FinancialandManagementAccounting

Unit13

Unit13

MarginalCostingandBreakEvenAnalysis

Structure
13.1

Introduction
Objectives

13.2

Concept
SelfAssessmentQuestions1

13.3

Fixedcost
SelfAssessmentQuestions2

13.4

VariableCost
SelfAssessmentQuestions3

13.5

Marginalcost

13.6

CVPanalysis
SelfAssessmentQuestions4

13.7

BreakEvenChart
SelfAssessmentQuestions5

13.8

BreakEvenAnalysis
SelfAssessmentQuestions6

13.9

BreakEvenPoint
SelfAssessmentQuestions7

13.10 Contributionmargin
SelfAssessmentQuestions 8
13.11 Equationapproach
SelfAssessmentQuestions9
13.12 Targetprofit
SelfAssessmentQuestions10
13.13 Marginofsafety
SelfAssessmentQuestions11
13.14 Application
SelfAssessmentQuestions12
13.15 Limitation
SelfAssessmentQuestions13
13.16 Usefulequation

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SelfAssessmentQuestions14
TerminalQuestions
AnswertoSAQsandTQs

13.1Introduction
Informationisacommodity.Itcanbepurchased,producedandconsumed.Itcanbeofhighor
lowquality,timelyorlate,appropriateforitsintendeduseorutterlyirrelevantlikeallothergoods
and services. Information entails both costs and benefits. While costs refer to other cost of
purchase, cost of compensation, cost of operating computers, cost of time spent by the
informationusers to read,understandand utilize the information,the benefits includeimproved
decisions,moreeffectiveplanning,andgreaterefficiencyofoperationsatlowercostsandbetter
directionandcontrolofoperations.

LearningObjectives:
Afterstudyingthisunit,youshouldbeabletounderstandthefollowing
1. Understandtheconceptofmarginalcost.
2. Distinguishbetweenfixedcost,VariablecostandMarginalCost.
3. Familiarizewithbreakevenchart,breakevenanalysisandbreakevenpoint.
4. Understandthecontributionmarginalapproach,equationapproach,targetprofit
andmarginofsafety.
5. Practicetheconceptsinreallifesituations.

13.2.ConceptOfMarginalCost
AccordingtoC.I.M.A.London,MarginalCostmeanstheamountatanygivenvolumeofoutput
bywhichaggregatecostsarechangedifthevolumeofoutputisincreasedordecreasedbyone
unit. Thus,marginalcostistheamountbywhichtotalcostchangeswhenthereisachangein
outputbyoneunit.Marginalcostperunitremainsunchangedirrespectiveofthelevelofactivity
oroutput.ItisalsoknownasVariableCost.Marginalcostisthesumtotalofdirectmaterialcost,
directlaborcost,variabledirectexpensesand allvariableoverheads.Themarginalcostisthe
sameasthevariablecost.
SelfAssessmentQuestions1
1. Marginalcostissumtotalof________.

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13.3FixedCost
Itinvolvesthewayacostchangesinrelationtochangesintheactivityofanorganization.The
activityreferstoameasureoftheorganizationsoutputofproductsandservicesexamplenumber
ofcontactclassesconducted,numberofstudentspassedinMBA,numberofcarsmanufactured
byanAutomobileindustry,numberofmealsservedbyahotel.Theactivitiesthatcausecoststo
be incurred are called Cost Drivers. A fixed cost remains unchanged in total as the level of
activity(costdrivers)varies.Ifactivityincreasesordecreasessayby20%,thetotalfixedcosts
remain the same e.g. depreciation, property tax, rent to landlord. But fixed costs per unit will
change.
SelfAssessmentQuestions2
1. Fixedcostremainsconstant_________.
2. Fixedcostvarieswith______________.
3. Variablecostremainsconstantwith____________.

