s.

2,

E,cans,I• \' d •
The following data Is supp te •
~ 40,000
Fixed cost.
Vatlable cost t 60,000
t 1,40,ooo
Sales
Salu/producl Ion 1,40,000 Units
1'h1W a b1eak-even ch1t1t.
5ot11t1on
I 1 111 I'll! ,,.,, bJNk rvcn chart b at f 10 ooo
... t'llcik rvl'n ,,on . , a11d 701111.

_
1111!
Thli 1~ \,Cllhl'
d h, thr followlnl) cakulat1ons :
iy
l'ixl'd cost x S,iles \
I ....,,, ..._
~

f BttU tvc11 point Cont1ibullon '

S V
_ ' 1,li0,000 '{ 60,000 ,. '{ 80,000
40,(l()(} ,c 1,ftQ,QQQ = f /Q,QQQ.
Sln);,t\•tm J)Oll\l - 80,000
Y~•!!ax~is~--------------
t,40,000

1,20,000

1,00,000
....
-
t,,

1/J
Gl
80,000
co
fl)
-0 70,000
C
al
60,000
ui
0
0

40,000 I
...,
8
'0
I)
)(
u:

N
0
0
t
g
~ ~ ~
o go
8 0 g O g
Volume of sales (units)
Fig, 5.5. Break-even Chart
Contribution Break-even Chart
ount of
This ts an alternate form of break-even chart and shows the amd flied cost ii
levels of output. In such charts variable cost is drawn fir st an leS une
the variable cost line. The space between total variable cost and ~ple.
This is now shown in Fig. 5.6 with the figures of the above e
 1.20.oo<>

1,00.000
~.::::-:_::
.. ...... ..-..
.·-.. ...
e:.,, ...................
-
::-.c::••··········
. .........
C, so,000 .. ::::::::::::::::::::
.,,__...•......•...••..•• .•.•.•
------- :: :: :: : iii iii! !!~ii ~
~~ :.Futed
'i 10.000· .·. ,~.c..
_:.,.,:: : '. ~:
-g., ···r ·····--··· cost ..•..•••.•
8
60,000
-==~~~~i~~~~]~ ~~~~~~ I~~~~~~~~~;~~;i~::=:=··
() .:::::::::,:::::.:::::: : :::::: · ·
········-· •··········· ....
···········--•--··-···-·· .
. :::::::::::::1::::::::::-
. ... ..... ..- .....
40,000 -
....... .. ...... . ....-.- . .. .. ..
·• ..

t•M~-
·············•· ······
················· •·
.. .. .. .. .......... ...... .. . .. .

20.000
..: -~tt
I
tI
I • X-axlll
0
§
§
~
l~ § § §
t ff .,0
VOU?'90!ules(in:3)
§
-~ ~
- I-
~ - 5.6. ConulbuUon Btt.u:•t'Vell Ch.art
alytkal Break-even Chart
This type of break-even c:hart can be constructed to show greater details by breaking down
1td and variable costs into sub-classifica:fons. fixed costs, for example, may be divided Into
ed ractor overhead and fixed administration, selling and distribution overhead. Similarly,
able costs may be classified into direct materials, direct labour, variable factor overheads,
able administrative, selling and distribution oveThe&ds. £·,en profit area may be subdivided
lcating appropriation of p1ofit to income tax, intHert and dividend payments, reserves, etc.
s type of break-even chart? p e a r as shown in 'Fig. 5.7.

~ ~FECt OF CHANGE IN tHE PROFIT FACTORS

...The break-even chatt can also st-o,-, the effect of change i n any of the following factors, which
u,ect profit :
l(r):~ ~ e in ftxed cost
Ch,,.! in ~ab\e cost
(II);:_~~ setting price
lbe --'\It" in sales YOlume.
latr~r~nt of_a business can be increased when there is (a) deaease ~n fixed cost, and/or (b)
rt. ftst t~ ~able cost , and/or (C') increase 'in selling price, ~d (d) increase In sales volwu.
114 thus ee, i.e., (a), (b) a."ld (c) factors Will ?lave the effect of lowering the breu-cwn point
I
111d Slcu:tirea_qng profit. The separate effect of each of these is shown in the following ~
ons:
 selling and dist. overheads
variable v::lrn,,

1,00,000
eE point

ct labour

~ Go,000-
111 Direct materials

Fixed adrn., selling and dist. overheads

l
20.000 Fixed factory overhead

20.000 40,000 60,000 80,000 1.00,000 1,20,000 1,40,000

Volume of sates (units)

Fig. s.7 Analytical Break-even Chart with Assumed Data

ntustration 5, 14 t 10 per unit

Fixed cost f 5,000 Variable cost 1,000 units
Selling price t' 20 per unit Sales volume
Draw a break-even chart and show the effect of the following :
(a) lOo/o decrease in fixed cost
(c) lOo/o increase in selling price m
(b) 10% decrease in variable cost
10% increase in sales volume.

Solution (!}'
(a) Effect of 10¾ decrease in fixed cost . ,,
. Al0'!. _decrease in fixed cost would amount to f 500 and would result in IO'fo 1J111111''
1s shown m Fig. 5.8
Calculations
Fixed
.. - -- cost
- lli •~ 5' ooo
- ,c t 20
Break-even point Contribution x se ·ng price • t 10
"' ' l0,000 or SOO units
New Fixed cost - ' 5,000 - 100/o - ' 4,500
New Break-even point .. t t4500 )( 20 "' ' 9,ooo or 450 units
10
Profit • Sales - Vanable
. cost - Fixed cost
 S.27

~
~
·"" •• f
f 70·""',it
10,000 ~
70,
5000. f 5,000
' 10 ooo . 4,500 • f !>,'>00
ooo - '
~pro

20.000 ·
Additional profit
,,,,,,,,
Ht.000
,,,,,,...
, . ,,.,,"' ~ New total cost line
::,i

.,,.,,
,,.,, ,,.,,

12,000
~New B.E. point

~ 8.000
0
0

New fixed cost line

200 400 600 800 1,000

Volume of output (units)

Fig. S.8 Break-even chart showing the effect of 100/o decrease in fixed cost

I) Effect of 10o/o decrease in variable cost

1 !0'{, decreaseIn variable cost would arnowtt to f 1,000 at the present level of output and it would
lilSt profit by 200/o. This is depicted on Fig. 5. 9.
lbtlons

!Uk-even point _ Fixed cost . . .

