Costing Booster Masterclass - Chapter 12 - Marginal Costing

Question 1 : (Nov 2023)

R Ltd. produces and sells 60,000 units of product 'AN', at its Noida Plant. The selling price of the product is ₹
15 per unit. The variable cost is 80% of selling price per unit. Fixed cost during this period is ₹ 4,20,000. The
company is continuously suffering losses, and management plans to shut down the Noida Plant.
The fixed cost is expected to be reduced by ₹ 2,50,000.
Additional costs of plant shut down are expected at ₹ 25,000.
You are required to comment on:
(i) Whether the Noida plant be shut down?
(ii) Find the shut-down point in units.

Solution 1 :
Statement of profit
Particulars ₹
Selling Price 15 per unit
Less : Variable cost 12 per unit
Contribution 3 per unit
Capacity 60,000 units
Total contribution (60,000 units × ₹ 3) 1,80,000
Less: Fixed Cost 4,20,000
Loss (2,40,000)
Shut down cost
Particular ₹
Fixed cost 1,70,000
Additional cost 25,000
Shut down cost 1,95,000

(i) Since the loss of Noida plant exceeds shut down cost it is better to shut down the plant.
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡−𝑆ℎ𝑢𝑡 𝑑𝑜𝑤𝑛 𝑐𝑜𝑠𝑡
(ii) Shut down point: 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
4,20,000−1,95,000
3
= 75,000 units

The solution can also be presented in following way

Statement of profit
Particulars If plant is continued ₹ If plant is shut down ₹
Selling Price 15 per unit -
Less : Variable cost 12 per unit -
Contribution 3 per unit -
Capacity 60,000 units -
Total contribution (60,000 units ×₹ 3) 1,80,000
Less : Fixed Cost 4,20,000 1,70,000
Additional Fixed Cost - 25,000
Loss 2,40,000 1,95,000
(i) Since the loss of Noida plant exceeds shut down cost it is better to shut down the plant.
𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 − 𝑆ℎ𝑢𝑡 𝑑𝑜𝑤𝑛 𝑐𝑜𝑠𝑡
(ii) Shut down point: 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
4,20,000−1,95,000
3
= 75,000 units
Question 2 : (RTP Sept 2024)
RS Ltd. manufactures and sells a single product X whose selling price is ₹ 100 per unit and the variable cost is
₹ 60 per unit.
(i)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 net return on sales, assuming an income tax level of 40%
(ii)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 break-even sales in units for both the products.

Solution 2 :
(i) Contribution per unit = Selling price – Variable cost

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 Costing Booster Masterclass - Chapter 12 - Marginal Costing

= ₹ 100 – ₹ 60
= ₹ 40
₹24,00,000
Break-even Point = ₹40
= 60,000 units
𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠−𝐵𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠
Percentage Margin of Safety = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠−60,000 𝑢𝑛𝑖𝑡𝑠
Or, 60% = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Actual Sales = 1,50,000 units
(₹)
Sales Value (1,50,000 units × ₹ 100) 1,50,00,000
Less: Variable Cost (1,50,000 units × ₹ 60) (90,00,000)
Contribution 60,00,000
Less: Fixed Cost (24,00,000)
Profit 36,00,000
Less: Income Tax @ 40% (14,40,000)
Net Return 21,60,000
Rate of Net Return on Sales = 14.40% ( ₹21,60,000
₹1,50,00,000
× 100 )
(ii) Products
X (₹) Y (₹)
Selling Price per unit 100 150
Variable Cost per unit 60 100
Contribution per unit 40 50
Composite contribution will be as follows:
40
(
Contribution per unit = 8 × 5 + 8 × 3
50
) ( )
= 25 + 18.75 = ₹ 43.75
Break-even Sale = 64,000 units (
₹28,00,000
₹43.75 )
Break-even Sales Mix:
X (64,000 units × 5/8) = 40,000 units
Y (64,000 units × 3/8) = 24,000 units

Question 3 : (May 2024)

The following information is given by PQR Ltd:
Year Sales (₹) Profit/(Loss) (₹)
2022-23 1,80,00,000 (3,80,000)
2023-24 2,40,00,000 11,20,000
You are required to:
(i) Calculate the Break even sales.
(ii) In 2024-25, it is estimated that the variable cost will go up by 5% and fixed cost will reduce by ₹4,80,000.
Selling price will remain same. Calculate the sales volume to earn a profit of ₹15,00,000.