13.4VariableCost
A variable cost changes in total in direct proportion to a change in the level ofactivity or cost
driver. Ifactivity increases,say by 20%, totalvariable cost alsoincreases by 20 %. The total
variablecostincreasesproportionatelywithactivity.Variablecostfixedperunitbutvariesintotal.
SelfAssessmentQuestions3
1. Variablecostvarieswith_______________.
2. MCisextracostincurred________________.

13.5MarginalCost
It is extra cost incurrent when one more unit is produced. It typically differs across different
rangesofproductionquantitiesbecausetheefficiencyoftheproductionprocesschanges.The
marginal cost of producing a unit declines as output increases. It is much more efficient to
producemorethantomakeonlyone.

13.6CostVolumeProfit(CVP)Analysis
Thistechniquesummarizestheeffectsofchangesinanorganizationsvolumeofactivityonits
costs, revenue and profit. CVP analysis can be extended to cover the effects on profit of
changes in selling prices, service fees, costs, incometax rates and the organizations mix of
productsorservices.Itprovidesmanagementwithacomprehensiveoverviewoftheeffectson
revenueandcostsofallkindsofshortrunfinancialchanges
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Although, the word profit appears in the term, CVP analysis is not confined to profit seeking
enterprises.ManagersinnonprofitorganizationsalsoroutinelyuseCVPanalysistoexaminethe
effectsofactivityandothershortrunchangesonrevenueandcosts.Itisbeingusedasaregular
organizational tool. . In CVP analysis, it is necessary that expenses should be categorized
accordingtotheircostbehaviorthatisfixedorvariable.
SelfAssessmentQuestions4
1. CVPreferstochangein________________.
2. CVPprovides_________________.
3. CVPisnot______________concept.
4. CVPfocuseson________________cost.

13.7BreakEvenChart
It is a graphic or visual presentation of the relationship between costs, volume and profit. It
indicates the point of production at which there is neither profit nor loss. It also indicates the
estimated profit or loss at different levels of production. While constructing the chart, the
followingassumptionisnormallyconsidered.
a) Costsareclassifiedintofixedandvariablecosts
b) Fixedcostsshallremainfixedduringtherelevantvolumerangeofgraph.
c) Variablecostperunitwillremainconstantduringtherelevantvolumerangeofgraph
d) Sellingpriceperunitwillremainconstant
e) Salesmixremainsconstant.
f) Productionandsalesvolumeareequal
g) Thereexistsalinearrelationshipbetweencostsandrevenue.
h) Linearrelationshipisindicatedbywayofstraightline.
SelfAssessmentQuestions5
1. BEPchartis______________.
2. Itsrelationisbetween________________.
3. Itindicatestheestimated____________.

13.8BreakEvenAnalysis
Itisanextensionoforevenpartofmarginalcosting.Itisatechniqueofstudyingcostvolume
profitrelationship.Basically,thebreakevenanalysisisaimedatmeasuringthevariationsofcost

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withvolume.Itisasimplemethodofpresentingtheeffectofchangesinvolumeonprofits.Itis
alsoknownasCVPanalysis.Thevariousassumptionsare:
a) Allcostscanbeclassifiedintofixedandvariable
b) Salesmixwillremainconstant.
c) Therewillbenochangeingeneralpricelevel
d) Thestateoftechnology,Methodsofproductionandefficiencyremainunchanged.
e) Costsandrevenuesareinfluencedonlybyvolume
f) Costandrevenuesarelinear.
g) Stocksarevaluedatmarginalcost
h) Unitproducedandsoldaresame.
SelfAssessmentQuestions6
1. BEPstudies____________________relationship.

13.9BreakEvenPoint
BEPisthevolumeofactivity wheretheorganizationsrevenuesandexpensesareequal.Ata
particularamountofsales,theorganizationshavenoprofitorloss:itnormallybreakseven.
SelfAssessmentQuestions7
1. BEPisa______________________.
Example
DRsells8,000pensatRs.16perpen.ThevariableexpensesamounttoRs.10perpen.The
totalfixedexpensesareRs.48,000.PrepareanIncomestatement.
Solution
No.ofpensproduced8,000
No.ofpenssold

8,000

UnitsellingpriceperpenRs.16
UnitvariablecostperpenRs.10
SalesRevenue(Quantitysoldxunitsellingprice)
8000 xRs.161,28,000

LessVariableCost(8000xRs.10)(80,000)
Less:Fixedexpenses

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ProfitorLossZero

Notethattheincomestatementhighlightsthedistinctionbetweenvariableandfixedexpenses.