Contribution )( Selling pnce
New variable cost - f 10 - 10% f 9 per unit
New contribution f 20 - f 9 • t 11
1111
Breu.even Point _ t 5000 11
t 20 - t 9,091 (Approx.}
11
111 Profit • f
~ 20, 000 • r 9,ooo - " s.ooo • , 6,000.
!ff.ct of lO
10\ lnc:iease . '4 increase in stlling price
lbls fs shlll Selling p1ice would add f 2,000 to sales revenue and would increase the cwtent profit
own °n fig. 5.10 .
... sales fl
'-toii 9Ures • 20,000 + 100/o - f 22,000
~Ution per unit - 22 - 10 - " 12
 Addition.t
_,/
........ ~
16,00o ........
........
e ............✓"
......... New total
I 12,000
w B.E.
cost line

1 point
i
0
8,000

4,()()0
.
600 800 1,000
0 200 400
Volume of output (units)

Fig, s.9 Break-even chart showing of 10% decrease lin ,amble c0st•

Additional prom-.....-11~•1

20:000 New sales line

e'. 16,000
Cl)
G)
'ii New BE point
(/)

"g 12,000
«I
ii
0
0
'8e point

4,000

400 600 800

200
Volume of output (Units) j
,.._ s.10 Break-even chart showing the effect of 1<>'- iJICfease ill
 !,~ ,.
22 • , 9, 167 (Approx. )
;,tll pO lnl ,.;. - 12 _ 417 units (Approx .)
•..a~ oo
t 7,000 r, 000 -
ff' p~ \0 0 - '
f zz,oOO - ~n , al., volum•
--Iii " ., o,cr*••• uld Increa se profit by t 1000 (I.e., at the rat• of ccmtJll ■lloa fll,
,' '.:« of so le~ v.1tun,e v:'0 ates volume wtll have no effect on the btuk-8"11 potJtt. (Set ....
.a pr-- ~5t ,11 ~~t) 1nc1e.1se II\ s
I"" 111t'I 1()ll UJI I '
• -d IJI

Current prom - - ~ - - ! M ~---Newprallt

1s.oOO

12.000
:I
;; I
0
C) s.000 I

4,000 Current sales I New sales

I

0 200 400 600 800 1,000 1,100 -

Volume of output (Units)

Fig. 5.11 Break-even chart showing the effect of 100/o increase in sales volume

~ ons
I ' ~"' sales figure - 1100 units " , 20 _ , 22,000
lltw Variable cost - 1100 units " f 10 _, 11,000
Hew pJOfi t • 22000 - 11000 - 5000 _ , 6,000

?tiep ~
OFIT-VOLUME CHART
Iii Is rofit-volume ch . .
'-•/'alttrnative art or P:ofit graph portrays the profit and loss at different levels of sates
f....C1Jnstructed f presentation of t he facts illustrated in the break-even chart. SUch a chart
~ b . of P rom the same basic data from which a break-even chart can be drawn.
1- tono-i roflt-Volllllle Ch art .
Loa. ~g st eps sho
1·"""Ct• seat uld be taken to construct a profit-volume chart.
' 'l'his h:ri~~n~oti~ontal axis. The horizontal axlf in the profit-volume graph 1.pedi SI
a line, known as sales line, divides the graph inm two parts.
•
 The vertical axis shows fixed cost
vertical axl:- line on the left hand Yerticl( Uno~ :
led a scale •:below the sa_e~t hand vertical line, .... ~

:C ~
2, s;,t, are m~k: line on the ng ts are plotted for the given filed "°II
ibove the sa e and profit,. Pain I line which crosses the sales lhie •
J. Plot fixed :•:1:ected by a d1agona '
points are c
t ~ 20)
~ 1o)
t 5,000 . @
f;:: ;'~o.ooo ~~o";~~~o
Variable co St ~
(l10
O, .
units @
8,00o
8,000

6,000
6,000
s.ooo ~
.....
4,000 4.ooo t
Q.

2,000

b.--,--:;_::;f~~ 5,000
101000
15; ~oo~o~~2~0.~oo~o 0
sa,;s (~) •
Loss
Tl
ic
2,000
' -----------
r--Margin ot safety
- ,,ooo
Ill

C:
I
I
0
~ 5,000
--
~
6,000

8,000

Fig. 5.12. Profit-volume C~art

Cmcalatlons

Profit-Volume ratio
S- V
= - - •
20,000 -10,000
20,000
X 100 = 50%
5
Fixed cost f 5, 00O = ~ 10 ooo
Break-even point • p / v ratio = 50% '
Profits • S - F - V = 20,000 - 5,000 - 10,000 = ~ 5,000

- o1 1,ut..,.n Analysis . d below :

Some of the important uses of break-even analysis . are sum manse
1. It ltetp In detennlning the break-even point. . . d sired 10fi~ I
2. It ltetp In detenn1rung the selling price which Will 1ve the. pIOfi~ ~
3. It help in sa es volume to earn a desu
~- -~- ~pUl-
4. It help in determining the costs and revenue at different levels
5. It~ In ~ the most Profitable sales mix. UP8-
7
I. : ~ I n ~ C0111(1al'aive profitability of each P'.oduct dalkl
• lbldlhoea the effect of change in selUng price or of piice differen
1.g., Ille lllarktt and foreign market.
1111111' ~tA""r:::=ly$f_:_•
____________________
_ _l:,:.J::l
""",,,.,,.. . .
dies the impact of increase or decrease in fixed and variable costs on profits.
1. Jt st1l . the effect on ~rofits and break-even points of high proportion of variable colts
Jt studiesfiJCed cost and vice-versa.
p. tfith tow UH! ptofitabillty of various firms.
contPales •i
1o It 5
ii~ manage ment llccis on_-m~ldng, e.g., In make or buy dedslons, discontlnu111Ce of a
It helP . , a~cpta ucu of special Job, elc.
1l. _...rfuct 1Ille, •
piv- i detennining cash 1equnemenls at different levels of operati
on wtth the help of caah
,z. ~:S~e ;n rhartl
.i0f Brea~-;ve~ ~nalys is
ons break-even analysi s is an inva\~a~le tool of management, there ut some Undtatlons
~.t11ongh h'15 tt?chnique suffe1s. These \umtat ions of break-even analysi s arise from certain
•~~ch t which the analysi s is based and which are in effect, not true. Thus "breaJ
c..,,_
......u~.$b on d on a simplified model of a business which is unrealistic.,, It "mwt be applW
.\-(~
,,., ,s I'JS€ • •
gent disr;immation , w1'th a11 adequa t e grasp 01,F assumptions
•
underlying tlw feduu4W
t:~ ante ~~s practical avplications." The assump tions of break-e
ven analysi s have already been
":i ~""nga."'!di. now it is ::~~end
•
ed to stu d y t he unreat·1stic
· nature
of these assump tions.
~e assumption that ~_os t can be. clearly separa ted into fi_:ted and varl~ components
is r.ot possible to achieve accura tely 1n practic e, ttlereby resultin g in inaccu rate break-
tftll
a:ia.lysis. ...... "
The assumption that variabl e cost :e:e!:.J!..nit remain s cons ~~and that it gives
a straight
!be c..':a:t is also not~w ai~tR t~ In practic e, many of the variable costs do
not obsetve
this te.,dency. Most of the variabl e costs, no doubt, move in sympa thy with the volume
of
producto:1 but not necess arily in_ · ct roporti on to the volume.
. Silro1arly, the assump tion tha{!i xed cost re ains consta nt is also unreali stic. Fixed
co51S
z:e constant only within a limited e of output and tend to inc~ by a. su4ilen jump
when add.'tft)nal plant and rnachi n~ryis introdu ced. ~ ·