Question 4 : (MTP Sept 2023)

LK Ltd. has an annual fixed cost of ₹ 98,50,000. In the year 2022-23, sales amounted to
₹7,80,60,000 as compared to ₹5,93,10,000 in the preceding year 2021-22. Profit in the year 2022-23 is
₹37,50,000 more than that in 2021-22.
Required:
(i) CALCULATE Break-even sales of the company;
(ii) DETERMINE profit/ loss on a forecasted sales volume of ₹8,20,00,000.
(iii) If there is a reduction in selling price by 10% in the financial year 2022-23 and company desires to earn the
same amount of profit as in 2021-22, COMPUTE the required sales amount?

Solution 4 :
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
(i) Break-even sales = 𝑃/𝑉 𝑅𝑎𝑡𝑖𝑜
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑜𝑓𝑖𝑡 ₹37,50,000
P/V Ratio = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑆𝑎𝑙𝑒𝑠
× 100 or, ₹7,80,60,000−₹5,93,10,000
× 100

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 Costing Booster Masterclass - Chapter 12 - Marginal Costing

₹37,50,000
Or, ₹1,87,50,000 × 100 or 20%
₹98,50,000
Break-even sales = 20%
= ₹4,92,50,000

(ii) Profit/ loss = Contribution – Fixed Cost

= ₹8,20,00,000 × 20% - ₹98,50,000
= ₹1,64,00,000 – ₹98,50,000 = ₹65,50,000
(iii) To earn same amount of profit in 2022-23 as was in 2021-22, it has to earn the same amount of
contribution as in 2021-22.
Sales – Variable cost = Contribution equal to 2021-22 contribution
Contribution in 2021-22 = Sales in 2021-22 × P/V Ratio in 2021-22
= ₹5,93,10,000 × 20% = ₹1,18,62,000
Let the number of units to be sold in 2022-23 = X
Sales in 2022-23 – Variable cost in 2022-23 = Desired Contribution
90 X – 80 X = ₹1,18,62,000
Or, 10 X = 1,18,62,000
Or, X = 11,86,200 units
Therefore, Sales amount required to earn a profit equal to 2021-22 profit
= ₹ 90 × 11,86,200 units = ₹ 10,67,58,000

Question 5 : (MTP Oct 2023)

T Ltd., produces and sells 95,000 units of ‘X’ in a year at its 80% production capacity. The selling price of
product is ₹ 8 per unit. The variable cost is 75% of sales price per unit. The fixed cost is ₹ 3,50,000. The
company is continuously incurring losses and management plans to shut-down the plant. The fixed cost is
expected to be reduced to ₹ 1,30,000. Additional costs of plant shutdown are expected at ₹ 15,000.
Should the plant be shut-down? Find the shut-down point in units and also in percentage of capacity level of
production.