13.10ContributionMarginApproach
The contribution margin approach refers to the total sales revenue minus the total variable
expenses. This is the amount of revenue that is available to contribute to covering fixed
expensesafterallvariableexpenseshavebeencoveredorrecovered.
DRs firm will break even when the organizations revenue from pen sales is equal to its
expenses.HowmanypensmustbesoldduringonemonthforDRtobreakeven?
EachpensellsforRs.16,butRs.10ofthisisusedtocoverthevariableexpenseperpen.This
leaveRs...6perpentocontributetocoveringthefixedexpensesofRs.48,000.Whenenough
penshavebeensoldinonemonthsothattheseRs.6contributionsperpenadduptoRs.48,000,
theorganizationwillbreakevenforthemonth.Thebreakevencanbecomputedasfollows:
BreakeveninFixedExpenses
Units=__________________________________________________
Contributionofeachpentowardscoveringfixedexpenses
Rs.48,000/Rs.6or8,000pens
The Rs.6 amount that remains of each pens price after the variable expenses are covered is
called the Unit contribution margin. The general formula for computing the break even sales
volumeinunitsis:
BEP(inunits):Fixedexpenses/unitcontributionmargin
Sometimes,themanagementprefersthattheBEPbeexpressedinsalesrupeesratherthanunit.
Theformulais:
BEPinRupees:Fixedexpenses/Contributionsalesratio
TheContributionSalesRatioispopularlyknownasMarginalContributionSalesRatioMCSR.
Itstraditionalnameis:P/VRatio.
Note: KindlyavoidusingthetermP/VRatioandonlyusethemodernconceptMCSR
MCSR=Contribution/Salesx100
WhereContribution=Salesvalueminusvariableexpenses
SelfAssessmentQuestions8
1. Contributionmarginis_______________.

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2. BEPinunitsis_________________.
3. BEPinrupeesis___________________.
4. Contributionis___________.

13.11EquationApproach
Thisapproachisbasedontheprofitequation.Incomeorprofitisequaltosalesrevenueminus
expenses.Ifexpensesareseparatedintovariableandfixedexpenses,theessenceofincomeor
profitstatementiscapturedbythefollowingequation:
SalesminusVariableCost= FixedCost+Profit
SV=F+P
The contribution margin and equation approaches are two equivalent techniques are two
equivalent techniques for finding g the BEP. Both the methods reach the same conclusion,
hencepersonalpreferencedictateswhichapproachshouldbeused.
SelfAssessmentQuestions9
1. Equationapproachisbasedon____________.
2. SalesVC=_______________
3. SV=_________
4. SV=C_________________.
5. C=_______________.
6. C_______=P.

13.12TargetProfit
Based on the experiences gained, an organization may intend to increase the production and
sales. When an organization was to be on its optimum level, a direction will be provided to
achieve the maximum level. In this connection, if one intends to increase the current year
productiontohigherlevels,novariableexpenseswouldbeincurred.Atargetnetprofitorincome
may be decided in advance. To achieve this profit, efforts will be made to effect sales. The
problem of computing thevolume ofsales required toearna particular targetnetprofitisvery
similar to the problem of finding the break even point. After all, the break even point is the
numberofunitsalesrequiredtoearnatargetnetprofitofzero.Thetargetnetprofitisknownas
desiredprofit.Theformulais:

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Number ofunits tobesold:Fixedexpenses+DesiredorTargetprofit/Contributionper

unit
Example: Calculatesalesinunitsandinrupees:Unitsproduced60,000.Sellingpriceperunit
Rs.15.ProfitstobeearnedisRs.87,500.
Solution: Sales required in units : Fixed expenses + target profit / contribution per unit or
1,50,000+87,500/15 10or47,500unitsorRs.47,500xRs.15orRs.7,12,500.
SelfAssessmentQuestions10
1. Numberofunitstobesoldis_________.
2. Desiredprofitisalsoknownas____________.
3. Atargetprofitisset____________.

