CVP Analysis
Compiled by: CA Sapna Bhupendra Jain
Meaning of marginal cost and marginal costing
Marginal cost is defined as the additional cost of producing one unit of output. It is the aggregate
of all-direct costs and variable overheads. Thus, marginal cost is the same as variable cost.
The CIMA, London defines the term marginal cost as “the amount at any given volume of output by
which aggregate costs are charged if the volume of output is increased or decrease by one unit.”
Marginal cost = Direct material cost + Direct labour cost + Other variable cost
OR Total cost – Fixed cost
Marginal costing is an accounting system, in which variable cost are charged to the cost unit
and fixed costs of the period are written off in full against the aggregate contribution to ascertain
profit.
1. BASIC MARGINAL COST EQUATION
Sales - Variable Cost = Fixed Cost + Profit [S – V = F + P]
2. CONTRIBUTION
= Sales - Variable Cost
OR = Fixed Cost + Profit
3. PROFIT – VOLUME RATIO OR P/V RATIO
= Sales – Variable Cost / Sales X 100
OR = Contribution / Sales X 100
OR = Change in profit / Change in sales X 100
4. BREAK-EVEN SALES (IN UNITS) OR BREAK EVEN POI NT (IN UNITS)
= Fixed Cost / Contribution per unit
OR = Actual Sales (in units) – Margin of Safety (in units)
5. BREAK-EVEN SALES (IN VALUE) OR BREAK-EVEN POINT (IN VALUE)
= Fixed Costs / P/V Ratio
OR = Actual Sales (In value) – Margin of Safety (in value)
6. MARGIN OF SAFETY (IN UNITS )
= Profit / Contribution per unit
OR = Actual Sales (in units) – Break-Even Sales (in units)
7. MARGIN OF SAFETY (IN VALUE)
= Profit / P/V Ratio
OR = Actual Sales (in value) – Break-Even Sales (in value)
8. MARGIN OF SAFETY (AS %) = Margin of safety / Total sales X 100
8. BREAK-EVEN POINT AT DESIRED PROFIT
(In units) = Fixed cost + Desired profit / Contribution per unit
(In value) = Fixed cost + Desired profit / P/V ratio
9. PROFIT = Sales x P/V Ratio – Fixed Cost
10. FIXED COST = Sales x P/V Ratio - Profit
1
Q.1- The selling price of a product is Rs. 5 per unit. The variable cost is Rs. 3 per unit. The fixed
expenses are Rs. 2,000 per month. Find BEP.
Q.2- From the following data calculate break-even point expressed in terms of units and also the
new B.E.P if selling price is reduced by 10%:
Fixed Expenses:
Depreciation Rs.1,00,000
Salaries Rs.1,00,000
Variable Expenses:
Materials Rs. 3 per unit
Labour Rs. 2 per unit
Selling Price Rs.10 per unit
Q.3- The following figures are available form the records of Rani Enterprises as at 31st March:
2006 2007
Rs. lakhs Rs. lakhs
Sales 150 200
Profit 30 50
Calculate: -
(a) the P/V ratio and total fixed expenses
(b) the break-even level of sales
(c) Sales required to earn a profit of RS. 90 lakhs.
(d) Profit or loss that would arise if the sales were Rs. 280 lakhs
Q.4: The following are the details relating to a company for two years:
Total sales Total cost
Year 2007 Rs. 22,23,000 19,83,600
Year 2008 Rs. 24,51,000 21,43,200
Assuming stability in prices and variable cost, calculate (I) P/V ratio; (ii) Fixed cost (iii) Break-
even point and (iv) Margin of safety in two years.
Q. 5- A Ltd. furnishes the following data relating to the year 2008.
1 st half of the year 2 nd half of the year
Sales (Rs.) 45,000 50,000
Total cost (Rs.) 40,000 43,000
Assuming that there is no change in prices and variable cost and that the fixed expenses are
incurred equally in the two half year period, calculate-
1. P/V Ratio
2. Fixed expenses
3. Break even sales
4. Percentage of margin of safety to total sales.
[Ans. 1. 40%; 2. 26,000; 3. 65,000; 4. 31.58%]
Q.6- From the following data calculate-
1. P/V ratio
2. Profit when sales are Rs. 20,000
3. New break even point if selling price is reduced by 20%.
Fixed expenses Rs. 4,000
Break even point Rs. 10,000. [Ans. 1. 40%; 2. 4,000; 3. 16,000]
2
Q.7- You are given the following data-
Fixed cost Rs. 40,000
Variable cost Rs. 2 per unit
Selling price Rs. 10 per unit
Calculate- 1. BEP; 2. Profit when sales are Rs. 1, 00,000
3. Sales when it is desired to earn a profit of Rs. 30,000.
[Ans. 1. 50,000; 2. 40,000; 3. 8,750]
Q.8- From the following data calculates:
(i) BEP expressed in amount of sales in rupees;
(ii) Number of units that must be sold to earn a profit of Rs. 60,000 per year.
(iii) How many units must be sold to earn a net income of 10% of sales?
Selling price Rs.20 per unit
Variable manufacturing cost Rs.11 per unit
Variable selling cost Rs.3 per unit
Fixed factory overheads Rs.5,40,000 per year
Fixed selling cost Rs.2,52,000 per year
Q.9- From the following data, Calculate:
(i) Break-even point in units.
(ii) What should be the selling price per unit if the break-even point is to be brought down to
4000 units?
(iii) How many units must be sold to earn a profit of Rs.10, 000?
Direct materials Rs.4 per unit.
Direct labour Rs.3 per unit.
Variable overheads 100% of direct labour.
Selling price Rs.20 per unit.
Fixed overheads Rs.50,000
Q.10- You are given the following information:
Fixed cost Rs. 4,000
Break-even sales Rs.20,000
Profit Rs. 1,000
Selling Price Rs.20 per unit.
Calculate:
(i) Sales and marginal cost of sales.
(ii) New break-even point if selling price is reduced by 10%.
Q.11- From the particular given below, calculate:
(i) Break-even sales,
(ii) Margin of safety, and
(iii) Sales of earn a profit of Rs.4,000.
Rs.
Selling Price 20,000
Total cost 16,000
Variable cost 12,000
3
Q.12- R.S. Manufacturing Ltd. Budgets production of 3, 00,000 units at a variable cost of Rs.10
per unit. The Fixed Costs are Rs.20, 00,000. The selling price is fixed to yield 20% profit on
cost.
You are required to calculate:-
(i) P/V Ratio
(ii) Break Even Production Units.
Q.13- From the following date calculate:
(i) Break-even point expressed in amount of sales in rupees.
(ii) How many units must be sold earn a net income of 10% of sales?
Selling Price Rs.20 per unit
Variable cost Rs.12 per unit
Fixed cost Rs.2,40,000
Q.14- The Cost Account of X Co. Ltd. Furnish you the following information:
Fixed Cost for the year Rs.40,000
Net profit for the year Rs.50,000
P/V ratio 30%
What is the amount of sales made during the year?
Q.15- A company budges a production of 10,000 units. The variable cost id estimated at Rs.12
per unit. The fixed costs are estimated Rs.40,000. The selling price is fixed to earn a profit of
earn a profit of 25% on cost. You are required to-
(i) compute break-even point in terms of units and sales; and
(ii) Computed how many units must be product and sold to earn a profit of Rs.60, 000.