371252194-Marginal-Costing-Problems-Solutions-2.pptx

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1. Marginal Costing – Problems & Solutions

2. Marginal Costing Formulae Sales – Variable Cost = Contribution Contribution – Fixed Cost = Profit Sales – Variable Cost = Fixed Cost + Profit Profit Volume Ratio = Contribution / Sales Contribution = Sales * PV Ratio Sales = Contribution / PV Ratio BEP (in units) = Fixed Cost / Contribution per unit BEP (in rupees) = Fixed Cost / Contribution/Sales BEP (in rupees) = Fixed Cost / PV ratio Required Sales (in rupees) = Fixed Cost + Profit / PV ratio Required Sales (in units) = Fixed Cost + Profit / Contribution per unit Actual Sales = Fixed Cost + Profit / PV ratio Margin of safety (in rupees) = Actual Sales – BEP Sales Margin of safety (in units) = Actual Sales (units) – BEP Sales (units) Profit = Margin of safety * PV ratio

3. Ascertaining Missing figures CONTRIBUTION = Sales – Variable Cost = Fixed Cost + Profit = Sales * PV Ratio = (BE Sales in units * Contribution per units) + Profit = (BE Sales in value * PVR ) + Profit = Fixed Cost + (MS in units * Contribution per unit) = Fixed Cost + (MS in value * PVR) = Profit / MS in % = Fixed Cost / BE sales in%   PROFIT VOLUME RATIO (PVR) = Sales - Variable Cost / Sales * 100 = Contribution / Sales *100 = Fixed Cost + Profit / Sales *100 = Fixed Cost / BE Sales in value * 100 = Fixed Cost / BE Sales in units *100 / Selling price per unit = Profit / Margin of safety in value *100 = Profit / Margin of safety in units *100 / Selling price per unit = Change in profit / Change in sales *100 = 100 – Variable cost to sales ratio

4. Ascertaining Missing figures BE SALES IN UNITS = Fixed Cost / Contribution per unit = BE Sales / Selling price = Fixed Cost / S.P. per unit – Variable cost P.U = Actual Sales per unit – Margin of safety in units   BE SALES IN VALUE = Fixed Cost / PVR = Actual Sales in value – Margin of safety in value = Fixed Cost / Contribution per unit * Selling price per unit = BE Sales in units * Selling price per unit = Fixed Cost / 1- Variable Cost / Sales = Fixed Cost / % of Contribution to sales   BE SALES IN % OF SALES = Fixed Cost / Contribution *100 = BE Sales / Actual Sales *100 = 100 – margin of safety (in %)

5. Ascertaining Missing figures MARGIN OF SAFETY IN UNITS = Profit / Contribution per unit = Actual Sales in units – BE Sales in units   MARGIN OF SAFETY IN VALUE = Profit / PV Ratio = Actual Sales in value – BE Sales in value = Profit / Contribution per unit * Selling price per unit = Margin of Safety in units * Selling price per unit   PROFIT = Sales – Total Cost = Sales – (Variable Cost + Fixed Cost) = Contribution – Fixed Cost = Margin of Safety in Value * PVR = Margin of Safety (% of sales) * Total Contribution = (Margin of Safety in % of Sales * Actual Sales) * PVR   SALES = Total Cost + Profit = Variable Cost + Fixed Cost + Profit = Variable Cost + Contribution = Contribution / PV ratio * 100 = BE Sales + Margin of Safety

6. QUESTION 1 The Acme Company produces and sells one product. The revenue and cost structure of the product is given below: Particulars Amount in R s . Selling Price Per Unit 10 . 00 Variable Cost Per Unit 6 . 00 Total Fixed Cost per year 1 , 00 , 000 COMPUTE THE BREAK EVEN VOLUME IN UNITS AND RUPE E S