14,000
Cost line

-
;:; 12,000
Ql

~ 10,000
c:,
>
...
Ql

'0 8,000
r::
I'll
;;; 6,000 Fixed cost line
8
4,000

. 2,000
10,000 15,000

"9. 5
. 0
Production (units)
·13 . Break-even chart with more than one break-even1loint showing that cost and
sales lines in actual practice
cannot be represented by sbaight lines.
 5.32

v. The assumptio~ regar~ing:Selling prices rern~ning unch:~~ ~

true. Jn practice, sellmg p?ttes-tio ~ rema1A fixed aod _ '°"-e
Any increase in output can be sold only by effecting
would effect the sates tintt.
s. The assumption that only one> p1od11ct is being produced
a rectuctton ii""'~'
• in Dtt...." -

~"'I\~
Wlthanged is also not found In 1,ractice. The sdles of va I or that pr,... ,,
. d . r ous pr 0d "\!let
atways in p1cdetetlllllH' p_ropo1 t1on. ucu "'--r.
6. It bas.urned that ~roduclton at~d ~ales are ~nchroni~hls ~
fall shot~ of rr\lduc_tion 01 l\\ayl>e capabT'e of increase- to match ls not '"-h
a reduction m st.ill mg prices. Product101101/•
1. The ~rea.k•i?\tel\ ,malysis completely ignores the consideration 0 f ht
be an important facto, in the study of profit analysis. capltat t111p~
In sp.ite of tht.ise limitations, break even analysis is a very useful m
be used ~y keeping in mind its limitations because then alone the /nhage.rnent d"'b
~"-~ti· _, ec nlque " - ,
cu~ \~y. r:;;:;,;;::;:---;::-~;;:;;;;:-:-;:::=~~--- ...n~ ~
I SUMMARY OF FORMULAE AND ABBREVIATrois]
1. Contribution (C) .. Sales - V~able cost (S - V)
or (C) = Fixed cost + Profit (F + P)
or (C) = Fixed cost - Loss (P - L)
Thus S- V = F+ P
OI S-V = F-L
Al.so Contribution - Sales int x P/V ratio
o; Contribution = (Sales at BEP in~ x P/V ratio)+ Profit
o!' Contribution = (Sales at BEP in units x Contribution per unit) + Profit
o; Contribution = (Margin of Safety in~ x P/V ratio)+ Fixed cost
or Conttibution = (Margin of Safety in units x Cper unit) + Fixed cost
Profit
or Contribution = Margin of safety in%
z. Contribution/Sales ratio or Profit/Volume ratio (C/S or P/V ratio)
C
Contribution C S- V p/V ratio in ,. •- • 100
P/V ratio .. ----=-=--
Sales S S
. s
Change in contribution Change in profit
Also, P/V ratio .. Change in sales "' Change in sales

P/V ratio • Fixed cost x 100

B. E. Point in f
P/V tatio - Profit · " 100
Margin of safety in ~

P/V ratio • 100 - Variable cost as a% of sales

3. Break-even point (BEP)
BEP (in units) • Total fixed cost
Ci>ntribution per unit
.. -
F
C
 •

F F
•> ----:-
sEP (in ~ • p / V ratio • -
C IC S

BEP .. Actual sales - Margin of safety

to earn a given profit
of sa1e•
~tloP f + Profit
.. (in units) - c- (per unit) (in \') • P + Profit
P /V ratio
Difference in fixed cost
lJICllfference point • Difference in P/V ratio or contribution per unit
i r,-t tu (M/S) • Actual sales - Break-even point
In of s.ue~.,
-&

6. lfllV . Actual sales - BEP x

100
M/S ratio • Actual sales
OR
Marg in of safety
Margin of safety in % of sales • Actual sales x lOP
• 100 - B.E ..Sales in %
Profit
M/S = P / V ratio

Profit = Margin of safety x P/V ratio.

Profit = Actual sales x M/S ratio x P/V ratio.
B.E. Point
7. Break even sales in % ... - - - - x 100
, Total sales
or • 100 - Margin of safety in 0/o
L Profit• Sales - Total cost
;

or • • Sales - Variable cost - Fixed cost

or • Contribution - Fixed cost
or
l Pbctd • _Margm
. •
of safety in t x p/V ra_t!o
/
~t • Sales - Variable cost - Profit
or •C •
ontnbution - Profit

IO, ~lilt ~~:s

• Total cost - Variable cost
at B~~ t _x _P/V_
even Point {of alt products)
ratio , /

Total fi d
,. -....:.:: Xe cost of all the products
Overall P / V ratio .
-
S.34

I· PROBLEMS AND SOLUTI

OHsJ
Problen, 5.1
A. C",,mrim,• pr~,ctu,c, \lllglc product which sells for ~ 20 per Unit
and fb.Pd -1, ~1hcad for llrn Vt',11 i~ ~ 6, l0,000. • _ · Veriable
Cost~ t
Ki'Qlllrwi: • l1~
(c) Catculah' ~.,t~~ v.tluc neetll.'d to earn a profit of 1o••,o on sate
4
(b) C:atculatc ~.,le<> prkc pe1 unit to bring SEP down to 1 2
(t:) rat~ut.,tc m.ugin of s.lfety sales if profit is ~ 60~000. ' o,ooo ""its
•
Saluthn, ~
\.:' s.. :-•:,,st' No \1, units of sale ': x
,-,tal salt's · 20,. Variable cost 15x
Tctat sates ·1 Variable cost + Fixed cost + Profit
... 20.'° • lSX + 6,30,000 + 2x
.
20\ - 11:< = 6,30,000
X ~ 6,30,000/3 =
?:,.10,000 Units.
Sa,cS ,·alue = 2,10,000 units x t 20 = t 42,00,000
F ~ 6,30,000
(b} PrcSent B.E. Point = c = f 20-15 = 1,26,000 units

Required B.E. Point = 1,20,000 units.

