.
Direct material `1.60
Direct labour `1.50
Variable factory overhead `1.20
Fixed factory overhead `3.00
Production at normal capacity is 2,00,000 units. Variable selling and administrative overhead per unit
is `0.50 and fixed selling and administrative overhead were `75,000 per year. Production and sales
data for the year 2017 and year 2018 are as follows:
Units produced in year 2017 2,00,000
Units sold in year 2017 1,60,000
Inventory – 31st Dec. 2017 68,000
Units produced in year 2018 1,50,000
Units sold in year 2018 1,80,000
Selling price in each year was `10.50. Prepare Income Statement for the two years under:
(i) Absorption costing, and (ii) Marginal costing
[Answer – (i) `3,57,000; `2,61,000; (ii) `2,37,000; `3,51,000]

Question – 36 [SM]
You are given the following information:
(i) Fixed cost `1,50,000
(ii) Variable cost `15 per unit
(iii) Selling price is `30 per unit
Calculate:
(a) Break-even point

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 CA Sunil Keswani 563
(b) Sales to earn a profit of `20,000
[Answer – (a) 10,000 units; (b) `3,40,000]

Question – 37 [SM]
You are required to:
(a) Determine profit, when sales = `2,00,000
Fixed cost = `40,000
BEP = `1,60,000
(b) Determine sales, when fixed cost = `20,000
Profit = `10,000
BEP = `40,000
[Answer – (a) `10,000; (b) `60,000]

Question – 38 [SM]
You are given the following data:
Sales Profit
Year 2020-21 `1,20,000 `8,000
Year 2021-22 `1,40,000 `13,000
Find out:
(a) PV ratio
(b) B.E. point
(c) Profit when sales are `1,80,000
(d) Sales required to earn a profit of `12,000
(e) Margin of safety in year 2021-22.
[Answer – (a) 25%; (b) `88,000; (c) `23,000; (d) `1,36,000; (e) `52,000]

Question – 39 [SM]
The following information is given by SK Ltd:
Margin of Safety `1,87,500
Total cost `1,93,750
Margin of Safety 3,750 units
Break-even Sales 1,250 units
Required to calculate profit, P/V ratio, BEP Sales (in `) and Fixed cost.
[Answer - `56,250; 30%; `62,500; `18,750]

Question – 40 [SM]
A company had incurred fixed expenses of `4,50,000 with sales of `15,00,000 and earned a profit of
`3,00,000 during the first half year. In the second half, it suffered a loss of `1,50,000.
Calculate:

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 CA Sunil Keswani 564
(i) The profit-volume ratio, break-even point and margin of safety for the first half year.
(ii) Expected sales volume for the second half year assuming that selling price and fixed expenses
remained unchanged during the second half year.
(iii) The break-even point and margin of safety for the whole year.
[Answer – (i) 50%; `9,00,000; `6,00,000; (ii) `6,00,000; (iii) `18,00,000; `3,00,000]

Question – 41 [SM]
Mr. X has `2,00,000 investments in his business firm. He wants a 15% 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?
(ii) What sales volume must be obtained to get 15 per cent return on investment?
(iii) Mr. X estimates that even if he closed the doors of his business, he would incur `25,000 as
expenses per year. At what sales would be better off by locking his business up?
[Answer – (i) `2,00,000; (ii) `2,75,000; (iii) `1,37,500]

Question – 42
A company has fixed costs of `90,000, Sales `3,00,000 and profit of `60,000.
Required to compute:
(a) Sales volume if in the next period, the company suffered a loss of `30,000?
(b) What is the margin of safety for a profit of `90,000?
[Answer – (a) 50%; `1,20,000 (B) `1,80,000]

Question – 43 [SM]
A company earned a profit of `30,000 during the year. If the marginal cost and selling price of the
product are `8 and `10 per unit respectively, find out the amount of margin of safety.
[Answer – 20%; `1,50,000]

Question – 44 [SM]
(a) If margin of safety is `2,40,000 (40% of sales) and P/V ratio is 30% of SK Ltd., calculate its (1)
Break even sales, and (2) Amount of profit on sales of `9,00,000,
(b) SK Ltd. has earned a contribution of `2,00,000 and net profit of `1,50,000 of sales of `8,00,000.
What is its margin of safety?
[Answer – (a) (1) `3,60,000; (2) `1,62,000; (b) `6,00,000]

Question – 45 [Jan21]
During a particular period, ABC Ltd. has furnished the following data:
Sales `10,00,000
Contribution to sales ratio 37% and

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 CA Sunil Keswani 565
Margin of safety is 25% of sales
A decrease in selling price and decrease in the fixed cost could change the “contribution to sales ratio”
to 30% and “margin of safety” to 40% of the revised sales. Calculate:
(i) Revised Fixed Cost
(ii) Revised Sales and
(iii) New Break-Even Point
[Answer – (i) `1,62,000; (ii) `9,00,000; (iii) `5,40,000]

Question – 46 [SM]
A single product company sells its product at `60 per unit. In 2019-20, the company operated at a
margin of safety of 40%. The fixed costs amounted to `3,60,000 and the variable cost ratio to sales
was 80%.

In 2020-21, it is estimated that the variable cost will go up by 10% and the fixed cost will increase by
5%.
(i) Find the selling price required to be fixed in 2020-21 to earn the same P/V ratio as in 2019-20.
(ii) Assuming the same selling price of `60 per unit in 2020-21, find the number of units required
to be produced and sold to earn the same profit as in 2019-20.
[Answer – (i) `66; (ii) 85,834 units]

Question – 47 [SM]
An automobile manufacturing company produces different models of Cars. The budget in respect of
model 007 for the month of March is as under:
Budgeted Output 40,000 units
`in lakhs `in lakhs
Net Realisation 2,10,000
Variable Costs:
Materials 79,200
Labour 15,600
Direct expenses 37,200 1,32,000
Specific fixed costs 27,000
Allocated Fixed costs 33,750 60,750
Total Costs 1,92,750
Profit 17,250
Sales 2,10,000
Calculate:
(i) Profit with 10 percent increase in selling price with a 10 percent reduction sales volume.
(ii) Volume to be achieved to maintain the original profit after a 10 percent rise in material costs, at
the originally budgeted selling price per unit.