13.13MarginOfSafety
Thesafetymarginofanenterpriseisthe/differencebetweenthebudgetedsalesrevenueandthe
breakevensalesrevenue.Thesafetymargingivesmanagementafeelforhowcloseprojected
operationsaretotheorganizationsbreakevenpoint.Theformulais:
MOS=Profit/MCSR
Example: CalculateBEPandMOS:
Sales at present50,000units perannum. Selling priceRs.6per unit,Prime cost Rs.3perunit.
VariableoverheadsRe.1perunit.FixedcostRs.75,000perannum.
Solution: BEP=Fixedcost/(SPVC)perunitor75,000/64or75,000/2or37,500units.
BEPinrupees:BEPinunitsxsellingpriceperunitor37,500xRs.6orRs.2,25,000
MOS:ActualSalesBEPSalesor(50,000x6)2,25,000orRs.75,000
SelfAssessmentQuestions11
1. MOSis________________
2. MOSiscalculatedas_______________.

13.14ApplicationsOfMarginalCosts
The marginal costing helps the management in taking many policy decisions. The vital areas
wheretheseconceptsareapplieddirectlyareasfollows:
Level of activity planning:

Normally, the managements will consider different levels of

productionorsellingactivitiestodecideoptimumlevelofactivity.Suchperiodicexerciseshallput

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theorganizationintherighttracttoachieveitsgoal.Sincetheoptimumlevelofactivityresultsin
themaximumcontributionperunit,theplanningcanbecomeaperfectexecutiontool.
Alternativemethodsofproduction: Withthehelpofmarginalcostingtechniques,itspossible
to undertake decision about the alternate methods of production. All the decisions should be
focusedatthegreatercontributionsothatprofitcanbemaintainedatabalancedlevel.
Makeorbuydecision: Dependinguponthesituationalambience,themanagementcanhavea
blueprintonavitaldecision.Managementcanthinkofoutsourcingtheproductionactivitiesorto
undertakeitwithinitspurview.Basedonthecomparativestatementofcostofmanufacturewith
thepurchaseprice,decisionscanbetaken.
Fixation ofSellingPrice: While pricing a product,the marginal costing techniquescan come
handy. While fixing a price for a product, it is prudent to take into account the recovery of
marginalcostinadditiontogetareasonablecontributiontocoverfixedoverheads.Pricingwillbe
ateaseoncethemarginalcostandoverallprofitabilityoftheconcernareknown.
Selectionofoptimumsalesmix:Theproductmixplaysanimportantrolewhenafirmproduces
more than oneproduct. The mainfocus willonprofit maximization. With thehelp of marginal
costing techniques, it is possible to decide the best product mix which will result in maximum
profitstothefirm.
New Product introduction: When a firm intends to diversify its activities or to expand its
existing markets, with the help of marginal costing techniques. By fixing the time horizon to
recoverthefixedcostsandprofit,decisionscanbetakenfortheintroductionofnewproducts.
Balancing of profits: As the economic trends gets changed on account of government fiscal
policiesand regulations, competitionat theregional,national,andinternationallevels, marginal
costingtechniquescanaidtobringoutfactswithregardtomaintainingadesiredlevelofprofits.
Finalbalancingdecisions: Ifthesalesoftheproductwerenotencouragingtocoverthefixed
costs, it is quite natural that the firm may decide about its continuance. This may lead to
dovetailingorcompletelyclosingdowntheoperations.Marginalcostinghelpsthemanagement
totakeasounddecision.
SelfAssessmentQuestions12
1. Theapplicationisas_______________.