F
SEP =
C
t 6,30,000
C
'f 6,30.000
Contribution or C = 1 , 2o,ooo units = < 5- 25
New selling price .. Variable cost + Contribution
= t 15 + 5.25 =~ 20.25 = t 20.25

(c) P/V ratio .. C - ~ - 25°/.,

S 20
. f f
Maigin o sa ety sales .. -
Profit 60,000 __ • 2 , 40,000
- - - - _;,..__ "
~
P/ V ratio 25%
~ :..----------------~5.J~S
5.% . data calculate the b1eak •even point.
~rot10W1n9
-,)JI"' .
~ tJae ·at pet unit
1
~ "' 111atell ' .a•
pi!fCI I bc,111 pet unit
PiJf'' a head (Total)
_.-,1 0ver
't ~.
10,00Q.
tv•· o\l'eJh ead
100."lo. on direct labour
ya1i,ble 11ce pet. unit
s,1u11g P
di<r,,unl
t,o, ,--
5%.,__./ ~ • I
nade · the net p1ofils, ii sales ate 10¾ above the break even point.
~ ,itltJll.\llll'
(B.Com., C.A. Int«)

Marginal Coat Statement

·•.:e , ~ 10 - 50/o discount)

!Jtl senm; JU.
l'utct matenal
ni,"Kt tat-ow
t).,uh!e Q\•e1 head
-'9.50
3.00
2.00
2.00
Vatiable cost
contnbution (~ 9.50 - 7.00) 7.00
2.50

~-even point ..
10,000
2.50
F
'
4,000
C units
•
U. Point (in ~) - 4,000 units @ t 10 ,
;.m : s-.. discount · - ~ 40,000
2,000
I!: sies \-alue at B.E. Point
~ '38,000
fl-.c sa!es are 10·% above B.E., Point
Sil!s; -<.ooo + 10% = 4,480. units'.
Ca:itri!r.ition (<.~00 units x t 2.50)
ill$ : fixed cost · · ~ 1i.ooo
~ 10,000
Profit ~ 1,000
~"iem 5~
1
~ ~ompany sold 10,000 units last year at a price of~ 500 each. The cost structure per wlit is

~terlats
l.cbour
Variable overheads
'
100 V
50"'
25 J
fixed overheads Variable coat 175

~ tO 0 Total cost ... - 200

375
'l be t 11111er10
"GIit Ito c1tan9: ! n, the price has to be :ar. Ass
reduced to t 425 for the coming
~ list Year. UI costs, find out how many .units shall be sold to ensure e
that there
U:.o~t of total
(B.Com. MO wne
tn
..
---~=--
S.36

(A}
Maleai.tl~
Ltbl'!ut
\'.uublt "Vl'lhuds
(B) Vui.lble cost
Contnhullon (A B)
l r.ss: Fb:l'd o,·eth<'ads

Contribution ~t new selling price - New SP - VC

• \' 425 - t 175 • ~ 250.

~ les to t.L.'l\ a desired profit • Fixed cost + Desired profit

Contribution per unit
~ to earn a profit of t 12,50,000 at reduced selling price

• 20,00,000 +12,50,000 • 13, 000 Onita

250
Thus If selling price is reduced to ? 425 per unit, then 13,000 radios wiU have to be sold 1.1 11
same PlOfiL
Vtrificatfon
New sales (13,000 " 425) • 55,25,000
Less; Variable cost (13,000 " 17S) s 22.75.000
Contn'bution • 32,50,000
LeJs: Fixed cost • 20,00,000
Profit • 11.2,50,000

Probt.m 5¥
<..>
The following data is given :
r
Se\Ung price 20 per unit
Variable manufacturing costs 11 per }ll'it
Vari.able selUng costs 3 per unit
Fixed factory overheads 5,40,000 per year
Fixed ulling costs 2,52,000 per •year •
You art required to compute :
(f) Breu-even point expreued In amow,t of sales In mpees;
(fl) Humber of WIits that must be sold to eam··a profit of f 60,000 per year. (B.COIII·• B~
(lff) How many units must be sold to earn a net Income of~ a t e s ?
 If
/,_,,_.
.,,JJ.IJII S V • ?O I 4 • 6 ., JO'tt
,r r Vr1tln • S 211' ?O •
!,, 40,
• BO¾
,..a~II J10ll'I •
R~, 7,!li',OJ2 • ' 26,40,000
• --- _10%
.l l l l',llll a p1ofil or 't 60,000
(~ be ~lllU l
""11 l'iXl'<l ~ l , dcsh~d _EJ~f~t • 7,92,000 + 60,000 • l,42,000 alta
• - conl1ibutlon per unit 6
• _ V • '.'0 14 f 6
_,.,,t)Oll • ~
~i;...- . be sole to earn 1O"'.,. profit • 'x'·
~t 1::11ts 10
~ ~pc~?es • s~lllng pnce >< units .. 20 x .
rt!il variable cost + Fixed cost + Profit
~1 51\es •
ZOX • 14X + 7,92,000 + 2X
,x ,. 7,92,000
7,92,000 + 4
X =

X • 1,98,000
1h!lS sales to earn a net income of 100/o on sales = J,98,000 untu.