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 CA Sunil Keswani 566
[Answer – (i) `28,350 lakhs; (ii) 44,521 units]

Question – 48 [RTP – May23]

The following data are available from the budget records of Finesign Women’s Handbag Company
for the forthcoming period.
(` )
Selling price per unit 1000
Variable cost per unit:
Cost of material used 750
Sales commission 50
Total variable cost 800
Annual fixed expenses:
Rent 7,00,000
Salaries 11,00,000
Other fixed expenses 5,00,000
Total Fixed cost 23,00,000
Although the firm manufactures Bags with different styles, they have identical purchase costs and
selling price.
Requirement:
(a) What is the annual break-even point both in terms of units and value?
(b) If the store manager is paid 1 per cent commission on sales, what would be the annual break-
even point both in terms of units and value?
(c) If the firm decides to pay a fixed salary of `9,00,000 in lieu of sales commission, what would
be the annual break-even point in terms of units and value.
(d) Considering break-even point in requirement (a), if the store manager is paid 2 per cent
commission on each bag sold in excess of the break-even point, what would be the profit if
20,000 bags were sold.
[Answer – (a) 11,500 units; `1,15,00,000; (b) 12,106 units; `1,21,05,263; (c) 12,800 units;
`1,28,00,000; (d) `15,30,000]

Question – 49 [May18]
PH Gems Ltd. is manufacturing readymade suits. It has annual production capacity of 2,000 pieces.
The Cost Accountant has presented following information for the year to the management:
Particulars Amount (`) Amount (`)
Sales 1,500 pieces @ `1,800 per piece 27,00,000
Direct Material 5,94,200
Direct Labour 4,42,600
Overheads (40% Fixed) 11,97,000 22,33,800
Net Profit 4,66,300

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 CA Sunil Keswani 567
Evaluate following options:
(i) If selling price is increased by `200, the sales will come down to 60% of the total annual
capacity. Should the company increase its selling price?
(ii) The company can earn a profit of 20% on sales if the company provide TIEPIN with ready-
made suit. The cost of each TIEPIN is `18. Calculate the sales to earn a profit of 20% on sales.
[Answer – (i) Accept; (ii) 1,900 units]

Question – 50 [May19]
M/s Gaurav Private Limited is manufacturing and selling two products:
‘BLACK’ and ‘WHITE’ at selling price of `20 and `30 respectively.
The following sales strategy has been outlined for the financial year 2019-20:
(i) Sales planned for the year will be `81,00,000 in the case of ‘BLACK’ and `54,00,000 in the
case of ‘WHITE’.
(ii) The selling price of ‘BLACK’ will be reduced by 10% and that of ‘WHITE’ by 20%.
(iii) Break-even is planned at 70% of the total sales of each product.
(iv) Profit for the year to be maintained at `8,26,200 in the case of ‘BLACK’ and `745,200 in the
case of ‘WHITE’. This would be possible by reducing the present annual fixed cost of
`42,00,000 allocated as `22,00,000 to ‘BLACK’ and `20,00,000 to ‘WHITE’.
You are required to calculate:
(1) Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break even during the financial year
2019-20.
(2) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at (iv)
above.
[Answer – (1) 3,15,000; 1,57,500; (2) `2,72,200; `2,61,200]

Question – 51 [RTP – May18]

A company manufactures two types of herbal product A and B. Its budget shows profit figures after
apportioning the fixed joint cost of `15 lacs in proportion of the numbers of units sold. The budget
for 2018, indicates:
A B
Profit (`) 1,50,000 30,000
Selling price / unit (`) 200 120
P/V Ratio (%) 40 50
Required:
Compute the best option among the following, if the company expects that the number of units to be
sold would be equal.
(a) Due to exchange in a manufacturing process, the joint fixed cost would be reduced by 15% and
the variables would be increase by 7½%.

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 CA Sunil Keswani 568
(b) Price of A could be increase by 20% as it is expected that the price elasticity of demand would
be unity over the range of price.
(c) Simultaneous introduction of both the option, viz. (a) and (b) above.
[Answer – (a) `2,43,000; (b) `4,20,000; (c) `5,01,000]

Question – 52 [SM]
You are given the following data for the current financial year of SK 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) PV Ratio; (c) Margin of safety. Also draw a break-even chart
showing contribution and profit.
[Answer – (a) 40%; (b) `75,000; (c) `25,000]

Question – 53 [SM]
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:
Sales Profit
Actual Over/(Under) Actual Over/(Under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (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.
[Answer – (i) 360; 660; 330; (ii) `800; `1,100; `600]

Question – 54 [May22] [RTP – Similar Nov23]

Top-tech manufacturing company is presently evaluating two possible machines for the manufacture
of superior pen-drives. The following information is available:
Particulars Machine A Machine B
Selling price per unit `400.00 `400.00
Variable cost per unit `240.00 `260.00
Total fixed costs per year `350 lakhs `200 lakhs
Capacity (in units) 8,00,000 10,00,000
Required:
(i) Recommend which machine should be chosen?

Marginal Costing
 CA Sunil Keswani 569
(ii) Would you change your Answer, if you were informed that in near future demand will be
unlimited and the capacities of the two machines are as follows?
Machine A – 12,00,000 units
Machine B – 12,00,000 units
Why?

Question – 55 [SM]
SK ltd. manufactures automobiles accessories and parts. The following are the total cost of processing
2,00,000 units:
Direct material cost `375 per unit
Direct labour cost `80 per unit
Variable factory overhead `16 per unit
Fixed factory overhead `500 lakhs
The purchase price of the component is `485. The fixed overhead would continue to be incurred even
when the component is bought from outside. Required:
(a) Should be part be made or bought from outside considering that the present facility when released
following a buying decision would remain idle?
(b) In case the released capacity can be rented out to another manufacturer for `32,00,000 having
good demand. What should be the decision?
[Answer – (a) Manufacture; (b) buy from outside]

Question – 56 [SM]
The product mix of SK Ltd. is as under:
Product M Product N
Units 54,000 18,000
Selling price `7.50 `15.00
Variable cost `6.00 `4.50
Find the break-even point in units, if the company discontinues product ‘M’ and replace with product
‘O’. the quantity of product ‘O’ is 9,000 units and its selling price and variable costs respectively are
`18 and `9. Fixed cost is `15,000.
[Answer – BEP of N = 1,000; BEP of O = 500 units]

Question – 57 [SM] [Nov20]

SK Ltd. produces products ‘X’, ‘Y’ and ‘Z’ and has decided to analyse its production mix in respect
of these three products – ‘X’, ‘Y’ and ’Z’.
You have the following information:
X Y Z
Direct materials `(per unit) 160 120 80
Variable overheads `(per unit) 8 20 12