7. ANSWER 1 C p e r un i s 4 C = S – V = 10 – 6 = 4 B . E . P . in Units  Fixed Expenses  1,00,000  25,000 units P . V . Ratio  C  100  4  100  40% S 10 B . E . P . in Amount  Fixed Expenses  1,00,000  2,50,000 P / V Ratio 40%

8. QUESTION 2 Calculate break even point on the basis of the following information supplied by a manufacturing firm: PARTICULARS AMOUNT IN R s . ESTIMATED SALES 10 , 00 , 000 ESTIMATED VARIABLE COSTS 6 , 00 , 000 ESTIMATED FIXED COSTS 2 , 00 , 000

9. ANSWER 2 C = S – V = 10,00,000 – 6,00,000 = 4,00,000 P . V . Ratio  C  100  4,00,000  100  40% S 10,00,000 B . E . P . in Amount  Fixed Expenses  2,00,000  5,00,000 P / V Ratio 40%

10. QUESTION 3 ,000 S al e s and Fixed O verh p r o d uction eads f o r the y e ar a m o was of 10,000 units. u nt to 20 F ind : Marginal Cost Contribution per unit Variable cost Total Contribution Net Profit COST PER UNIT AMOUN T ( Rs .) RAW MATERIALS 25 LABOUR 10 VARIABLE OVERHEADS 5 SELLING PRICE 50

11. Answer 3 Marginal Cost= Mat + Labour +Variable Overheads = 25+10+5 = 40 Contribution per unit = S – M.C. = 50 – 40 =10 Total Variable Cost = 40 x 10,000 = 4,00,000 Total Contribution = C x Units = 10 x 10,000 = 1,00,000 Net Profit = Total Contribution – Fixed Overhead = 1,00,000 – 20,000 = 80,000

12. QUESTON 4 the manufacture of 1,0 0,000 cycle cts that due t o c o mp e ti tion they This is based on s per annum. The company exp e will have to reduce selling price, but they want to keep the total profits intact. What level of production will have to be reached, i.e. how many cycles will have to be manufactured to get the same amount of profit, if:- The selling price is reduced by 10% The selling price is reduced by 20% PARTICULARS AMOUNT ( Rs .) MATERIALS 60 LABOUR 20 VARIABLE OVERHEADS 20 FIXED OVERHEADS 50 PROFIT 50 SELLING PRICE 200

13. ANSWER 4 100 100 New S .. P . after 20% Re duction  200  80  160 Present Profit = 100000 x 50 = 50,00,000 Pr esent S . P .  200 New S . P . after 10% Re duction  200  90  180 60 1,00,00,000 cycles  1,66,667 Pr ofit  F  P  50,00,000  50,00,000  1,00,00,000  1,25,000 cycles C 80 80 Re quired Sales to earn same amount of C  S  V  160  100  60 C  S  V  180  100  80

14. QUESTION 5 Given the following figures: mpact of the following cha nges on br Show the i eak even point: Fixed Cost increase by 5,000 Rs . Decrease in Fixed Costs by 4,000 Rs . 20% increase in variable cost Fixed Cost increase by 20% and variable costs decreased by 10% PARTICULARS A M OUN T ( Rs .) FIXED COSTS 1 6 , 000 SELLING PRICE PER UNIT 8 VARIABLE COST PER UNIT 5

15. Answer 5 Effect of increase in Fixed Costs by 5,000, Now Total Fixed Expenses = 16,000+5,000 = 21,000 C 3 Pr esent B . E . P . inUnits  F  16,000  5,333 units New B . E . P . inUnits  F  21,000  7,000 units Effect of decrease in F C ixed C 3 ost by 4,000 , Now Fixed Expenses =16,000 - 4,000 = 12,000 New B . E . P . inUnits  F  12,000  4,000 units C 3

16. Co n t d. Effect of increase in variable cost by 20% V.C. = 5 + 1 = 6 , New C will be 8 – 6 = 2 New B . E . P . inUnits  F  16,000  8,000 units C 2

