Unit ‐ 4

MODULE – 6

Absorption and Marginal

Costing

Practical Problems
(with solutions)
1. Pepsi Company produces a single article. Following cost data is given about its
product:‐
Selling price per unit Rs.40
Marginal cost per unit Rs.24
Fixed cost per annum Rs. 16000
Calculate:
(a) P/V ratio (b) break even sales (c) sales to earn a profit of Rs. 2,000 (d) Profit
at sales of Rs. 60,000 (e) New break even sales, if price is reduced by 10%.
 2. From the following information's find out:
a. P/V Ratio
b. Sales &
c. Margin of Safety
Fixed Cost = Rs.40, 000
Profit = Rs. 20,000
B.E.P. = Rs. 80,000

a) pv ratio = s-v= f+p s(s-v)/s= f+p bep s * pv ratio= f

pv = f/bes
pv= 40000/ 80000= 50%
sales *pv = contri sales= contri/ pv ratio 60000/50%=
120,000
contri= f +p 60000
c) mos= sales – bes= 120,000- 80,000= 40,000 rs

3. Bansi company manufactures a single product having a marginal cost of Rs. 1.50 per
unit.
Fixed cost is Rs. 30,000 per annum. The market is such that up to 40,000 units can
be sold at a price of Rs. 3.00 per unit, but any additional sale must be made at Rs.
2.00 per unit. Company has a planned profit of Rs. 50,000. How many units must be
made and sold?
4. Mitanshi & company manufacture three products. The following is the cost data
relating to products A, B, and C.
Products A B C Total
Rs. Rs. Rs. Rs.
Sales 1, 50, 000 90, 000 60, 000 3, 00, 000
Variable Cost 1, 20, 000 63, 000 36, 000 2, 19, 000
Contribution 30, 000 27, 000 24, 000 81, 000
Fixed Cost 40, 500
Profit 40, 500
Prove that how knowledge of marginal costing can help management in changing
the sales mix in order to increase profit of the company.
5. A company has a machine No. 9 which can produce either product A or B. The cost
data relating to machine A and B are as follows:

Particulars Product Product B

A
Selling price Rs. 20.00 Rs. 30.00
Variable Rs. 14.00 Rs. 18.00
expenses
Contribution Rs. 6.00 Rs. 12.00

Additional Information:
a. Capacity of machine No. 9 is 1, 000 hrs.
b. In one hrs machine No. 9 can produce 3 units of A and 1 unit of B.
Which product should machine No. 9 produced?

6. Meet & company Ltd. has three divisions each of which makes a different product.
The budgeted data for the next year is as follows:

Divisions A B C
Rs. Rs. Rs.
Sales 1, 12, 000 56, 000 84, 000
Direct material 14, 000 7, 000 14, 000
Direct labor 5, 600 7, 000 22, 400
Variable overhead 14, 000 7, 000 28, 000
Fixed cost 28, 000 14, 000 28, 000
Total cost 61, 600 35, 000 92, 400
The management is considering closing down division C. There is no possibility of
reducing variable costs. Advice whether or not division C should be closed down.
7. Cost data for last year:
Sales ‐ 60, 00, 000 (Operating at 75% capacity)
Marginal cost (50% of sale) ‐ 30, 00, 000
Contribution ‐ 30, 00, 000
Fixed cost ‐ 20, 00, 000
Profit ‐ 10, 00, 000
Percentage of profit over sales ‐ 16.7%
A report on the performance for the year states:
Sales ‐ 80, 00, 000
Profit ‐ 16, 00, 000
Percentage on profit on sale ‐ 20%
Should the performance of current year be commended? What option should be
conveyed to the managing director on the basis of the Cost ‐ Volume ‐ Profit
analysis?
8. The following budget has been prepared at 70% level of home market:
Units ‐ 4, 200
Wages ‐ 12, 600
Materials ‐ 21, 000
Fixed cost ‐ 7, 000
Variables cost ‐ 2, 100
Total ‐ 42, 700

The selling price in India is Rs. 15. In Sri Lanka about 800 units may be sold only at
Rs. 10 and in addition 25 paise per unit will be expenses as freight etc, Do you advise
trying for the market in the Sri Lanka?

9. Asian paints manufacture 1, 000 tins of paints when working at normal capacity. It
incurs the cost of Rs. 16 in manufacturing one unit. The details of this cost are given
below:
Particulars Rs.
Direct material 7.50
Direct labor 2.00
Variable overheads 2.50
Fixed overheads 4.00
Production cost (per 16.00
unit)
Each unit of product is sold for Rs. 20 with variable selling and administrative
expenses of Rs. 0.50 per unit of production.
During the next 3 months, only 500 units can be produced and sold. Management
plans to close down the factory estimating that the fixed manufacturing cost can be
reduced to Rs. 2, 000 for the quarter.
When the plant is operating, the fixed overhead costs are incurred at a uniform rate
throughout the year. Additional cost of plant shut down for the three month is
estimated at Rs. 2, 800.
Express your view whether the plant should be shut down for three months, and
calculate the shut down point for three months in units of products.
10. A company is providing its product to the consumer through the wholesalers. The
managing director of the company thinks that if the company starts selling through
retailers or to the consumers directly, it can increase its sales, charge higher prices
and make more profit.
On the basis of the following information, advise the managing director whether the
company should change its channel of distribution or not:

Particulars Wholesaler Retailer Consumer

Rs. Rs. Rs.
Sales per unit 3.60 5.25 6.00
Estimated Sales per year 1, 00, 000 1, 20, 000 1, 80, 000
(units)
Selling and distribution 0.40 1.00 1.50
overheads (per unit)
Cost of production: Variable cost Rs. 2.50 per unit, Fixed cost Rs. 50, 000.