Marginal Costing
 CA Sunil Keswani 570
Direct Labour:
Departments Rate per Hour Hours per unit Hours per unit Hours per unit
(` ) X Y Z
Department A 4 6 10 5
Department B 8 6 15 11
From the current budget, further details are as below:
X Y Z
Annual production at present (in units) 10,000 12,000 20,000
Estimated selling price per unit (`) 312 400 240
Sales department estimate of possible sales 12,000 16,000 24,000
in the coming year (in units)
There is a constraint on supply of labour in Department-A and its manpower cannot be increased
beyond its present level. Required:
(i) Identify the best possible product mix of SK Ltd.
(ii) Calculate the total contribution form the best possible product mix.
[Answer – (i) X; Y; Z; (ii) `28,48,000]

Question – 58 [SM]
SK ltd. produces and sells two product X and Y. The product is highly demanded in the market.
Following information relating to both the products are given as under:
Per Unit (`)
X Y
Direct Materials 140 180
Direct Wages 60 100
Variable Overheads (`5 per machine hour) 20 40
Selling Price 300 450
The company is facing scarcity of machine hours for working. The availability of machine hours are
limited to 60,000 hours in a month. At present, the monthly demand of product X and product Y is
8,000 units and 6,000 units respectively. The fixed expenses of the company are `2,25,000 per month.

You are required to:

Determine the product mix that generates maximum profit to the company in the given situation and
also calculate the profit of the company.
[Answer – Profit = `8,70,000]

Question – 59 [RTP – Nov22]

RPP Manufactures is approached by an international customer for one-time special order similar to
one offered to its domestic customers. Per unit data for sales to regular customers is provided below:
Direct material `693

Marginal Costing
 CA Sunil Keswani 571
Direct labour `315
Variable manufacturing support `504
Fixed manufacturing support `1092
Total manufacturing costs `2604
Markup (50%) `1302
Targeted selling price `3906
It is provided that RPP Manufactures has excess capacity.
Required:
(a) What is the full cost of the product per unit?
(b) What is the contribution margin per unit?
(c) Which costs are relevant for making the decision regarding this one-time special order? Why?
(d) For RPP Manufactures, what is the minimum acceptable price of this one-time-special order only
(e) For this one-time-only special order, should RPP Manufactures considers a price of `2100 per
unit? Why or why not?
[Answer – (a) `2,604; (b) `2,394; (c) `1,512; (d) `1,512; (e) Accept]

Question – 60 [July21]
LR Ltd. is considering two alternative methods to manufacture product it intends to market. The two
methods have a maximum output of 50,000 units each and produce identical items with a selling price
of `25 each. The costs are:
Method – I Method – II
Semi-Automatic (`) Fully automatic (`)
Variable cost per unit 15 10
Fixed costs 1,00,000 3,00,000
You are required to calculate:
(i) Cost Indifference Point in units. Interpret your results.
(ii) The Break-even point of each method in terms of units
[Answer – (i) 40,000 units; (ii) 10,000; 20,000]

Question – 61 [SM]
SK Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilization is reckoned
as 90%. Standard variable production costs are `11 per unit. The fixed costs are `3,60,000 per year.
Variable selling costs are `3 per unit and fixed selling costs are `2,70,000 per year. The unit selling
price is `20.

In the year just ended on 31stMarch, 2019, the production was 1,60,000 units and sales were 1,50,000
units. The closing inventory on 31st March was 20,000 units. The actual variable production costs for
the year were `35,000 higher than the standard.
(a) Calculate the profit for the year

Marginal Costing
 CA Sunil Keswani 572
(i) By absorption costing method and
(ii) By marginal costing method
(b) Explain the difference in the profits
[Answer – (a) (i) `2,59,375; (ii) `2,39,375]

Question – 62 [SM]
SK Ltd. manufactures a single product, SK. The following figures relate to SK for a one-year period.
Activity Level 50% 100%
Sales and production (units) 400 800
(`) (` )
Sales 8,00,000 16,00,000
Production costs:
- Variable 3,20,000 6,40,000
- Fixed 1,60,000 1,60,000
Selling and distribution costs:
- Variable 1,60,000 3,20,000
- Fixed 2,40,000 2,40,000
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 SK at the beginning of
the year.
In the first quarter, 220 units were produced and 160 units were sold. Required:
(a) Compute the fixed production costs absorbed by SK if absorption costing is used.
(b) Calculate the under/over recovery of overheads during this period?
(c) Calculate the profit using absorption costing?
(d) Calculate the profit using marginal costing?
[Answer – (a) `44,000; (b) `4,000; (c) `40,000; (d) `28,000]

Question – 63 [MTP – May24]

AB Ltd produces a single product V2 and sells it at a fixed price of `2,050 per unit. The production
and sales data for first quarter of the year 2023-24 are as follows:
April May June
Sales in units 4,200 4,500 5,200
Production in units 4,600 4,400 5,500

Actual/budget information for each month was as follows:

Direct materials 4 kilograms at `120 per kilogram
Direct labour 6 hours at `60 per hour
Variable production overheads 150% of direct labour
Fixed production overheads `5,00,000

Marginal Costing
 CA Sunil Keswani 573
Fixed selling overheads `95,000
There was no opening inventory at the start of the quarter. Fixed production overheads are budgeted
at `60,00,000 per annum and are absorbed into products based on a budgeted normal output of 60,000
units per annum.
Required:
(i) Prepare a profit statement for each of the three months using absorption costing principles.
(ii) Prepare a profit statement for each of the three months using marginal costing principles.
(iii) Present a reconciliation of the profit or loss figures given in your Answer to (i) and (ii).
[Answer – (i) `22,59,000; `24,10,000; `29,19,000; (ii) `22,19,000; `24,20,000; `28,89,000]

Question – 64 [MTP – May24]

A meeting of the heads of departments of the Arnav Ltd. has been called to review the operating
performance of the company in the last financial year. The head of the production department
appraised that during the last year the company could operate at 70% capacity level but in the coming
financial year 95% capacity level can be achieved if an additional amount of `100 Crore on capex
and working capital is incurred.

The head of the finance department has presented that during the last financial year the company had
a P/V ratio of 40%, margin of safety and the break-even were `50 crore and `200 crore respectively.

To the reply to the proposal of increasing the production capacity level to 95%,the head of the finance
department has informed that this could be achieved if the selling price and variable cost are reduced
by 8% and 5% of sales respectively. Fixed cost will also increase by `20 crore due to increased
depreciation on additional assets. The additional capital will be arranged at a cost of 15% p.a. from a
bank.

In the coming financial year, it has been aimed to achieve an additional profit of `10 crore over and
above the last year’s profit after adjusting the interest cost on the additional capital.