17. QUESTION 6 The total cost and profits during two period were as follows: Calculate: P/V Ratio Break Even Sales Sales required to earn a profit of 1,25,000 R s . Profit earned when sales are 3,50,000 R s . PARTICULARS PERIOD –I PERIOD – II AMOUNT AMOUNT TOTAL COST 4, 5 0,000 6,50,000 PROFIT 50,000 1,00,000

18. Answer 6 250000 50000  100  20% Change in Sales P / V Ratio  Change in Pr ofit  100  Fixed Expenses  Sales  P / V Ratio  Pr ofit  5,00,000  20%  50000  50,000  50000  2,50,000 P / V R a ti o 20 % F B . E . P . Sale  Sales to earna Pr ofit 1,25,000  Fixed Expenses  Desired Pr ofit  50,000  1,25,000  8,75,000 P / V Ratio 20% Pr ofit when Sales are 3,50,000  Pr ofit  ( Sales P / VRatio )  Fixed Cost  3,50,000  20%  50,000  20,000

19. QUESTI O N 7 XY Co. Sold in two successive years 7,000 and 9,000 units and incurred a loss of 10,000 R s . and earned 10,000 as profit respectively. The selling price per unit is 100 R s . Calculate (a) the amount of fixed costs, (b) the number of units to break even, and (c) the number of units to earn a profit of 50,000 R s .

20. ANSWER 7  100  10% P / V Ratio  Change in Pr ofit  100  20,000 C hang e i n Sa l e s 2 , , 000 The amount of Fixed Cost: Contribution of First Year 10% of 7,00,000 = 70,000 + Loss during the year 10,000 = 80,000 B . E . P .  Fixed Cost  80,000  8,00,000 P / V Ratio 10% B . E . P . in Units  Total Sales  8,00,000  8,000 units S . P . per unit 100

21. Co n t d. Re quired Sales  Fixed Cost  Desired Pr ofit  80,000  50,000  13,00,000 P / V Ratio 10% B . E . P . in Units  Total Sales  13,00,000  13,000 units S . P . per unit 100

22. Question 8 100  Fixed Expenses = 20,000, Variable Cost per unit 10, Selling Price Unit = 20, Calculate profit when sales will be 2,00,000.  Answer P / V Ratio  C  100  10  100  50% S 20 Pr ofit  ( Sales  P / VRatio )  Fixed Expenses  2,00,000  50  20,000  80,000

23. Questio n10 Fixed Expenses = 20,000, Variable Cost per unit 10, Selling Price Unit = 20, Calculate the required sales if profit target of Rs. 60,000 has been budgeted.

24. Answer 10 10 C  S  V  20  10  10 Re quired Sales to earn 60,000 amount of Pr ofit  F  P  20,000  60,00,000  C 10 80,000  8000 units 50 80,000 X 100  1,60,000 F  P  20,000  60,00,000  P / V Ratio 50% Re quired Sales to earn 60000 amount of Pr ofit  C  S  V  20  10  10 P / V Ratio  C / S X 100  10 / 20 X 100  50%

25. Problem From the following particulars, you are required to calculate : ( i ) P/V Ratio (ii) BEP for sales; (iii) Margin of Safety; (iv) Profit when sales are Rs.2,00,000/- (v) Sales required to earn a profit of Rs.40,000/- Year Sales Profit I Rs . 2,40,000 18,000 II Rs . 2,80,000 26,000 You may make possible assumptions. Also evaluate the effect on II year’s profit of (a ) 20% decrease in sales quantity. (b) 20% decrease in sales quantity accompanied by 10% increase in sales price and reduction of Rs . 3,500/- in fixed costs