Solution 5 :
Statement Showing “Operating Loss”
If Plant is Continued If Plant is Shutdown
Sales 7,60,000 ---
Less: Variable Cost 5,70,000 ---
Contribution 1,90,000 ---
Less: Fixed Cost 3,50,000 1,30,000
Less: Additional Cost --- 15,000
Operating Loss 1,60,000 1,45,000
Decision on Shut Down
A comparison of loss figures (indicated as above) points out that loss is reduced by ₹15,000
(₹ 1,60,000 - ₹ 1,45,000) if plant is shut down.
→ Accordingly, plant should be Shut Down.
₹3,50,000−₹1,45,000
Shut Down Point = ₹8−₹6
= 1,02,500 units
Capacity Level at Shut Down Point (%)
At 100% Level – Production Capacity
95,000 𝑢𝑛𝑖𝑡𝑠
= 1,18,750 × 0.80
Capacity Level at Shut Down Point
( )
1,02,500 𝑢𝑛𝑖𝑡𝑠
= 86.32% 1,18,750 𝑢𝑛𝑖𝑡𝑠

Question 6 : (MTP Oct 2023)

A company manufactures four products. The annual demand for products, selling prices and variable
production costs are as follows:
Product P Q R S
Demand (Units) 1,20,000 1,86,000 1,71,000 99,000
₹ ₹ ₹ ₹
Selling price/unit 23.88 28.68 55.08 47.88
Direct Material/Unit 10.08 13.20 30.48 24.96

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Direct Labour/unit 4.08 4.08 6.72 6.36

Variable overheads/unit 1.44 1.44 2.40 2.16

Other data:
(i) The variable overheads are absorbed on a machine hour basis at a rate of ₹ 1.20 per machine hour.
(ii) Fixed overheads total ₹ 46,84,000 per annum.
(iii) Production capacity available 8,15,000 machine hours per annum.
(iv) Products P, Q and R can be bought-in at ₹ 21.36 per unit, ₹ 24 per unit and ₹ 48 per unit respectively.
You are required to calculate Best product mix and Profitability statement for the year.

Solution 6 :
(a) (i) Statement Showing “Calculation of Contribution/ unit”
P (₹) Q (₹) R (₹) S (₹)
Selling Price …(A) 23.88 28.68 55.08 47.88
Variable Cost
Direct Material 10.08 13.20 30.48 24.96
Direct Labour 4.08 4.08 6.72 6.36
Variable Overheads 1.44 1.44 2.40 2.16
Total Variable Cost …(B) 15.60 18.72 39.60 33.48
Contribution per unit …(A) - (B) 8.28 9.96 15.48 14.40

(ii) Calculation of Machine Hours/ unit

Machine Hours per unit 1.20 1.20 2.00 1.80

(iii) Machine Hours Required

Machine Hours per unit 1,44,000* 2,23,200% 3,42,000@ 1,78,200#
Total 8,87,400
* - (1,20,000 × 1.2); % - (1,86,000 × 1.2); @ - (1,71,000 × 2); # - (99,000 × 1.8)
(iv) Total Machine Hours Available 8,15,000. Hence, it is a key factor. Product ‘S’ is to be
manufactured, since it is not available with sub-contractor/ market.
(v) Statement Showing “Make or Buy for Products P, Q, R”
P Q R
(₹) (₹) (₹)
Sub-Contractor/ Buy Price 21.36 24.00 48.00
Less: Variable Manufacturing Cost 15.60 18.72 39.60
Saving in Cost 5.76 5.28 8.40
Saving in Cost per machine hour 4.8 4.4 4.20
Ranking I II III
(vi) Statement Showing “Best Product Mix”
Product Units Machine Hour/ Total Machine Hours
Unit
S 99,000 1.8 1,78,200
P 1,20,000 1.2 1,44,000
Q 1,86,000 1.2 2,23,200
R (Balance) 1,34,800 2.0 2,69,600
Total 8,15,000
Balance quantity of R to be purchased 36,200 units (1,71,000 – 1,34,800).

(vii) Profitability Statement

Product No of Units Contribution/unit (₹) Total Cont.
(₹)
P (Mfg) 1,20,000 8.28 9,93,600
Q (Mfg) 1,86,000 9.96 18,52,560
R (Mfg) 1,34,800 15.48 20,86,704
R (Buy) 36,200 7.08 (₹55.08 - ₹48.00) 2,56,296
S (Mfg) 99,000 14.40 14,25,600

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 Costing Booster Masterclass - Chapter 12 - Marginal Costing

Total Contribution 66,14,760

Less: Fixed Overheads 46,84,000
Net Profit 19,30,760

Question 7 :(MTP MArch 2024)

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
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).