The following points is required to be calculated on urgent basis to put the same in the meeting. You
being an assistant to the head of finance, has been asked the followings:

i. What will be the revised sales for the coming financial year?
(a) `322.22 Crore (b) `311.11 Crore (c) `300.00 Crore (d) `324.24 Crore

ii. What will be the revised break-even point for the coming financial year?
(a) `222.22 Crore (b) `252.22 Crore (c) `244.44 Crore (d) `255.56 Crore

iii. What will be the revised margin of safety for the coming financial year?
(a) `100 Crore (b) `58.89 Crore (c) `55.56 Crore (d) `66.66 Crore

Marginal Costing
 CA Sunil Keswani 574

iv. The profit of the last year and for the coming year are:
(a) `50 Crore & `95 Crore respectively (b) `20 Crore & `65 Crore respectively
(c) `20 Crore & `30 Crore respectively (d) `45 Crore & `66.66 Crore respectively

v. The total cost of the last year and for the coming year are:
(a) `230 Crore & `292.22 (b) `230 Crore & `275 Crore
(c) `220 Crore & `282.22 Crore (d) `220 Crore & `292.22 Crore
[Answer – (i) A; (ii) D; (iii) D; (iv) C; (v) A]

Solution – 36
2%314 5#6& 7,9:,:::
(a) Break-even point (BEP) = = = 10,000 units
,#-&"%./&%#- 01" /-%& (<:=79)
,#-&"%./&%#- (<:=79)
(b) PV Ratio = ?+@16
× 100 = <:
× 100 = 50%
2%314 5#6&A*1B/%"14 0"#$%& 7,9:,:::AC:,:::
Required sales = !( *+&%#
= 9:%
= `3,40,000

Solution – 37
2%314 5#6&
(i) Break-even sales = !( *+&%#
E:,:::
1,60,000 = !( *+&%#
E:,:::
PV Ratio = 7,F:,::: = 0.25 = 25%
Profit = Contribution – Fixed cost = (2,00,000 ´ 25%) – 40,000 = `10,000
2%314 5#6&
(ii) Break-even sales = !( *+&%#
C:,:::
40,000 = !( *+&%#
C:,:::
PV Ratio = E:,::: = 0.50 = 50%
Contribution = Fixed cost + Profit
(Sales ´ 50%) = 20,000 + 10,000
<:,:::
Sales = 9:%
= `60,000

Solution – 38
,G+-H1 %- !"#$%& 7<,:::=I,::: 9,:::
(a) P/V Ratio = ,G+-H1 %- ?+@16
× 100= 7,E:,:::=7,C:,::: × 100= C:,::: × 100= 25%
(b) Contribution for Year 2021-22 = 1,20,000 × 25%
Fixed cost + Profit = 30,000

Marginal Costing
 CA Sunil Keswani 575
Fixed cost + 8,000 = 30,000
Fixed cost = `22,000
2%314 ,#6& CC,:::
Break-even sales = !/( *+&%#
= C9%
= `88,000
(c) Profit = Contribution – Fixed cost = (1,80,000 ´ 25%) – 22,000 = `23,000
2%314 ,#6&AJ16%"14 !"#$%& CC,:::A7C,:::
(d) Desired sales (in `) = !/( *+&%#
= C9%
= `1,36,000
(e) Margin of Safety = Actual sale – Break-even sales = 1,40,000 – 88,000 = `52,000

Solution – 39
KL? /-%&6 <,N9:
Margin of safety (%) = M#&@+ /-%&6 × 100 = (<,N9:A7,C9:) × 100 = 75%
KL? 7,IN,9::
Total sales = KL? % = N9%
= `2,50,000
Profit = Sales – Total cost = 2,50,000 – 1,93,750 = `56,250
!"#$%& 9F,C9:
PV Ratio = KL?(`) × 100 = 7,IN,9:: × 100 = 30%
Break-even sales = Total sales ´ Breakeven sales %
= 2,50,000 ´ (100 – MOS%) = 2,50,000 ´ 0.25 = `62,500
Fixed cost = Contribution – Profit = (2,50,000 ´ 30%) – 56,250 = `18,750

Solution – 40
(i) In the First half year
Contribution = Fixed cost + profit = 4,50,000+3,00,000 = `7,50,000
! "# $%# %%%
P/V ratio = C C $%'
( )$# %%# %%%
Break-even point = !"#$%&'(F*&+&,(FF 1 -. L0. 000 = `9,00,000
2 P 4&5(*"( L06
Margin of safety = Actual sales – Break-even point = 15,00,000 – 9,00,000 = `6,00,000
(ii) In the second half year
Contribution = Fixed cost - loss = 4,50,000 – 1,50,000 = `3,00,000
Expected sales volume = !"#$%&'(F*&&+&,(FF &0& -. //. ///&0 `6,00,000
1 2 P&4(*"(& 5/6
(iii) For the whole year
B.E point = !"#$%C'(F*C 1 +, -., .../ 0 = `18,00,000
2 P 4C56*"( -.7
!"#$%&' ()* ))* ))) +,* -)* )))
Margin of safety = . . `3,00,000
! / 0'"1&%# -)2

Solution – 41
P/V ratio = 100 – 60% = 40%

Marginal Costing
 CA Sunil Keswani 576

(i) B.E. Point = * = $"%""" = `2,00,000

'(F&!"#$% !"#
(ii) Return of 15% on `2,00,000 = `30,000
Add: Fixed cost 80,000
Contribution required 1,10,000
Sales required = *&+&' = $%$"%""" = `2,75,000
'(F&!"#$% !"#
(iii) When business in lock
Fixed cost `25,000
PQ#%4+.@1 2, (I:,:::=C9,:::)
Minimum sales = !( *+&%#
= E:%
= `1,37,500
Thus Mr. S will be better off if sales are more than `1,37,500.

Solution – 42
2%314 ,#6&A!"#$%& R:,:::AF:,:::
(a) P/V Ratio = ?+@16
× 100= <,::,:::
×100 = 50%
2%314 ,#6&AJ16%"14 !"#$%& R:,:::A(=<:,:::)
Desired sales (in `) = !/( *+&%#
× 100= 9:%
×100 = `1,20,000
!"#$%& R:,:::
(b) Margin of safety = !/( *+&%# = 9:%
= `1,80,000

Solution – 43
,#-&"%./&%#- (7:=I)
PV Ratio = ?1@@%-H 0"%51
× 100 = 7:
× 100 = 20%
!"#$%& <:,:::
Margin of safety = !( *+&%# = C:%
= `1,50,000