13.15LimitationsOfMarginalCosting
Therearecertainlimitationswhichcanbedescribedasfollows:
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Suitability: Thetechniquesofmarginalcostingcannotbeappliedtoalltheconcerns.Whena
concern needs to carry large stocks by way of workinprogress, the technique becomes
redundantInadditionthemarginalcostingtechniquesarenotsuitabletoindustriesworkingon
contractbasis.
Inventory valuation difficulties: Since the work in progress and the closing inventories are
valued at marginal cost basis, it will not be a sound decision from the Balance Sheet point of
view.Themainfocusonthetrueandfairvalueconceptgetsdilutedandtheverypurposeof
exhibitingthefinancialpositionwillgetdefeated.
Segregationofcosts:Thoughthemarginalcostingprinciplescallforthedifferentiationofcosts
into fixed and variable, in actual practice it becomes difficult to classify them precisely. Many
overheads whichareappear to befixedand variable may notexactly align atvariouslevels of
production. There is no logical method to segregate semivariable expenses into fixed and
variable.
Timefactor: Themarginalcostingignoresthetimefactorwhichisveryimportantforanycosting
purposes. Ignoring the time would naturally relate to unreliable and incomplete basis for
comparingtwoalternativejobs.
Salesemphasis: Marginalcostingprinciplesarebasicallyasalesorientedconcept.Whilethe
sellingfunctiongetstheprominence,otherfunctionsarenotgivenequalweightage.Thiswould
beamajorsetback.
SelfAssessmentQuestions13
1. Limitationinclude________________.

13.16UsefulEquationsOfMarginalCosting
Someoftheusefulequationofmarginalcostingareasfollows:
Basicequation:SalesRevenueVariableExpenses=FixedExpenses+Profit
Otherderivationsareasfollows
SalesRevenueVariableExpensesFixedExpenses=Profit
SalesVariablecosts=Contribution
ContributionFixedcosts=Profit
SalesContribution=Variablecosts
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MarginalContributionSalesRatio(MCSR)=Contribution/Salesx100
MCSRalsocanbefoundout:Changeinprofit/changeinsalesx100
MCSRxSales=Contribution
Sales=Contribution/MCSR
Numberofunitstobesold=Fixedexpenses+DesiredProfit/Contributionperunit
Sales required to earn target net profit in Rupees : Fixed expenses + Profit / Marginal
contribution
BEPinunits=Fixedexpenses/MCSRcontributionperunit
BEPinRupees:BEPinunitsxSellingpriceperunitor
FixedcostsxTotalsales/TotalSales Variablecosts
MarginofSafety:TotalSalesBreakEvensalesOR
Profit/MCSRwhereProfit=SalesTotalCosts

SelfAssessmentQuestions14
1. BasicequationofM.Cis__________.
2. Profitis__________.
Problem1: Findthecontributionandprofitearned.SellingpriceperunitRs.25.Variablecost
perunitRs.20.FixedCostRs.3,,05,000.Output80,000units.
Solution: Contribution = Sales variable cost . Rs.25 Rs.20 or Rs.5 or 80,000 x 5 =
Rs.4,00,000
Profit=ContributionFixedCostor4,00,0003,05,000=Rs.95,000
Problem 2: Calculate the profit earned. Fixed cost Rs.5,00,000. Variable cost R.10 per unit.
SellingpriceRs.15perunit.Output150,000units
Solution: SV=F+Por(1,50,000x15)(1,50,000x20)=5,00,000+Profit
Profit=22,50,00015,00,0005,00,000=Rs.2,50,000
Problem3: Findthefixedcosts:SalesRs.2,00,000.VariableCostRs.40,000.ProfitRs.30,000
Solution: SV=F+Por2,00,00040,000=FixedCost+30,000
FixedCost=2,00,00040,00030,000=Rs.1,30,000
Problem 4: Calculate the variable cost : Sales Rs.1,50,000. Profit Rs.40,000. Fixed cost
Rs.30,000.Findtheamountofvariablecost.
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Solution: SV=F+Por1,50,000V=30,000+40,000or1,50,00030,00040,000=
Rs.80,000
Problem5: CalculateMCSRorP/VRatio:MarginalcostRs.24,000.SalesRs.60,000
Solution: Contribution:SalesMarginalCostor60,00024,000or36,000
MCSR=Contribution/Salesx100or36,000/60,000x100or60%
Problem6:Thesalesturnoverandprofitduringtwoperiodsareasunder:
Period1Period2
SalesRs.20,000Rs.30,000
ProfitRs.2,000Rs.4,000
CalculatetheMCSR.
Solution : MCSR = ChangeinProfit/ ChangeinSales x100 or4,000 2,00,000 / 30,000
20,000x100
2,000/4,000x100or20%