!ll)llell5,5
-Elm the blanks for each of the following independent situations:
B C D E
A
Sflling price per unit~
ule cost as % of sales 60 ...
- so
-
20
75 75
- •-
4,000 - 6,000 5,000
lo. of wiits sold 10,000'..
- 25,000 50,000
Contribution t 20,obo. 80,000
filed cost , 12,00:0 - 1,20,000 10,000 -
~ht (Loss) t . - 20,000 30,000 - 15,000
(c.A. lntlr)

llllion
Sltuotton A
Profit • Contribution - Fixed cost
Su • 20,000 - 12,000 - 't 8,000
NPl>Ose selling price • x
0
• of units sold (S ,p• per •unit Variable cost per unit) • Contribution

10,000 (x-ix) ,,• ~ 20,0~0

..
·,

2
-x
5
-?2
1luis lellin . X "' f 5
9 puce per unit • f s
i,38

S1tuntion B - Conlllhutton l'iofil

fi,;rd cost
• R0,000 10,000 t ll0,000
• , llll,000 + t,000 1111lt s • t 70
Cont 11bu111,11 I'•11.
S.I', Cn11llih11llon pc, unit
\'11l:1b\r ('O \I a~ a % Ill ~illl?S. - S,I'.

x 100 • l!O'Y.

Si'tuaticn r.
t':entubutfoll . I' .i p • I /0.000 t 30,000 ~ l,'10,000

P/\' tallo 100% /~OJ. 21J%

c~nt11buli\m lll'l \11\11 ~ .'0 " 2'i0/o { ~
Tot,,\ cont 1illullon Rs 1,50, 000
Rs - .. 30,000 units
Conttibulion pe1 unit 5

Siti:ctfo:1 D
Pt~flt. C- f \ 25,000 - 10,000 • t 15 ,000
P/\l ntio • 10011:'o - 750/o .. 250/o

F+P 25,000
Sales - p V ratio = ZS¾ • ~ 1,00,000

Selling price per Wtit • f 1,00,000 + 6000 units c ~ 16.67

Situation E
Fixed cost• C- P • 50,000 - 15,000: ~ 35,000

Total Sales s S -
£- 50,000
l,SO,OOO
X 100
• 33.33 Vo
o

Variable cost as a¾ of Sales • 100% - 33 .33% s 66.67%

Pl'oblem 5.6
(a) A company has fixed expenses of ~ 90,000 with sales at f 3,00,000 and a profit of'~«
ta\culate the Profit/Volume ratio. If in the next period the company suffere,d a loss of? 30,000. ~
the sales volume.
(b) What is the margin of safety for a profit of ~ 60,000 in (a) above? (CA. ~
Solution
(o) C011tribut1on • fixed cost + Profit - ~ 90,000 ~ 60,000 .. f 1,50,000

P/V ratio • ~ " 100 ~ 1,50,000 >c 10 • 50¾

3,00,000
In the next period Contribution • Fixed cost Loss " ~ 90,000 - 30,000 " ' 60,000
P/V ral!o • ~ - SO"f,
S.i\es
60,000
SI
a cs • -
11\us at sa\e5 ol t 1 70
~o,.
ooo I
• t 1 20 ooo ,,
• • • I me WIil be a loss of t 30,000.
 0 tysis

P1ofit 60 000
• • - f 1,20,000
of saCetY • P/V , atio <,O"/o
,.ar91J1 I . I
(t) n1e,1k-t'Vl'n poll\
1 5.ttes - ) 90
01
·•
'"'
5- ~( I~~<'
.- d _£Cl~ l- - 3,00,000 • ~ ) - , · 1,20,000.
( 50%
• 3,00.o?O · p /V 1aUO

~~ '1 P/V ratio of 40o/o. By what percentage must sales be Increased to off-set:
::;.,,--:: . -"'1\1' h.tS a .
~ Ct,111~1\} . n in selling pnce.
>'It ,educno . (B. Com. Horu. Delhi)
. n 111 selling price
.,
:I iv
, ,.,-
1•
~-- ieducuo

,.ati~ Sales • (l00 units @ t 1 each) t 100

s::;;.,ost - Less : contribution (40% of s·ates) 40
Variable cost 60
· dnced by 10%, then-
11ien selling price 1s re
t 90
Ne1'l Sales 60
ress : variable cost 30
New contn'bution
Volume of sales to maintain the same contribution will be
40
,,.
Contibution " New sales = x 90 = f 120
• New contribution 30
Thus if the selling price is reduced by 10%, the volume of sales will have to be increased by 20%, i.e.,
11 f 100 to f 120.
(b) If Selling price is reduced by 20%
New sales ~ 80
Le.ss: Variable cost f 60
.New contribution ? 20

In order to maintain the same contribution, the volume of sales should be:
~o
20 X 80 * ~ 160
lhui if .sell . .
~ - m n c e 1s reduced by 200/o, the sales will have to be increased by 60%.

'he V3?iabTi')t../
tt: e cost structure of a product manufactured by a company during the current year Is as

r per unit
Material 120
Labour 30
e~ ~~~~ 12
, •o•509lakhs
Price Iler 1. .
res un_ t ts ~ 270 and the fixed cost and sales during the cunent Ye.I! are , 14 1akhs
~~ . -
s.40 '-.
ear the direct workers will be entitled to a ~
l)Uring the forthcomindgt:e ~aterial cost, variable overhead and fixed ovwahge Iner.,,•.
. . of the year an er ead ar...,.. Of
begmnlll95,:, and 3cy., respectively. e ~O\.,.
bJ 7.5%, II wing are required to be computed : . ~:,
O
'111e fo • in the fotthcoming year if the current P/V ratio Is to b
(a) New sale puce . e ll!i•·
f •ts that would require to be sold du11ng the forthcoming y 111~
{b) Number or unotfit in the cuuent year, assuming that selling price per unearl, so as to .i...
iIDOtlnt O pl . t "ill llo{~~~
(J.c .,,'"..'
Solutioa · :4.)
Marginal Cost Statement ,

~
Current year Increase
r
120 7.50/o r
Matenal 30 100/o 129
labcUI 33
12 5%
Variable omhead

-
ll.£0
::---.;
162
Vmable cost per unit 174~
270
Selling price
108
Contribution (S - V)
C 108
P/V ntio • x 100 • 270 X 100 m 40%
5
(a) Jew seltiag price for the forthcoming year-The current year's marginal cost is 60\ ell
selling price oft 270. In order to maintain the current P/~ ratio of 40o/ojn the forthcomillg,a
the new selling price should be :
174.60 t 291
60"fo
(b) Saw volume in. the forthcoming year r
Profit in the current year: 16.11.1
Contribution (40% of , 40.50 lakhs)
~
Less : Fixed cost
~
Profit
Forthcoming year:
Profit required 2,20,000
Add: Fixed cost (14,00,000 + 30/,) 14,42,000
Desired contribution 16,62,000
Contribution per unit • 270 - 174.60 • 95.40