Solution – 44
(a) (1) Margin of safety = 40% of sales
2,40,000 = 40% of sales
Sales = 2,40,000 ÷ 40% = `6,00,000
Break-even sales = Sales – Margin of Safety = 6,00,000 – 2,40,000 = `3,60,000
2%314 ,#6&
(2) Break-even sales = !/( *+&%#
2%314 ,#6&
3,60,000 = <:%
Fixed Cost = `1,08,000
Given Sales = `9,00,000
Profit = Contribution – Fixed Cost = (9,00,000 × 30%) – 1,08,000 = `1,62,000
5#-&"%./&%#- C,::,:::
(b) PV Ratio = ?+@16
× 100 = I,::,::: × 100 = 25%
!"#$%& 7,9:,:::
Margin of safety = !( *+&%# = C9%
= `6,00,000

Marginal Costing
 CA Sunil Keswani 577
Solution – 45
Existing variable cost ratio = 100 – Contribution to sales ratio = 100 – 37% = 63%
Existing variable cost = 10,00,000 × 63% = `6,30,000
New variable cost = Existing variable cost = `6,30,000
New variable cost ratio = 100 – 30% = 70%
F,<:,:::
New sales = N:%
= `9,00,000
New Margin of safety = 9,00,000 × 40% = `3,60,000
New Break-even point = 9,00,000 – 3,60,000 = `5,40,000
New Fixed cost = New Break-even point × PV Ratio = 5,40,000 × 30% = `1,62,000

Solution – 46
(i) Contribution per unit = Sale price – VC per unit = 60 – (60 × 80%) = `12
!"#$%C'($C"#)*+%)(#C$ !"
P/V Ratio = ,-.. = #!$$ = 20%
/+00C#1)*%C2+)*+%)(#C$ %$
!"#$%C'(F* !" #$" $$$
BEP = = = 30,000 units
'(+*,"-.*"(+C/$,C.+"* %&
Margin of safety is 40%. Therefore, break-even sales will be 60% of units sold.
No. of units sold = BEP (in units) ÷ 60% = 30,000 ÷ 60% = 50,000 units
Profit earned (in year 2010) = Total contribution – Fixed cost
= (50,000 × 12) – 3,60,000 = `2,40,000
Revised variable cost = `48 + 10% = `52.80
Revised fixed cost = `3,60,000 + 5% = `3,78,000
Required P/V ratio (same as of 2018) = 20%
Thus, variable cost ratio = 100 – 20% = 80%
Revised selling price = `52.80 ÷ 80% = `66
2%314 5#6&A416%"14 0"#$%& <,NI,:::AC,E:,:::
(ii) Required sales volume (for year 2019) = ,#-&"%./&%#- 01" /-%&
= F:=9C.I:
= 85,834units

Solution – 47
C,7:,::: @+TG6
(i) Budgeted selling price = E:,::: /-%&6
= `5,25,000 per unit
7,<C,::: @+TG6
Budgeted variable cost = E:,::: /-%&6
= `3,30,000 per unit
Increased selling price = `5,25,000 +10% = `5,77,500 per unit
New volume = 40,000 – 10% = 36,000 units
Statement of Calculation of Profit
Particulars (`in lakhs)
Sales (36,000 units ´ `5,77,500) 2,07,900
Less: Variable cost (36,000 units ´ `3,30,000) 1,18,800

Marginal Costing
 CA Sunil Keswani 578
Contribution 89,100
Less: Fixed costs 60,750
Profit 28,350

(ii) Budgeted Material cost = 79,200 lakhs ÷ 40,000 units = `1,98,000 per unit
Particulars (`in lakhs)
Increased material cost (1,98,000 + 10%) 2,17,800
Labour cost (15,600 lakhs ÷ 40,000 units) 39,000
Direct expenses (37,200 lakhs ÷ 40,000 units) 93,000
Variable cost per unit 3,49,800
Budgeted selling price per unit 5,25,000
Contribution per unit (5,25,000 – 3,49,800) 1,75,200
$%314 5#6&A!"#$%& (F:,N9: @+TG6A7N,C9: @+TG6)
Sales volume = 5#-&"%./&%#- 01" /-%& = 7.N9C @+TG6
= 44,521 units

Solution – 48
,#-&"%./&%#- 01" /-%& ([Link]=I::)
(a) PV Ratio = ?1@@%-H 0"%51 01" /-%&
× 100 = [Link]
× 100 = 20%
2%314 5#6& C<,::,:::
Annual BEP in units = ,#-&"%./&%#- 01" /-%& = C::
= 11,500 units
2%314 5#6& C<,::,:::
Annual BEP in value = !( *+&%#
= C:%
= `1,15,00,000

(b) Commission on sale per unit = 1% ´ 1000 = `10

(7,:::=N9:= 9:=7:) 7R:
Revised PV Ratio = [Link]
× 100 = [Link] × 100 = 19%
2%314 5#6& C<,::,:::
Annual BEP in units = ,#-&"%./&%#- 01" /-%& = 7R:
= 12,106 units
2%314 5#6& C<,::,:::
Annual BEP in value = !( *+&%#
= 7R%
= `1,21,05,263

,#-&"%./&%#- 01" /-%& ([Link]=I::)

(c) PV Ratio = ?1@@%-H 0"%51 01" /-%&
× 100 = [Link]
× 100 = 20%
Revised fixed cost = 23,00,000 + 9,00,000 = `32,00,000
2%314 5#6& <C,::,:::
Annual BEP in units = ,#-&"%./&%#- 01" /-%& = C::
= 12,800 units
2%314 5#6& <C,::,:::
Annual BEP in value = !( *+&%#
= C:%
= `1,28,00,000

(d) Annual BEP under requirement (a) is 11,500 units

Margin of safety = 20,000 – 11,500 = 8,500 units
Manager’s commission = 8,500 ´ 1,000 ´ 2% = `1,70,000
Profit = Sales – Cost = (20,000 ´ 1,000) – (20,000 ´ 800) – 1,70,000 – 23,00,000
= `15,30,000

Marginal Costing
 CA Sunil Keswani 579

Solution – 49
(i) Evaluation of option (i)
New Selling price = 1,800 + 200 = `2,000
New Sales Quantity = 2,000 × 60% = 1,200 Pieces
Particulars Amount (`)
Sales (1,200 × `2,000) 24,00,000
9,RE,C:: 4,75,360
Less: Direct Material J 7,9::
× 1,200M
E,EC,F:: 3,54,080
Less: Direct Labour J 7,9::
× 1,200M
77,RN,:::×F:% 5,74,560
Less: Variable Overheads J 7,9::
× 1,200M
Contribution 9,96,000
Less: Fixed Costs (11,97,000 × 40%) 4,78,000
Profit 5,17,200
If the price is increased by `200 than quantity is reducing by 20% (300 on 1,500). Through this step,
the profit of the firm will rise by `50,900 from the existing level. Since there is increase in profit, thus
it may be recommended to accept this policy.