Solution 7 :
(i) Statement of Profit under Absorption Costing

Particulars April (₹) May (₹) June (₹)

Sales (units) 4,200 4,500 5,200
Selling price per unit 2,050 2,050 2,050
Sales value (A) 86,10,000 92,25,000 1,06,60,000
Cost of Goods Sold:
Opening Stock @ ₹1,480 0 5,92,000 4,44,000
Production cost @ ₹1,480 68,08,000 65,12,000 81,40,000
Closing Stock @ ₹1,480 (5,92,000) (4,44,000) (8,88,000)
Under/ (Over) absorption 40,000 60,000 (50,000)
Add: Fixed Selling Overheads 95,000 95,000 95,000
Cost of Sales (B) 63,51,000 68,15,000 77,41,000
Profit (A – B) 22,59,000 24,10,000 29,19,000

Workings:
1. Calculation of full production cost
(₹)
Direct Materials (4 kg. × ₹ 120) 480
Direct labour (6 hours × ₹ 60) 360
Variable production Overhead (150% of ₹ 360) 540
Total Variable cost 1,380
( ₹60,00,000
Fixed production overhead 60,000𝑢𝑛𝑖𝑡𝑠 ) 100
1,480

2. Calculation of Opening and Closing stock

April May June
Opening Stock 0 400 300
Add: Production 4,600 4,400 5,500
Less: Sales 4,200 4,500 5,200
Closing Stock 400 300 600

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 Costing Booster Masterclass - Chapter 12 - Marginal Costing

3. Calculation of Under/Over absorption of fixed production overhead

April (₹) May (₹) June (₹)
Actual Overhead 5,00,000 5,00,000 5,00,000
Overhead absorbed 4,60,000 4,40,000 5,50,000
(4,600 units × ₹100) (4,400 units × ₹100) (5,500 units × ₹100)
Under/(Over) absorption 40,000 60,000 (50,000)

(ii) Statement of Profit under Marginal Costing

Particulars April (₹) May (₹) June (₹)
Sales (units) 4,200 4,500 5,200
Selling price per unit 2,050 2,050 2,050
Sales value 86,10,000 92,25,000 1,06,60,000
Less: Variable production 57,96,000 62,10,000 71,76,000
cost @ ₹1,380
Contribution 28,14,000 30,15,000 34,84,000
Less: Fixed 5,00,000 5,00,000 5,00,000
Production Overheads
Less: Fixed Selling Overheads 95,000 95,000 95,000
Profit 22,19,000 24,20,000 28,89,000

(iii) Reconciliation of profit under Absorption costing to Marginal Costing

Particulars April (₹) May (₹) June (₹)
Profit under Absorption 22,59,000 24,10,000 29,19,000
Costing
Add: Opening Stock 0 40,000 30,000
(400 × ₹100) (300 × ₹100)
Less: Closing Stock 40,000 30,000 60,000
(400 × ₹100) (300 × ₹100) (600 × ₹100)
Profit under Marginal Costing 22,19,000 24,20,000 28,89,000

Question 8 :(MTP March 2024)

PQ Ltd. sells bottles and currently is trying to find out the profitability of opening another store which will have
the following expenses and revenues:
Amount per piece (₹)
Selling Price 600
Variable costs:
Material cost 410
Salesmen’s commission 60
Total variable cost 470
Annual fixed expenses are: (₹)
- Rent 6,00,000
- Office and administrative expenses 20,00,000
- Advertising 8,00,000
- Other fixed expenses 2,00,000
Calculate the annual break-even point in units and in value. Also determine the profit or loss if 35,000 units of
bottles are sold.