11. The cost analysis of two products A and B is given below:

Particulars Product A Product B
Rs. Rs.
Material Rs. 2.50 per unit 25 45
Labor @ Rs. 1 per hour 12 ‐‐‐
Labor @ Rs. 1.50 per hour ‐‐‐ 15
Variable overheads 2 5
Selling price 70 80
 On the basis of above information, which product would you recommend to be
manufactured if labor is key factor and if material is key factor?

12. A manufacturer produces 1500 units of products annually. The marginal cost of each
product is Rs. 960 and the product is sold for Rs. 1200. Fixed cost incurred by the
company is Rs. 48, 000 annually. Calculate P/V Ratio and what would be the break ‐
even point in terms of output and in terms of sales value?

Contri pu = sales – vc= 1200-960=

Pv ratio= 240/1200= 20%

13. From the following data calculate Margin of Safety.

Particulars Rs.
Sales 15, 00, 000
Fixed expenses 4, 50, 000
Profit 3, 00, 000
14. Following data is of Dev manufacturing company.
Costs Variable cost Fixed cost
(% of Sales) Rs.
Direct materials 23.8
Direct labor 18.4
Factory overheads 21.6 37, 980
Distribution expenses 4.1 11, 680
General & administrative expenses 11.1 13, 340
Budgeted sales for the next year are Rs. 3, 70, 000.
Calculate the followings:
The sales required to break even.
Profit at the budgeted sales volume
The profit, if actual sales – A. Increases by 5 % from the budgeted sales and B. Drop
by 10% from the budgeted sales.

15. Gyan limited manufactures and sells four types of products under the brand names
A, B, C, and D. The sales mix in value comprises 30%, 40%, 20%, and 10% of A, B, C,
and D respectively. The total budgeted sales are Rs. 60, 000 per month. The
operating costs are:
Product A ‐ 60% of selling price
Product B ‐ 70% of selling price
Product C ‐ 80% of selling price
Product D ‐ 70% of selling price
Fixed cost Rs. 12, 000 per month. Calculate the break‐even point and percentage of
margin of safety for the product on overall basis.
16. From the following information, calculate Break‐even point and Sales to earn profit
of Rs. 2, 40, 000.

Particulars Rs.
Sales 8, 00, 000
Fixed cost 3, 60, 000
Variable cost 5, 60,000

17. From the information given below, calculate P/V Ration, Fixed expenses, Expected
profit if sales is budgeted at Rs. 90, 000.
Year sales Profit
2004 1, 80, 000 30, 000
2005 2, 60, 000 50, 000
18. The budgeted results of Dev limited company include the following:
Products Sales volume Rs. P/V
Ratio
A 2, 00, 000 40%
B 1, 20, 000 50%
C 80, 000 25%
Total 4,00, 000 30%
Fixed overheads for the period are Rs. 80, 000. The management is very much
concerned at the result forecasts for the company. They have requested you to
prepare a statement showing the amount of loss expected and recommend a
change in sales mix which will eliminate the expected loss.
19. Use the following information and explain that how the reduction in selling price
would affect the margin of safety?
Particulars Rs. Rs.
Selling price per unit ‐‐‐‐‐‐‐ 40
Variable cost
Material 12 ‐‐‐‐‐
Labor 8 ‐‐‐‐‐
Overheads 4 24
Fixed cost is Rs. 8, 000.
Full capacity of the Plant is 5, 000 units.
Reduced selling price is Rs. 32 per unit.

Solution:
1. When selling price is Rs. 40, then Margin of Safety:
MOS = Total sales – Sales at B.E.P.
So, first of all we have to calculate Total sales and Sales at B.E.P.

A. Total Sales = Total units x Sales price per unit

= 5, 000 x 40
= 2, 00, 000

B. Sales at B.E.P. = Fixed cost x Price / Price – Variable cost

= 8, 000 x 40 / 40 – 24
= 3, 20, 000 / 16
= 20, 000

From the above information now we can calculate Margin of Safety by the following
way:
Margin of Safety = Total sales – Sales at B.E.P.
= 2, 00, 000 – 20, 000
= 1, 80, 000

2. Margin of Safety when reduced selling price is Rs. 32:

B.E.P. = Fixed cost x Price / Price – Variable cost
= 8, 000 x 32 / 32 – 24
= 8, 000 x 32 / 8
= 32, 000
Margin of Safety = 1, 80, 000 – 32, 000
Margin of Safety = 1, 48, 000
3. Impact: From the above calculation we can see that the reduced price will decrease
margin of safety and B.E.P. will increase.