(ii) Evaluation of option (ii)

Calculation of P/V Ratio
Selling price per unit 1,800.00
9,RE,C::
Less: Direct material per unit J 7,9::
M 396.13
Less: cost of Tie pin 18.00
E,EC,F::
Less: Direct labour per unit J 7,9::
M 295.07
77,RN,:::×F:%
Less: Variable Overheads J 7,9::
M 478.80
Contribution 612.00
F7C
P/V Ratio = 7,I:: × 100 = 34%

Let sales required to earn profit of 20% = y

2%314 ,#6&AJ16%"14 !"#$%&
Desired sales = !/( *+&%#
E,NI,I::A:.C:V
y= <E%
0.34y = 4,78,800 + 0.2y
y = `34,20,000
Thus, sales required to earn a profit of 20% on sales = `34,20,000
<E,C:,:::
Sales units required to earn a profit of 20% of sales = 7,I::
= 1,900 units

Marginal Costing
 CA Sunil Keswani 580

Solution – 50
(i) Statement showing Break Even Sales
Particulars BLACK WHITE
Sales Planned (in `) 81,00,000 54,00,000
Break-even sales % 70% 70%
Break-even sales (in `) (A) 56,70,000 37,80,000
Selling price per unit (in `) (B) 18 24
Break-even sales (in units) (A ÷ B) 3,15,000 1,57,500

(ii) Statement Showing Fixed Cost Reduction

Particulars BLACK WHITE
Profit to be maintained (`) (A) 8,26,200 7,45,200
Margin of Safety (30% × Sales) (B) 24,30,000 16,20,000
P/V Ratio (A ÷ B) 34% 46%
Desired Contribution (Sales × P/V Ratio) 27,54,000 24,84,000
Less: Desired Profit 8,26,200 7,45,200
Target Fixed Cost 19,27,800 17,38,800
Present Fixed Cost 22,00,000 20,00,000
Required reduction in fixed cost 2,72,200 2,61,200

Solution – 51
Working Notes:
1) Contribution per unit of A = 200 × 40% = `80
⸫Variable cost per unit of A = 200 – 80 = `120
Contribution per unit of B = 120 × 50% = `60
⸫Variable cost per unit of A = 120 – 60 = `60

2) Let units sold of A & B = y

Contribution = Fixed cost + Profit
80y + 60y = 15,00,000 + 1,50,000 + 30,000
140y = 16,80,000
y = 12,000
⸫Units sold of each product = 12,000

(a) Statement of Profit

Particulars Amount (`)
Contribution of A [{200 – (120 + 7.5%)} × 12,000] 8,52,000
Contribution of B [{120 – (60 + 7.5%)} × 12,000] 6,66,000

Marginal Costing
 CA Sunil Keswani 581
Total contribution 15,18,000
Less: Fixed Cost (15,00,000 – 15%) 12,75,000
Profit 2,43,000

(b) Existing total sales of A = 12,000 × 200 = `24,00,000

New Selling price of A = 200 + 20% = `240
New quantity of A = 24,00,000 ÷ 240 = 10,000 units

Statement of Profit
Particulars Amount (`)
Contribution of A [(240 – 120) × 10,000] 12,00,000
Contribution of B [(120 – 60) × 12,000] 7,20,000
Total contribution 19,20,000
Less: Fixed Cost 15,00,000
Profit 4,20,000

(c) Statement of Profit

Particulars Amount (`)
Contribution of A [{240 – (120 + 7.5%)} × 10,000] 11,10,000
Contribution of B [{120 – (60 + 7.5%)} × 12,000] 6,66,000
Total contribution 17,76,000
Less: Fixed Cost (15,00,000 – 15%) 12,75,000
Profit 5,01,000

A comparison of increase in profit figures under above three options clearly indicates that the option
(c) is the best as it has the highest profit of `5,01,000.

Solution – 52
7,::,:::=F:,:::
P/V Ratio = 7,::,:::
= 40%
M#&+@ $%314 5#6& <:,:::
Break Even Point = !/( *+&%#
= E:%
= `75,000
Margin of safety = 1,00,000 – 75,000 = `25,000

Marginal Costing
 CA Sunil Keswani 582

Solution – 53

North East South

Sales Profit Sales Profit Sales Profit
Actual 1,100 135 1,450 210 1,200 330
Add: Under/(Over)
budgeted 400 180 (150) (90) 200 110
Budget 1,500 315 1,300 120 1,400 440
!&" " &!"
$!# " !$# ! !"" $$" " %%"
Difference in Profit ! !"" =45% !$%" " !#"" ! !"" =55%
P/V RatioN Difference in Sales O !#"" " !!"" !$"" " !#""
=60%
Fixed cost (1100 × 45%) – 135 = (1450 × 60%) – 210 (1200 × 55%) – 330 =
[(Sales × P/v) -Profit] 360 = 660 330
Fixed cost $%& = `800 ""# = `1,100 ##$ = `600
B.E. Sales N P/V ratio O "#! "#! ""!

Solution – 54
(i) Statement of Profit
Particulars Machine A Machine B
Contribution per unit (`) 400 – 240 = 160 400 – 260 = 140
Capacity (units) 8 lakhs 10 lakhs
Total contribution (`) 1,280 lakhs 1,400 lakhs
Less: Fixed cost (`) 350 lakhs 200 lakhs

Marginal Costing
 CA Sunil Keswani 583
Profit 930 lakhs 1,200 lakhs
Machine B should be chosen as it gives more profit than Machine A.

(ii) Statement of Profit

Particulars Machine A Machine B
Contribution per unit (`) 400 – 240 = 160 400 – 260 = 140
Capacity (units) 12 lakhs 12 lakhs
Total contribution (`) 1,920 lakhs 1,680 lakhs
Less: Fixed cost (`) 350 lakhs 200 lakhs
Profit 1,570 lakhs 1,480 lakhs
Machine A should be chosen as it gives more profit than Machine B.

Solution – 55
(a) The decision shall be made comparing the marginal cost of making and buying the component.
Here the variable cost of making the component is `471 as compared to buying cost of `485. The
component shall be made by suing own production facility as it would save the company `14 per unit.

(b) If by releasing the production facility the company can earn a rental income of `32,00,000, then
the additional cost of buying from outside and the rental income from releasing the capacity shall be
compared for making decision.
Additional cost of buying = `14 ´ 2,00,000 units = `28,00,000
Rental income to be received = `32,00,000
Additional benefit = `4,00,000
The component should be bought from outside as it would save the company `4,00,000 in fixed cost.