..olume of sales requi1ed = 16,62,000

11
_ = f 17,421 units (Approx).
95 40

fla~m 5.9 ',oo,

ABC Ltd. manufatures three p1oducts P, aand R. The unit selling prices of these prodUcts areJdOI'.!
and, 50 1espectively. The conespondlng unit variable costs are, so,, 40 and f 20. nie propO IJ f,e
tltJ-wlse) In which these products are lllal\ufactured and sold are 200/o. 300/o and soat. respective ·
flied costs are, 14,80,000.
Glnll the aboft lnfonnation, you are requlrecl to work out the over-all break-even q_UII'~
pridact-wlse break-up of such quantity. .. (J.CDW'-
 SAi

~
,

f biealc•even analysis H that the company produces only one product ad a ase ot
~ ~pt1on 5 ; piodurt mix does not change. In the present problna, three pretctr P, Q.-d I ae
,t ~ c""'ra"~~ iota! conulbutlon from the three producu ts taken as a contr1budola of OM o■, u
~ F.~1o1
,..- ....,.c1urtd, t .
_,_.111us: cost • Contribution
,-"· -•.s - ~ariab1e 50 - f 50
~ _' 100 -
, - ' 80 - 40 - ' 40
a • ' so - 20 - ' JO
I ·on per cornposit~unU.:(9·
tnbUll ,__
-
,~!--- ; so " 20 "4 - 10
~ - ,o ~ 30.,. - 12

R
- 30 " 50 "'· - 15
t 37
Fixed cost == 14, 80,000
pl! brt.k•even points Contribution 37 • 40,000 llllits
Stal•eYell point of p = 40,000 >< 20"/o = 8,000 uniU
area.t-even point of Q = 40,000 " 30% = 12,000 units
Brak-even point of R = 40,000 " socr. = 20,000 uniu

1i1ms.10
11m PlaStic company makes plastic buckets. An analysis of their accounting rew-eals:
amble cost per bucket f 20
IRd cost , 50,000 for the year
apacitJ 2,000 buckets per year
llling price per bucket ~ 70
ff!lired :
ij Find the break-even point.
0 Find the number of buckets to be sold to get a profit of ~ 30,000.
~ If the company can manufact)lre 600, buckets m~re per year -with an ~tiorw fixed cost of ,
2,000, what should be the selling price to maintain the profit per bucket as at (ii} abaft.
(B.Com. Hons. .Dllti)
--
•tribution • Seltin9 .._,
ruce - Variable cost
•t 70 f 20 • t 50 per bucket

I 1.t Polat (t1nita} .. Fixed cost = t' 50,000 = l, 000 Wlits

• Contribution per wtit t' 50

) a..u,td ~••• _~Fixed cost+ Desired profit t 50,000 + 30,000

C ..:....::~;_:_:___:...;..:.;_ • 1,600 .... .
'r111t ontribution per unit • t 50
QS.... ,., btadtet. f 30,000 + 1600 buckets • t 11.75
t ~ CaJl • V.C. + F.C. + Profit -
(Z.6Do • SP) now Produce 2,000 + 600 - 2,600 buckets
• (2,600 X ' 20} + ' 52,000 + (2,600 IC 18.75)
J

S.42
• 52,Q0Q ~- !,j>,QQQ I 1,8,750 • t 1,52,7SQ
t 1,rl7,/~0
Selling p!ICC pct m\ll ( SP) • 2,600 buckets "'
''>R.Jr;

v,rifiratlon
l\u 111111 '
Saltls ',8. ,,, Total t
lW \a1table co~t 70.00 1,s2,1so
Cont11but1011 38.!S 52,0Qo
20.00 1,oo,1si,
less · Fi'.'.'td co,t
Pl'oht 18.7!>
~
~
,. Band care tht<'C simila1 1ilanls unde1 the same management who w
~ , . d • ant the111
pcraunr. The deta1h a1e a~ un ct . to ht ller9ie
A B
tapanty opented 100% 70¾ C
~ . ~ so,.

Tmnovez
(in lakhs)
300
200
(in lakhs)
280
(In '
labs]
150
\'alia.ble cost 210
7S
Fine ccst 70 50 62
fmd out:
(i} the capacity of the merged plant for break-even. -t_\~~ ~
{1i) the profit at 750/o capacity of the merged plant. '-'\ ◄ o' {(}
(iii) the tuinovet from the merged plant to give a profit of '{ 28 lak.hs. Pt,./.;, (C4
Solution
statement of Cost and Turnover of the Three Plants at 10011/o capacity.
(FffUllll

Plants
C
H11g,iA
A B
Capacity 100% 100% 100'Yo -
100'
1.111
Turnover 300 400 300 611
Le.u: Variable cost 200 300 150

Contribution 100 100 150

62
"'
!ti
Fixed cost 70 50

(i) P/V ratio of merged plant

Contribution of merged plant <' 350 lakhs

Turnover of merged plant x 100 = - - - - x 100 = 350/o
1,000 lakhs

Break-even point Fixed cost t 182 lakllS :: t 520 . . -

• P/V Ratio • 35"fo
 SM
,,,.,,, '""lyfi'
~ ,gl'.d 1,i;int 1,1 lur.ak evrn 11111111
n1r
If t!r 11111 R, •,;,o lllkh,
~ •' J,r"' k 11 11111111 x 100 • R, , 1,000 l,1khs
t""
~ Jlt1IJlc,\'l'I
fol" .adlV of n111r9•rl p l.1nt
7!1~ , ...,
_.Ill ,t
rr-·
siin ,1
,~'lo ra1•,1r7!,,. y
Al
11
(,11i.1c11y
t / ',O l,1klu ,
- /'10 " I',% - ' 7<,7,', lakhs
11,~uun
11 • ~ t RJ l,1kh~
end cCl51 L J!l2 • ~ 80.t., 1.ikhs
t 262-~
rrel1
1 • rroht of t 2 8 l:\khs
sat" ,o ,.irn .a
l + l'lofil 187 I ?8
n,rd ro~ - "" t 600 lakh a.
• - p V 1,1l\ll JS

s.1Z •
~---; :inutactwes and sells four types of products under the brand names. A. B, c and D The
AFC ,I.I"' I:! •• •
• QJu,·compnses 33/{%, 41¾%, 16¾% 8 1{% of A, B, C and D respectively. The total budgeted
ail! S!J • 60 ooo per month. Operating costs are as follows:
,II!.,~> alt' .
'D!lablts ~sts:
}'Joduct A 60% of selling price B 68% of selling price
c 80"fo of selling price D 40% of selling price
r]S?! ca5t 1s t 1,.100 per month.
~ t ? the br~alH~.vcn point for the products on an overall ~~-
ll ha.s been proposed to change the sales mix is foltows, the total sales per month remaining f
J00.
Product A 25% B 40,.
C 30% D 50/o
lfflmling that proposal Is implemented, calculate the break-even point. (B.Com. Hons., Delhi)
Jiiilo11 I)