Problem7: Calculate:MCSR.TotalSalesTotalCosts
Yearending31st December200622,23,00019,83,600
Yearending31st December200724,51,00021,43,200
Solution: Profit = Total Sales Total Costsor For the year 2006 = 22,23,000 19,83,600 =
2,39,400
Fortheyear2007=24,51,00021,43,200=3,07,800
MCSR=Changeinprofit/changeinsalesx100or68,400/2,28,000x100or30%
Problem:8: CalculatethesellingpriceifmarginalcostisRs.2,400andMCSRis20%.
Solution: MCSR=20%,thereforethevariablecostis10020=80%
VariablecostgivenisRs.2,400:Therefore,Sellingpriceis24000/80%
OrRs.3,000.
Problem9 : Find, Contributionand MCSR. Variable costperunit Rs.40.Sellingpriceperunit
Rs.80.FixedexpensesRs.2,00,000.Output10,000units.
Solution: Contribution:Salesvariablecostsor(10,000xRs.80)(10,000xRs.40)
8,00,0004,00,000orRs.4,00,000.
MCSR=Contribution/MCSRor4,00,000/8,00,000x100or50%

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Problem 10. Calculate Breakeven point. Fixed costs Rs.80,000.Variable cost per unit Rs.4.
Sales Rs.2,00,000. The number of units involved coincides with expected volume of output.
EachunitsellsatRs.20.
Solution: BEPinunits:Fixedexpenses/contributionperunit
Contribution=SVorRs.20Rs.4orRs.16
Rs.80,000/Rs.16or5,000units.
Problem 11: Calculate the Break even point : Sales Rs.2,00,000. Fixed expenses Rs.50,000.
Variableexpenses.Rs.1,00,000.
Solution: Sincenoinformationaboutthenumberofunitsproducedandcostsperunitisgiven,
onlyBreakevenpointinvaluecanbeascertained.
BEPinRs.=FixedcostsxTotalsales/TotalSalesVariablecosts
50,000x2,00,000/2,00,0001,00,000orRs.1,00,000
Problem 12: Calculate MCSR and Break Even Point : Sales Rs.5,00,000. Fixed Costs
Rs.1,00,000.ProfitRs.1,50,000.
Solution: MCSR=Contribution/Sales
Contribution=FixedCosts+ProfitorRs.1,00,000+Rs.1,50,000=Rs.2,50,000
MCSR=2,50,000/5,00,000=50%
BEPinRs.=FixedCosts/MCSRor1,00,000/50%orRs.2,00,000.
Problem13:FindBEP.VariablecostperunitRs.12.SellingpriceperunitRs.20.Fixedexpenses
Rs.60,000.WhatwillbethesellingpriceperunitiftheBEPisbroughtdownto6000units?
Solution: BEPinunits:FC/CPUwhereCPUSV2012orRs.8,60,000/8or7,500units
7,500unitsxRs.20=Rs.1,50,000.
SellingpriceifBEPis6000units:FC/CPUorFC/(SPVP)perunitor60,000/(x12)
LetsellingpricebeRs.x
6,000=60,000/x12or6000(x12)=60,000orx=Rs.22onsimplification.
Problem14: CalculateMCSR.(2)ProfitwhensalesareRs.20,000(3)NewBEPifsellingprice
isreducedby20%.GivenFixedexpensesRs.4,000andBreakevenpointRs.10,000.
Solution: BasisBEPsales:BEPinvolume:FC/MCSR
Crossmultiplying,MCSR=FC/BEPSalesor40,000/10,000x100or40%.
ProfitCalculatethecontributionfirstwhereMCSR=C/Sales
40%x20,000=ContributionorRs8,000
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C=F+Por8,000=4,000+PorProfit=Rs.4,000.
NewBEPisSPisreducedby20%:LettheoriginalSPbeRs.x.Therefore,at20%reduction,
theRevisedSPwouldbecome20%ofxor.2x.HencetherevisedSPwouldbex0.2xor0.8x
NewcontributionisSVorx (60%ofx)=Cor0.8x0.6x=0.2x.SR=0.2x/0.8xor0.25
BEPinvolume=4,000/o.25orRs.16,000
Problem 15: Given fixed cost is Rs.8,000. Profit earned Rs.2,000 and BEP sales Rs.40,000.
Findtheactualsales.
Solution: MCSRisbasedonBEPsales:BEPsales=FC/MCSR=FC/BEPsalesor8,000/
40,000=0.2
Actualsales=FC+desiredprofit/MCSRor8,000+2,000/0.2orRs.50,000