Solution – 56
M#&+@ 5#-&"%./&%#- (7I=R)(R:::)A(79=E.9:)(7I:::)
Overall contribution per unit = M#&+@ /-%&6
= CN:::
= `10
2%314 5#6& 79,:::
Overall BEP = LQ1"+@@ 5#-&"%./&%#- 01" /-%& = 7:
= 1,500 units
R:::
BEP of O = 1,500 ´ CN,::: = 500 units
7I:::
BEP of N = 1,500 ´ CN,::: = 1,000 units

Solution – 57
(i) Statement of Contribution per unit and Ranking
Particulars X (`) Y (`) Z (`)
Selling price (A) 312 400 240
(-) Direct material 160 120 80
(-) Direct labour of Dept. A 24 40 20

Marginal Costing
 CA Sunil Keswani 584
(-) Direct labour of Dept. B 48 120 88
(-) Variable overheads 8 20 12
Contribution per unit 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Ranking I II III
(b) Statement of Product Mix and Profit
Product Units Hours per unit Material consumed Contribution
X 12,000 6 72,000 12,000×72 = 8,64,000
Y 16,000 10 1,60,000 16,000×100 = 16,00,000
Z 48,000÷5 = 9,600 5 (Bal. fig.) 48,000 9,600×40 = 3,84,000
37,600 2,80,000 28,48,000

Solution – 58
Statement of Contribution per unit and Ranking
Particulars X (`) Y (`)
Selling price 300 450
(-) Direct material 140 180
(-) Direct wages 60 100
(-) Variable overheads 20 40
Contribution per unit 80 130
Machine hours per unit 4 8
Contribution per machine hour 20 16.25
Ranking I II
Statement of Product Mix and Profit
Product Units Machine hour Material consumed Contribution
per unit
X 8,000 4 32,000 8,000×80 = 6,40,000
Y 28,000÷8 = 3,500 8 (Bal. fig.) 28,000 3,500×130 = 4,55,000
11,500 60,000 10,95,000
(-) Fixed Cost 2,25,000
Profit 8,70,000

Solution – 59
(a) Full cost of the product per unit = `2,604
(b) Selling price `3,906
(-) Direct material `693
(-) Direct labour `315
(-) Variable support cost `504

Marginal Costing
 CA Sunil Keswani 585
Contribution per unit `2,394
(c) Costs for decision making are those costs that differ between alternatives, which in this situation
are the incremental costs.
Direct material `693
Direct labour `315
Variable support cost `504
Total incremental costs `1,512
(d) Minimum acceptable price would be the incremental costs in the short term i.e. `1,512
(e) Yes, RPP Manufactures may consider a price of `2100 per unit because this price is greater
than the minimum acceptable price.

Solution – 60
(i) Let cost indifference units = y
Thus, Total cost of Method – I = Total cost of Method – II
1,00,000 + 15y = 3,00,000 + 10y
5y = 2,00,000
y = 40,000
At y = 40,000 units, cost of the two methods will be equal.
If quantity produced is more than 40,000 units than option where variable cost per unit is low
i.e. Method - II will have greater benefits in term of cost. If quantity produced is less than 40,000
units than option with lowest fixed cost i.e. Method – I will have greater benefits in terms of
total cost.

(ii) Statement of Break-even point

Particulars Method – I Method - II
Contribution per unit (A) 25 – 15 = 10 25 – 10 = 15
Fixed cost (B) 1,00,000 3,00,000
Break-even point (in units) (B÷A) 10,000 20,000

Solution – 61
Working Note
Particulars Year 2019
Opening stock (Bal. fig.) 10,000
(+) Production 1,60,000
(-) Sales 1,50,000
Closing Stock 20,000
(a) Income Statement under Absorption Costing
Particulars Amount
Sales (A) 1,50,000×20 = 30,00,000

Marginal Costing
 CA Sunil Keswani 586
Particulars Amount
Variable Production Cost 1,60,000×11 = 17,60,000
Under Recovered Variable Prod. Cost 35,000
Fixed Production <,F:,:::
C,::,:::×R:%
×1,60,000 = 3,20,000
GFC/NFC/COP 21,15,000
(+) Op. Stock FG 10,000×(11 + 2) = 1,30,000
(-) Cl. Stock FG C7,79,:::
7,F:,:::
×20,000 = 2,64,375
COGS 19,80,625
(+) Variable Selling Cost 1,50,000×3 = 4,50,000
(+) Fixed Selling Cost 2,70,000
COS 27,00,625
(+) Under Recovered Fixed Prod. Cost 3,60,000 – 3,20,000 = 40,000
Total Cost (B) 27,40,625
Profit (A – B) 2,59,375
Income Statement under Marginal Costing
Particulars Year 2019
Sales (A) 1,50,000×20 = 30,00,000
Variable Production Cost 1,60,000×11 = 17,60,000
Under recovered variable Prod. Cost 35,000
Variable GFC/NFC/COP 17,95,000
(+) Op. Stock FG 10,000×11 = 1,10,000
(-) Cl. Stock FG 7N,R9,:::
7,F:,:::
× 20,000 = 2,24,375
Variable COGS (B) 16,80,625
(+) Variable Selling cost 1,50,000×3 = 4,50,000
Variable COS (B) 21,30,625
Contribution (A – B) 8,69,375
(-) Fixed Production Cost 3,60,000
(-) Fixed Selling Cost 2,70,000
Profit 2,39,375

(b) The reasons for difference in profit are:

Particulars Year 2019
Profit as per absorption costing 2,59,375
Add: Opening stock under-valued (1,30,000 – 1,10,000) 20,000
Less: Closing stock under-valued (2,64,375 – 2,24,375) (40,000)
Profit as per marginal costing 2,39,375

Marginal Costing
 CA Sunil Keswani 587
Solution – 62
(a) Budgeted fixed production costs = `1,60,000
W/4H1&14 #Q1"G1+46 7,F:,::
Recovery rate = X#"Y+@ @1Q1@ #$ +5&%Q%&V = I::
= `200 per unit
Fixed overheads absorbed = 220 units ´ `200 = `44,000
(b) Actual production overheads = `40,000
Fixed overheads recovered = `44,000
Over recovered overheads = 44,000 – 40,000 = `4,000
(c) Profit statement as per Absorption Costing
Particulars `
Sales revenue (160 units ´ `2,000) (A) 3,20,000
Variable cost (220 units ´ `800) 1,76,000
Fixed overheads recovered (220 units ´ `200) 44,000
Total production cost 2,20,000
Add: Opening stock -
C,C:,::: (60,000)
Less: Closing stock J CC:
× 60M
Cost of goods sold 1,60,000
Less: Adjustment for over recovery of fixed overheads (4,000)
Add: Variable selling & distribution overheads (160 ´ `400) 64,000
Add: Fixed selling & distribution overheads (2,40,000 ´ ¼) 60,000
Cost of Sales (B) 2,80,000
Profit (A – B) 40,000
(d) Profit statement as per Marginal Costing
Particulars `
Sales revenue (160 units ´ `2,000) (A) 3,20,000
Variable cost (220 units ´ `800) 1,76,000
Variable production cost 1,76,000
Add: Opening stock -
7,NF,::: (48,000)
Less: Closing stock J CC:
× 60M
Variable cost of goods sold 1,28,000
Add: Variable selling & distribution overheads (160 ´ `400) 64,000
Variable cost of sales (B) 1,92,000
Contribution (A – B) 1,28,000
Less: Fixed production cost (40,000)
Less: Fixed selling & distribution cost (60,000)
Profit 28,000