(I)

Products
A B C D Total
- Sar~ mix 33½% 41½% 16½% 8½% JOO%

Silt1 r r r r r
20,000 25,000 10,000 S,000 60,000
~ble cost 2,000 39,000
12,000 . 17,000 8,000
~- Contribution 21,000
· f'llw cost,
14,700

~ -- -
6,300

lrti(.
even point ~ nxed cost 14,700
'c;;j;tribuUon x Sales Zl,QQO IC 60,000 • t 42,000
 ~·:~)- - - - - - - - - ~ ~
~------
A
Products
- - -- :----------
B C
Revised sale., mix ~ 25% 4.0% 30%

Sal~s ~ l ':1,000 i>/4,000 18,000

Vatiahle <'OSt ~ 9,000 16,320 14,400
C<'nUibUU<'n ~
hss : Fixed eo~ t ~

14. 700
1Q,OSO " 60,000 • f 46,226 (Approx).

Problem
· n the following data:
Sales Profit
Year 2010 ~ 1,20,000 8,000
Year 2011 t 1,40,000 13,000
-~ ~ u t -
~ P/V ratio,
,u) B.E. Point,
(iii) Profit when sales are ~ 1,80,000,
(iv} Sales required to earn a profit of ~ 12,000.
@)wgin of safety in year 20fl (C.A. Inter. B.Co1.)
Solution
Sales Profit
Year 2010 1,20,000 8,000
Year 2011 1,40,000 13,000
Difference 20,000 5,000
Difference in profit 5,000 ii~
(i) p/V ratio • Difference in sales >< 100 - 20,000 >< 100 • 2~%

4-==-
ContJtution ln 2010 (1,20,000 " 25¾2
==
30,000
f

Less: Profit 8,000

Fixed cosr 22.000
• Contribution - Fixed cost + Profit
.·. Flxed cost s Contribution - Proflt
Fixed cost 22,000
(fl) Break-even point • P/V ratio = 25% • f 88,000
 sa IeS are r 1,80,000
,fit ,v11en t rJbution (f 1,80,000 • 25%)
(//IJ ffO. con r•-ed cost
Less: "'
Profit
'
4s,ooo
_22,000
23,oOO
profit of f 1? ,000
to e.ifl\ a
(1Y) s,tes . d cost + Oesiled profit 7?,000 I 17,000
f1xc - ·
- P•V 1atio -. - 2!'>"f. - • t 1,36,000
( ~afcly ill 2011
111 ~,gin ° ·(lt safety • Actual sales Break-even sales
f,ldl91ll • 1,40,000 - 88,000 • ~ 52,000

.ue the sales and profits of the two halves of the year :
1st half IInd half
Sales ~ 1,00,000 1,20,000

-~
Ptofit , ? 30,000 38,000
td cost during the first half is equal to that ~uring the second half. Selling price and per att
flI t remain unchanged. Calculate the following :
(i) P/V ratio tor each half and for the full year. -
(u1 Fixed cost for each half and for the full year.
fm) 3£P tor each half and for the_full year.
{Ii') Halt-yearly sales to earn half-yearly profit of ~ 40,0J)_~-
{v) Annual sales to earn annual profit of ! 90,000. . (B. Com. Hom. DIDd)
ltfon

(i) P/V ratio • Difference in Profit. 38,000 - 30,000 ~ 8,000 • 40'f.

· Difference in sales 1,20,000 - 1,00,000 20,000
For each of the half year P/V ratio will remain the same i.e. 40%.
(ii) Fixed cost - (Sales • P/V ratio) - Profit
!st half • (1,00,000 x 40%) - 30,000
= ~ 10,000
For full year, fixed cost - ~ 10,000 x 2 = f 20,000
iit) B.E. Point • F
P /V ratio

ut half • 10,000 .. ? 25 000

40% ,
Br Point for full years - ~ 25,000 x 2
.. I(' 50,000
iv) Reqlllred •at F+ p
• es •
P /V ratio
lfatf Year sales _ .!_0,ooo + 40,000
40% .. t' 1,25,000
(~) ~
Ual sates •· 3.0,000 + 90,000
40% • t 2,75,000
 5.46

Problun 5.15
~----!!."~ ""
A ~ scld ln 11\"C <uc« -.1w l't!llod, 7,000 unit\ .and q ooo ~
I" 000 a!!-, wntd 't 10 000 a, p:otit 1~,1l('r llve\\•, Thr stllhi,1 ,;,,,, ,:~~"~, ;i nd h;is fnr
ol.--t '"'- t to r.a\ru\,1tt: ilt r.an be allntd • ,_
1\IJ-'lltd ""oi
\ Tht .amount cl fh~d r ,,t I!, 11 ,
"' Th• 11 bc-1 cf uruh t o bu•.1\ .-wn
'n!l' II ~I ·I unit~ t,, uin a p1ohl ,,t t 40,000,
S:clWca
(I.e.,~ ,
Pe11od l l'imod II
,. r Difftre~
S.1!e - ,: '
'. .,,, p.!l \llll t , 7 00 .000 9.00,000 r
Pt~• .. ~ • ( ) t0.000 10,000 2.00.000
20.000
lliffer.-i,;:-i- 1n l't ofit 20,000
P V iatr.i • - - - -- - - ,
ti!hunN in ~ le5
too ~ --'-c...:._
2,00.000
" 100 . 10%

~ pez1.•d I (1(1'1!. of '{ 7 .00.00) '{ 70,000

1.1~- l<:5$ n ~nc d r ? 10,000
J: li'lr~ CC$!
l' 80,000
5ote: f ~ t.:-rt - Contribution - Profit (or Contribution + Loss)
fixed cost 80,000
Bl"" 2 «-l'n."I ;io:nt • p V ratio = lO'Vo = ~ 8,00,000

I\...,~.,.,.:- ::i: '!!.~.its to break-even • 8,00,000 + 100 = 8,000 units

Fixed cost + Desired profit
~) ; ; _ ~ Sa~es = P 'V ratio

80,000 + 40,000 • '{ 12,00,000 or 12,000 uni-ts

10-r.