TerminalQuestions:
1. Afactory is manufacturing sewing machines.Thevariable cost ofeachmachine is Rs.200
and each machine is sold for Rs.250. Fixed costs are Rs.12,000. Calculate the BEP for
output.
2. Calculate breakeven pointand marginof safety. Fixed cost Rs.1,60,000. Variable costper
unitRs.2andSellingpriceperunitRs.18.Alsocomputethemarginofsafetyifthecompany
isearningaprofitofRs.36,000.
3. Calculate the breakeven point and turnover required to earn a profit of Rs.3,600. Fixed
overheads Rs.1,80,000. Variable cost per unit Rs. Selling price Rs.20. If the company is
earningaprofitofRs.36,000,expressthemarginofsafetyavailabletoit.
4. Given variable cost Rs.6,00,000. Fixed cost Rs.3,00,000. Net profit Rs.1,00,000. Sales
Rs.10,00,000. Find (a) MCSR (b) BEP (c) Profit when sales amounted Rs.12,00,000 (d)
salesrequiredtoearnaprofitofRs.2,00,000.
5. Given:FixedcostsRs.4,000.BreakevensalesRs.20,000.ProfitRs.1,000.Sellingpriceper
unitRs.20.Calculate(a)salesandmarginalcostofsales(b)newbreakevenpointifselling
priceisreducedby10%.
6. FindthemarginofsafetyifprofitisRs.20,000andMCSRis40%.
7. Calculate Break even sales and margin of safety. Given Sales Rs.10,00,000.Fixed costs
Rs.3,00,000andProfitRs.2,00,000.
8. Given Sales Rs.20,000. Total Costs Rs.16,000 and Variable Costs Rs.12,000. Compute
Breakevensales,MarginofsafetyandsalestoearnaprofitofRs.4,000.

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AnswerSelfAssessmentQuestions
SelfAssessmentQuestions1
1. DMC,DLC,variableoverheads
SelfAssessmentQuestions2
1. Intotal.
2. Perunit.
3. Perunit
SelfAssessmentQuestions3
1. Total
2. Withonemoreunitofproduction.
SelfAssessmentQuestions4
1. Cost,revenueandprofits.
2. Comprehensive
3. Profitseeking
4. Categorizationof
SelfAssessmentQuestions5
1. Avisualpresentation
2. Cost,volumeandprofit.
3. Profitorloss
SelfAssessmentQuestions6
1. Cost,volume,profits.
SelfAssessmentQuestions7
1. Noprofit,noloss
SelfAssessmentQuestions8
1. SalesTVC
2. FC/unitcontributionmargin
3. FC/MCSR
4. SalesVC
SelfAssessmentQuestions9
1. Profitequation
2. FC+profit
3. F+P