Marginal Costing
 CA Sunil Keswani 588
Solution – 63
(i) Statement of Profit under Absorption Costing
Particulars April (`) May (`) June (`)
Sales (A) 4,200 ´ 2,050 = 4,500 ´ 2,050 = 5,200 ´ 2,050 =
86,10,000 92,25,000 1,06,60,000
Direct material 4,600 ´ 4 ´ 120 = 4,400 ´ 4 ´ 120 = 5,500 ´ 4 ´ 120 =
22,08,000 21,12,000 26,40,000
Direct labour 4,600 ´ 6 ´ 60 = 4,400 ´ 6 ´ 60 = 5,500 ´ 6 ´ 60 =
16,56,000 15,84,000 19,80,000
Variable production 16,56,000 ´ 150% = 15,84,000 ´ 150% = 19,80,000 ´ 150% =
overheads 24,84,000 23,76,000 29,70,000
Fixed production 4,600 ´ 100 = 4,400 ´ 100 = 5,500 ´ 100 =
overheads 4,60,000 4,40,000 5,50,000
Production cost 68,08,000 65,12,000 81,40,000
Add: Opening stock - 5,92,000 4,44,000
Less: Closing stock FI,:I,::: F9,7C,::: I7,E:,:::
× 400 = × 300 = × 600 =
E,F:: E,E:: 9,9::
5,92,000 4,44,000 8,88,000
COGS 62,16,000 66,60,000 76,96,000
Add: Fixed selling 95,000 95,000 95,000
OHs
Under/(Over) 5,00,000 – 4,60,000 5,00,000 – 4,40,000 5,00,000 – 5,50,000
recovery = 40,000 = 60,000 = (50,000)
Total Cost (B) 63,51,000 68,15,000 77,41,000
Profit (A – B) 22,59,000 24,10,000 29,19,000

(ii) Statement of Profit under Marginal Costing

Particulars April (`) May (`) June (`)
Sales (A) 4,200 ´ 2,050 = 4,500 ´ 2,050 = 5,200 ´ 2,050 =
86,10,000 92,25,000 1,06,60,000
Direct material 4,600 ´ 4 ´ 120 = 4,400 ´ 4 ´ 120 = 5,500 ´ 4 ´ 120 =
22,08,000 21,12,000 26,40,000
Direct labour 4,600 ´ 6 ´ 60 = 4,400 ´ 6 ´ 60 = 5,500 ´ 6 ´ 60 =
16,56,000 15,84,000 19,80,000
Variable production 16,56,000 ´ 150% = 15,84,000 ´ 150% = 19,80,000 ´ 150% =
overheads 24,84,000 23,76,000 29,70,000
Variable Production 63,48,000 60,72,000 75,90,000
cost
Add: Opening stock - 5,52,000 4,14,000

Marginal Costing
 CA Sunil Keswani 589
Less: Closing stock F<,EI,::: F:,NC,::: N9,R:,:::
× 400 = × 300 = × 600 =
E,F:: E,E:: 9,9::
5,52,000 4,14,000 8,28,000
Variable Cost (B) 57,96,000 62,10,000 71,76,000
Contribution (A – B) 28,14,000 30,15,000 34,84,000
Less: Fixed 5,00,000 5,00,000 5,00,000
Production OHs
Less: Fixed selling 95,000 95,000 95,000
OHs
Profit 22,19,000 24,20,000 28,89,000

(ii) Reconciliation Statement

Particulars April (`) May (`) June (`)
Profit as per 22,59,000 24,10,000 29,19,000
Absorption Costing
Add: opening stock - 5,92,000 – 5,52,000 4,44,000 – 4,14,000
overvalued in = 40,000 = 30,000
absorption
Less: Closing stock 5,92,000 – 5,52,000 4,44,000 – 4,14,000 8,88,000 – 8,28,000
overvalued in = 40,000 = 30,000 = 60,000
absorption
Profit as per 22,19,000 24,20,000 28,89,000
Marginal Costing

Working Note- 1
Particulars April May June
Opening Stock - 400 300
Add: Production 4,600 4,400 5,500
Less: Sales 4,200 4,500 5,200
Closing stock 400 300 600

Solution – 64
*1Q%614 2,AZ3015&14 !"#$%& 779A([Link])
(i) A – Revised sales = !( *+&%#
= E9%
= `322.22 crores
2%314 5#6& 779 5"#"1
(ii) D – Revised break-even point = !( *+&%#
= E9%
= `255.56 crore
(iii) D – Revised margin of safety = Revised sales – Revised BES
= `322.22 crores - `255.56 crores = `66.66 crores
(iv) C - `20 crores and `30 crore respectively
(v) A – Total cost in last year `230 cores
Total cost in coming year = VC + FC = (322.22 ´ 15%) + 115 = `292.22 crore

Marginal Costing
 CA Sunil Keswani 590
Working notes:
Present Sales & Profit
Total sales = Break-even sales + Margin of Safety = `200 + `50 = `250 crores
PV Ratio = 40%
Variable cost = 60% of sales = 250 ´ 60% = `150 crores
Fixed cost = Break-even sales ´ PV Ratio = `200 ´ 40% = `80 crores
Total cost = `150 crores + `80 crores = `230 crores
Profit = Sales – Cost = `250 crores - `230 crores = `20 crores
Revised Sales
Present fixed cost 80.00
Increase in fixed cost 20.00
Interest at 15% on additional capital (100 crores ´ 15%) 15.00
Total revised fixed cost 115.00
Assuming that the present selling price is `100
Revised selling price will be 8% less 92.00
New variable cost (reduced from 60% to 55%) of sales (92 ´ 55%) 50.60
Contribution (92.00 – 50.60) 41.40
E7.F:
New PV Ratio = RC.:: × 100 = 45%

Marginal Costing