Ptr.Nem S.16
A c01I:pany has annul hxed costs of'{ 14,00,000. In 2004 sales amounted tot 60,00,000 as com;rl
with l' ,5,!>0/.lOO !:n 2003 and profit in 2004 was ~ 4 ,20,000 higher than in 2003.
(i) At wlat lewl of sales does the company break-even?
(1i) Determine profit or loss on a precast sales volume of '{ 80,00,000.
i,EC{i) If there H a :eduction in selling price In 2005 by 10'1'. and the company desires to earn
~ pmfit u 1~ 200.:. what would be the required sales? (B.Com. Hons..
U,.t;
Solution

Increase in profit 4,20,000

P/V ntto • Increase in $illes "lOO • 60,00,000-45,00,000" tO0

• 4,20,000 " I OO • 28%

1s.oo.ooo
fll(ed cos l
Break-even Point - 14 00 000
P/V ratio • • • • t 50,00,000
28"fo
 ~Jt ,nolyli•
5.47
~ r e f ao,00,000
sales .,
-~ lfllt11 o 00,000 >< 78-,.
(11, bUllOII " 8 , 22,40,000
eo11trl itcl cost _!4,oo,ooo
i,S,: " Profit
. prier Is lO"lo lrss 1,40,ooo
tll stlhn9
,,,,) -~ .. 110.00.000 10~
Salts <I (II0.00.000 " O'Yo•) - 72,oo,ooo
. y,rtJbl~ c,1. ... - J7,6o,ooo
fl$$· fkW ront11!111t11m •l'l.f ,,
14,-'0,000
of ,•at l ,,t,k rii$1 to sal<•s .. 100 28"/o 12"!.
bl"' r 14.40.000 " 100 .. 20%
,., r 1\ ,auo
1
S 72,00,000

''()t.'4 • ((10,00.000 ,c 28%) 1 ✓. ,00,000 - ~ 2,80,000

ilfil Ill '
aun the desited p1ofit
Its Ill ,.,..
rixrd cost ♦ Desired profit
- P/V ratio - 1-4,00,000 + 2,80,000
20% ~ f 84,00,000.

i,m S.17
folloll'lllg figures relating to the performance of a company of the years I and. II are available.
~; that (i) the 1atio of variable costs to sales, and (ii) the fixed costs are the same tor both the
asce1tain :
the l'tofit:volwne ratio, (b) the amount of the fixed costs,
Uie Break-even point, and
the budgeted profit for the year ID, if the budgeted sales for that year are f t aores.
Total sa /es Total costs
((in '000) (r in '000)
Year I 7,000 5,800 , ;_
Year Il 9,000 6,600 t.,
(J.C. W.A. Inter)
ID

Sales Total cost Profit

(( in '000) (i'fn 'OOOJ (( in '000)
r 7,000 5,800 1,200
n 9,000 6,600 2,400
~rence
2,000 800 1,200

P/V ratio 1,200

• 2,000 ,c 100 • 600/o
''ixed cost
.. (Sales )( P/V ratio) - Profit
Year I • (70,00,000 ,c 600/o) - 12,00,000 • f 30,00,000
I.E.Potnt F = 30,00,000 00 000
lud. • P/V ratio 60% • f so, ,
on:~:~1sales• 100,00.000
Pron • 100,00,000 ,c 60% • 60,00,000
Ofit • C _ F
 5.41
- ad incurred fixed expenses of ~ 4,50,oqo,, with sales of , t 1s 00
-probleJII 5.18 111
J. comp.tnY dh
of < ,.oo.OOO u, Ing
u,e first half year. In tht second half, it suffered a • •~ 50
1
os, Of ' I •
.,
~
r,a1a1tate: '
r ,., profit•••'""'' . ,m d ma,g n of .,1,ty for th, flt
iado .......... n p,,rnt • ,0oo·• •
/ili/ 9
...,wtd ,. ,. ,alum• f or th• second half y,ar mumtng thaf s,tllp " h'1f
1

~ '-i
1
lj)'O ,.,..1n,d unMangtd dutlll9 tM ,ocoud half V•"· - _ Pike ,,. :-
Jilill•l ,., .,,.. -• paint ••• n.atglu of •·• r,t Y fm th• whole year,
·~11.. !<:..,
(i) la thf! nat half yea•
Co) ,Uibutton - fixed Cl'd I Pic,nt
.. ~.so,ooo .. 3,00,000 - , 7 ,!Jo,ooo

C 7,S0,000 ~
1\ 11t10
• S • 15,00,000 • SO'l'o

Fiiu~J Cl'~! 4,50,000

lrNt~ point • p V 1,,tio • 500/o - t 9,00,000

~ of ~atcty • Actual sales Break-even point

• 15,00,000 - 9,00,000 • f 6,00,000

la tllt secollil t.aU year

CanttibntiOll • rued cost - Loss
• 4,50,000 - 1,50,000 .. ~ 3,00,000
3,00,000 • f 6,00,000
,:xpected sales volume • Fixed cost - Loss ,s
t' P/V rotio 50%

ht tlle whole year

B.t. pob:: • P.xed SOO/o ,c 2
Cost • 4,50,000
PfV ratio = t 18,00,000

.Margin of safety • p Profit . = 30,00,00 -1,so,000 ,., f 3 00 000

I V ratio 5~ • ,

~~
~
ProblemS,19 _.,
,,. ....,.
"" •
fol owing com and ,ale s•• f • manufactudng company for the rust half and second•ir,Jf'
06 secor.d haif
,
First half r
30,00,00o
Sates 24,00,000 26,00,00o
Total COU$ 21,80,000
You an asked lo 4eterm1ne •
(~a =:u:::1s:::s ratio. of the firm.
(Ill} Break even point ·
( rv) M.itgin of safety ·as percentage of sales.