26. Solution (1) P/V Ratio In year 2, additional NP which means additional contribution 8,000 Additional sales 40,000 P/V Ratio 20% (2) BEP Fixed cost = Contribution – NP = (2,40,000 * 20%) – 18,000 48,000 – 18000 30,000 BEP = FC/PV Ratio 30,000/0.20 =1,50,000 (3) Margin of Safety Year 1 2,40,000 – 1,50,000= 90,000 Year 2 2,80,000 – 1,50,000 =1,30,000 (4) Net Profit (Contribution*PV Ratio) – Fixed Cost (2,00,000 * 20%) – 30,000= 10,000 OR Cap Sales 2,00,000 (-) BEP 1,50,000 Margin of Safety 50,000 (-) PV Ratio 20% NP =10,000

27. 5 ) Sales Required 100/20 ( 30,000(FC) + 40,000(NP )) = 3,50,000 or BEP 1,50,000 Margin of Safety Req (100/20*40,000) 2,00,000 Sales Required 3,50,000 (6) a) 20% decrease in sale Qty Reduction in Contribution & in net profit 20% *(2,80,000*20%) 20% ( 56,000) Reduction in Contribution & in net profit Rs.11,200 (b) Revenue Sales ( 2,80,000*80%) *110% 2,46,400 (-) Revenue Cost (2,80,000*80%) * 80% 1,79,200 Revenue contribution 67,200 (-) Revenue Fixed Cost (26,500) Revenue NP 40,700 (-) Given NP (26,000) Increase in NP=14,700

28. ILLUSTRATION A company is producing a single article and sells at Rs. 30/- each. The Marginal cost of production is Rs. 24/- each and fixed cost are Rs. 11,000/ per quarter. Find out Profit Volume Ratio Break even sales in value and volume Sales required to earn a profit of Rs. 15,000 Profit at sales of R. 5,00,000 Margin of safety for (3) and (4) above

29. We know, PV ratio = Contribution/Sales or = Contrb p.u /Selling P.u In the given problem, they have given us Selling price p.u and Marginal cost p.u . Contrb p.u = Selling price p .u – Marginal cost p.u = 30 – 24 = 6 Now PV Ratio = (6/30)*100 = 20%

30. In order to Calculate Break even Sales : Value and volume we know BEP (Sales) = Fixed cost/PV Ratio = 44,000/.20 = Rs. 2,20,000 Fixed Cost = 11000 per quarter i.e for whole year (11000*4) = 44,000 BEP (Volume/Qty) = Fixed cost/ Contrb p.u = 44,000/6 = 7,333 Units

31. In order to find out the desired sales revenue so that a profit of Rs. 15,000 can be earned = (Fixed cost + Desired profit )/ P/V Ratio = (44,000 +15,000)/.20 = Rs. 2,95,000 If you are asked to find Sales Volume (Qty) : can be found out either by dividing the Sales revenue by Selling price (2,95,000/30 = 9833 units ) or using the above formula i,e (FC+P)/ Contrib p.u = (44,000+15000)/6 = 9833 units

32. Profit at Sales of Rs. 5,00,000 . We know PV Ratio = 20% hence contribution = 5,00,000*.20 = 1,00,000 Fixed Cost = 44,000 PROFIT = 56,000 ( Contr – FC) Margin of Safety = Actual Sales – Break even sales MOS (Value) when Sales Rs. 2,95,000 = 2,95,000 – 2,20,000 = 75,000 MOS (Value) When Sales Rs. 5,00,000 = 5,00,000 – 2,20,000 = 2,80,000

33. A company gives you the following information for a financial year. You are required to find out : P V Ratio Fixed cost Profit or loss where sales are Rs. 8,20,000 Sales required to earn a profit of 2,80,000 First 6 months Later 6 months Sales 12,20,000 15,40,000 Profit earned 62,400 1,58,400

34. In this problem in order to find out P V Ratio no information of Variable cost is give, instead comparison for two periods are given, hence PV Ratio = Change in Profit/Change in Sales = (1,58,400 – 62,400) (15,40,000 – 12,20,000) = 0.3 or 30 % Fixed cost = Contribution – Profit = (15,40,000 *.30) – 1,58,400 = Rs. 3,03,600 Fixed cost remains fixed for the two level of activity .