Solution 8 :
Total Fixed Cost = ₹ 6,00,000 + ₹20,00,000 + ₹8,00,000 + ₹ 2,00,000 = ₹ 36,00,000
Contribution per unit = ₹600 - ₹470 = ₹130

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 ₹130

P/V Ratio = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔𝑃𝑟𝑖𝑐𝑒
×100 = ₹600
x 100 = 21.67%

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 ₹36,00,000

Break-even Point = 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
= ₹130
= 27,692.31 or 27,693 units

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 Costing Booster Masterclass - Chapter 12 - Marginal Costing

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 ₹36,00,000

Break-even Sales = 𝑃/𝑉 𝑅𝑎𝑡𝑖𝑜
= 21.67 %
= ₹1,66,12,829

Calculation of Profit/ (loss):

Total Contribution (₹130 × 35,000 units) = ₹45,50,000

Less: Fixed Cost = ₹36,00,000
Profit = ₹ 9,50,000

Question 9 :(RTP Nov 2023)

A dairy product company manufacturing baby food with a shelf life of one year furnishes the following
information:
(i) On 1st April, 2023, the company had an opening stock of 20,000 packets whose variable cost was ₹ 180 per
packet.
(ii) In 2022-23, production was 1,20,000 packets and the expected production in 2023-24 is 1,50,000 packets.
Expected sales for 2023-24 is 1,60,000 packets.
(iii)In 2022-23, fixed cost per unit was ₹ 60 and it is expected to increase by 10% in 2023-24. The variable cost
is expected to increase by 25%. Selling price for 2023-24 has been fixed at ₹ 300 per packet.
You are required to calculate the Break-even volume in units for 2023-24.

Solution 9 :
Working Notes:

Particulars 2022-23 (₹) 2023-24 (₹)

72,00,000 79,20,000
Fixed Cost
(₹ 60 × 1,20,000 units) (110% of ₹ 72,00,000)
225
Variable Cost 180
(125% of ₹ 180)
Calculation of Break-even Point (in units):
Since, shelf life of the product is one year only, hence, opening stock is to be sold first.
(₹)
Total Contribution required to recover total fixed cost
79,20,000
in 2023- 24 and to reach break-even volume.
Less: Contribution from opening stock
24,00,000
{20,000 units × (₹ 300 – ₹ 180)}
Balance Contribution to be recovered 55,20,000
Units to be produced to get balance contribution
₹ 55,20,000
= ₹300 −₹ 225 = 73,600 packets.
Break-even volume in units for 2023-24
Packets
From 2023-24 production 73,600
Add: Opening stock from 2022-23 20,000
93,600

Question 10 : (RTP Nov 2023)

The M-Tech Manufacturing Company is presently evaluating two possible processes for the manufacture of a
toy. The following information is available:
Particulars Process A (₹) Process B (₹)
Variable cost per unit 12 14
Sales price per unit 20 20
Total fixed costs per year 30,00,000 21,00,000
Capacity (in units) 4,30,000 5,00,000
Anticipated sales (Next year, in units) 4,00,000 4,00,000
Suggest:
1. Identify the process which gives more profit.

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2. Would you change your answer as given above, if you were informed that the capacities of the two
processes are as follows:
A - 6,00,000 units; B - 5,00,000 units?

Solution 10 :
(1) Comparative Profitability Statements
Particulars Process- A (₹) Process- B (₹)
Selling Price per unit 20.00 20.00
Less: Variable Cost per unit 12.00 14.00
Contribution per unit 8.00 6.00
32,00,000 24,00,000
Total Contribution
(₹ 8 × 4,00,000) (₹ 6 × 4,00,000)
Less: Total fixed costs 30,00,000 21,00,000
Profit 2,00,000 3,00,000
Capacity (units) 4,30,000 5,00,000
34,40,000 30,00,000
Total Contribution at full capacity
(₹ 8 × 4,30,000) (₹ 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 4,40,000 9,00,000
Process - B gives more profit.