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4. Contribution
5. F+P
6. FC
SelfAssessmentQuestions10
1. FC+DP/MCSR
2. Targetprofitinadvance.
SelfAssessmentQuestions11
1. DifferencebetweenBudgetBEPsales.
2. Profit/MCSR.
SelfAssessmentQuestions12
1. Activityplanning.
SelfAssessmentQuestions13
1. Suitability,segregationofcost.
SelfAssessmentQuestions14
1. SV=F+P
2. SVF

AnswerforTerminalQuestions
1. Contribution=SVor250200orRs.50:ThereforeBEP=FC/Contributionor12,000/
500or240units.
2. Contribution = S V = 18 2 = 16. BEP in units = Fixed costs / contribution per unit or
1,60,000/16or10,000units.
Marginofsafety=ActualSaleslessBreakevensales:
Theformulaforactualsalesis:fixedCost+Desiredprofit/contributionperunitor1,60,000
+36,000/16or12,250units.
Therefore,marginofsafetyis12,25010,000unitsor2,250units.
3. Contributionperunit=SVor202=18.BEPinUnits:FC/CPUor
1,80,000/18=10,000units.
Breakevensales:BEPinunitsxSellingprice=10,000xRs.20=Rs.2,00,000
TurnoverrequiredtoearnaprofitofRs.36,000

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TotalFixedoverheads+Profitdesired/CPU=1,80,000+36,000/18=12,000unitsorin
termsofrupeesunitsxselling[rice=12,000xRs.20=Rs.2,40,000.
Margin of safety = Actual sales Break even sales = Rs. 2,40,000 Rs.2,00,000 =
Rs.40,000orintermsofunits12,00010,000units=2,000units.
4. MCSR=Contribution/Salesx100=Contribution=SVorRs.4,00,000.
4,00,000/10,00,000x100or40%
Breakevenpoint=FC/MCSR=3,00,000/0.4=Rs.7,50,000
ProfitwhensalesamountedtoRs.12,00,000.Contribution40%Thereforetotalcontribution
12,00,000x40%=Rs.4,80,000LessfixedcostsRs.3,00,000=Rs.1,80,000,beingprofit.
SalestoearnaprofitofRs.2,00,000=FC+Desiredprofit/MCSRor3,00,000+2,00,000/
40%=Rs.12,50,000.
5. BEP=Fixedcosts/MCSR =20,000=4,000 /MCSRor MCSR=4,000/20,000x100=
20%
Contribution:FixedcostProfit=4,000+1,000=Rs.5,000.
MCSR=Contribution/Salesx100or20=5,000/Salesx100=Rs.25,000
Marginalcostofsales=SalesContributionor25,0005,000=Rs.20,000
(b)Ifsellingpriceisreducedby10%:Newsellingprice=202=Rs.18
Variablecost=Rs.16(2020%of20)=Rs.2
New MCSR = 2 /18 x 100. Therefore new break even sales = FC /SR or 4,000 / 100 or
Rs.36,000.
6. Marginofsafety=Profit/40%=Rs.50,000
7. MCSR=Contribution/sales=5,00,000/10,00,000=50%.
Breakevensales:Fixedcosts/MCSR=3,00,000/50%=Rs.6,00,000
Marginofsafety=Profit/MCSR=2,00,000/50%=Rs.4,00,000
8. Sales20,000,VariablecostRs.13,000,TotalCostRs.16,000.Therefore,Fixedcost=Total
costvariablecost=16,00012,000=Rs.4,000.Profit=ContributionFixedCost=8,000
4,000=4,000.MCSR=Contribution/sales=8,000/20,000=40%.BEPinunits:FC/
MCSR=4,000/40%=10,000.
Marginofsafety=Profit/MCSR=400/40%=10,000
Sales toearn a profit ofRs.4,000 = FC + Desired profit / MCSR =4,000 + 4,000/40 % =
Rs.20,000.

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