35. Profit or Loss at Sales of Rs. 8,20,000 Contribution = (8,20,000*. 30) = 2,46,000 Less : Fixed cost = 3,03,600 LOSS = (57,600) Sales required to earn Profit of Rs. 2,80,000 = (FC + P)/PV ratio = (3,03,600 + 2,80,000)/ .30 = 19,45,333 ~ 19,45,000

36. The following budget estimates are given to you for a financial year - Find PV Ratio, BEP and MOS Calculate the revised PV Ratio, BE and MOS if Selling price is decreased by 10% Variable cost increases by 10% Sales volume increases by 2000 units Fixed cost increases by 6,000 Sales (Units) 15,000 Fixed Expenses Rs. 34,000 Sales Value Rs, 1,50,000 Variable costs Rs. 6 p.u

37. PV Ratio = Contribution/Sales Contribution : Sale Value = 1,50,000 Less : Variable Cost ( 15,000 units*6 p.u ) = 90,000 Contribution = 60,000 PV Ratio = 60,000/ 1,50,000 = 40% BEP = FC/PV Ratio = 34,000/.40 = Rs. 85,000 MOS = Act Sales – BE Sales = 1,50,000 – 85,000 = Rs. 65,000

38. Selling Price decrease by 10% Current Selling Price 1,50,000/15000 = Rs. 10.p.u Revised Selling price 10*.10 = 9 p.u Revised contribution p.u 9 – 6 = 3 Revised P V Ratio (3/9)* 100 = 33.33% BEQ =34,000/3 = 11,333 units BE sales =11,333 * 9 = 1,02,000 MOS & MOS (Value) = 15,000 – 11,333 = 3667 units * 9 = Rs.33,003 Variable Cost increases by 10% Revised Variable cost = 6*.10 = 6.60 p.u Revised Contribution 10 – 6.6 = 3.4 p.u Revised P V Ration = 3.4 /10 = 34% BE Q =34,000/3.4 = 10000 units BE Sales =10,000 * 10 = 1,00,000 MOS & MOS (Value) = 15,000 – 10000 = 5,000 units * 10 = 50,000

39. Increase in Sales volume by 2,000 units Revised Sales units 15,000 +2,000 = 17,000 units Revised P V Ratio =4/10 = 40% BEQ 34,000/4 = 8,500 units BESales = 8,500 * 10 = 85,000 MOS (Q) 17,000 – 8,500 = 8,500 units MOS (Value) = 8,500 * 10 = 85,000 Increase of Rs. 6,000 in Fixed costs Revised P V Ratio = 4/.10 = 40% Revised Fixed Cost =34,000+6,000 = 40,000 BEQ = 40,000/4 = 10,000 units BESales = 10,000 * 10 = 1,00,000 MOS(Q) = 15,000 – 10,000 = 5,000 MOS (V) = 5,000 *10 = 50,000

40. A company has fixed cost of Rs.1,30,000, Sales Rs. 4,50,000 and Profit of Rs. 50,000. Required: ( i ) Sales volume if in the next period, the company suffered a loss of Rs.15,000. (ii) What is the margin of safety for a profit of Rs.70,000? In order to find the sales volume - from the data given first we need to find the P V ratio . In order to find the PV ratio we need contribution . In the problem sales, fixed cost and Profit figures are given so contribution can be calculated as follows:

41. Sales = 4,50,000 Less: Profit = 50,000 COGS = 4,00,000 Less Fixed cost = 1,30,000 VARIABLE COST = 2,70,000 P V Ratio = 1,80,000/ 4,50,000 = 40% Desired Sales = 1,30,000 – 15000 (Loss)/.40 = Rs. 2,87,500 therefore Contribution Sales = 4,50,000 Less : Variable cost = 2,70,000 CONTRIBUTION = 1,80,000