(2)
Particulars Process- A (₹) Process- B (₹)
*Capacity (units) 6,00,000 5,00,000
48,00,000 30,00,000
Total contribution
(₹ 8 × 6,00,000) (₹ 6 × 5,00,000)
Fixed Cost 30,00,000 21,00,000
Profit 18,00,000 9,00,000
Process-A be chosen.
*Note: It is assumed that capacity produced equals sales.

Question 11 :(RTP May 2024)

The analysis of cost sheet of A Ltd. for the last financial year has revealed the following information for it’s
product R:
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 Overhead 10% of cost of goods sold ₹ 2,30,000
General & Administration Overhead 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.
You being an associate to cost controller of the A Ltd., CALCULATE :
(i) Break-even Sales (in rupees),
(ii) Profit earned during last year,
(iii) Margin of safety (in %) and
(iv) The profit if the sales were 10% less than the actual sales.

Solution 11 :
Workings:
Calculation of Cost of Goods Sold (COGS):
COGS = {(DM- 0.3 COGS) + (DL- 0.15 COGS) + (FOH- 0.10 COGS +
₹ 2,30,000) + (G&AOH- 0.02 COGS + ₹ 71,000)} Or COGS = 0.57 COGS + ₹ 3,01,000
₹3,01,000
Or COGS = 0.43
= ₹ 7,00,000
Calculation of Cost of Sales (COS):
COS = COGS + (S&DOH- 0.04 COS + ₹ 68,000)
Or COS = ₹ 7,00,000 + (0.04 COS + ₹ 68,000)

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₹7,68,000
Or COS = 0.96
= ₹ 8,00,000

Calculation of total Fixed Costs:

Factory Overhead ₹ 2,30,000
General & Administration OH ₹ 71,000
Selling & Distribution OH ₹ 68,000
₹ 3,69,000

Calculation of Variable Costs:

Direct Material (0.3 × ₹ 7,00,000) ₹ 2,10,000
Direct Labour (0.15 × ₹ 7,00,000) ₹ 1,05,000
Factory Overhead (0.10 × ₹ 7,00,000) ₹ 70,000
General & Administration OH (0.02 × ₹ 7,00,000) ₹ 14,000
Selling & Distribution OH (0.04 × ₹ 8,00,000) ₹ 32,000
₹ 4,31,000

Calculation of P/V Ratio:

𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑆𝑎𝑙𝑒𝑠− 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠
P/V Ratio = 𝑆𝑎𝑙𝑒𝑠
× 100 = 𝑆𝑎𝑙𝑒𝑠
× 100
(₹185×5,000 𝑢𝑛𝑖𝑡𝑠)−₹4,31,000
= ₹185×5,000 𝑢𝑛𝑖𝑡𝑠
×100 = 53.41%
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 ₹3,69,000
(i) Break-Even Sales = 𝑃 / 𝑉 𝑅𝑎𝑡𝑖𝑜 = 53.41% = ₹ 6,90,882
(ii) Profit earned during the last year
= (Sales – Total Variable Costs) – Total Fixed Costs
= (₹ 9,25,000 - ₹ 4,31,000) - ₹ 3,69,000
= ₹ 1,25,000
𝑆𝑎𝑙𝑒𝑠−𝐵𝑟𝑒𝑎𝑘 𝐸𝑣𝑒𝑛 𝑆𝑎𝑙𝑒𝑠
(iii) Margin of Safety (%) = 𝑆𝑎𝑙𝑒𝑠
×100
₹9,25,000−₹6,90,882
= ₹9,25,000
×100 = 25.31%
(iv) Profit if the sales were 10% less than the actual sales:
Profit = 90% (₹ 9,25,000 - ₹ 4,31,000) - ₹ 3,69,000
= ₹ 4,44,600 - ₹ 3,69,000 = ₹ 75,600

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