42. MOS for a profit of Rs. 70,000 Desired Sale at Profit of 70,000 = (1,30,000 + 70,000)/.40 = 5,00,000 Break even sales = 1,30,000/.40 = 3,25,000 Therefore MOS = 5,00,000 – 3,25,000 = 1,75,000 Alternatively, MOS = Profit/PV Ratio = 70,000/.40 = 1,75,000

43. The ratio of variable cost to sales is 60%. The break-even point occurs at 80% of the capacity sales. ( i ) Find the capacity sales when fixed costs are ` 1,60,000 Compute profit at 80% of the capacity sales. Find profit if sales is Rs.5,70,000 and fixed cost remain same as above. Find sales, if desired profit is Rs.44,000, and fixed cost is Rs.1,42,000.

44. Given, Ratio of variable cost to sales = 60% This means P V Ratio = 40% BE Sales : when FC = 1,60,000 = 1,60,000/.40 =Rs . 4,00,000 We know BEP occurs at 80% capacity sales Therefore, if 80% sales = 4,00,000 100% = ? Therefore Sales when FC 1,60,000 = 5,00,000

45. Profit at 80% capacity sales It is already given that BEP occurs at 80% capacity sales. Hence Profit at 80% capacity sales will be NIL . As at the BEP Costs = Revenue Profit for sales of 5,70,000 and FC = 1,60,000 Variable cost (60% of 5,70,000) = 3,42,000 Fixed Cost = 1,60,000 Total Cost = 5,02,000 Sales = 5,70,000 PROFIT = 68,000

46. Sales, if desired profit is Rs. 44,000, and fixed cost is Rs. 1,42,000 Desired Sales = (FC + P)/PV Ratio = (1,42,000+44,000)/.40 = Rs. 4,65,000 Note : PV Ratio does not change with the change in the FC or sales value.

47. If margin of safety is Rs 2, 40,000 (40% of sales) and P/V ratio is 30% of Gupta Ltd, calculate its Break even sales, and Amount of profit on sales of ` 9,00,000. Margin of safety = Total sales – Besales Given MOS = 2,40,000 which is 40% of sales Therefore, Total Sales (100%) = ? TOTAL Sales = Rs. 6,00,000 Therefore BES = Total Sales – MOS = 6,00,000 – 2,40,000 = Rs. 3,60,000

48. Amount of profit on sales of ` 9,00,000 . Given PV Ratio = 30% P V Ratio =( Contribution/Sales )* 100 there for Contribution = Sales * PV Ratio = 6,00,000 * .30 = 1,80,000 We have already found that BE Sales = 3,60,000 Therefore BE Sales = FC/PV Ratio FC = 1,08,000 Now, Desired Sales =( FC + Profit)/PV Ratio 9,00,000= (1,08,000+ P)/.30 Profit = 1,62,000

49. A company has fixed cost Rs. 1,00,000 and Sales 2,50,000 with Profits at 60,000 Calculate the MO Safety for Profit of Rs. 1,00,000 Also find the sales volume if in the subsequent period the company is expected to suffer a loss of 30,000 MOS = Total Sales – Break even Sales BE Sales =FC/PV Ratio PV Ratio = 1,60,000/2,50,000 = 64% BE Sales = 1,00,000/.64 = Rs. 1,56,250 Total Sales = (1,00,000+1,00,000)/.64 = Rs. 3,12,500 MOS = 3,12,500 – 1,56,250 = 1,56,250 Contribution = Profit+ FC = 60,000 + 1,00,000 = 1,60,000

50. Sales volume if in the subsequent period the company is expected to suffer a loss of 30,000 Sales = (FC + Profit )/PV Ratio = (1,00,000 – 30,000)/.64 = Rs. 1,09,375

51. Product P has a PV ratio of 25%. Fixed Operating costs directly attributable to product P during the quarter 1 of the financial year is Rs, 2,50,000. Calculate the sales required to earn a quarterly profit of Rs. 80,000. Sales = (2,50,000 + 80,000)/.25 = 13,20,000