marginal costing

Cost- Volume- Profit

Analysis

Break Even Analysis

Profit Volume Chart

Cost- Volume- Profit
Analysis
Break Even Analysis

Methods

Algebraic Method

Graphic Method
 Cost- Volume- Profit
Analysis ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V

Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution

Fixed Cost
BEP (Rs) = ------------------
P/V Ratio
 Cost- Volume- Profit
Analysis ALGEBRAIC
Fixed Cost METHOD
BEP (Units) = --------------- = F
Contribution PU S-V

Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution F Cost=Rs 12000
S Price=Rs12 pu
Fixed Cost V Cost =Rs 9 pu
BEP (Rs) = ------------------
Units produced-10000
P/V Ratio
Find BEP
 Cost- Volume- Profit
Analysis F Cost=Rs 12000
Other Uses S Price=Rs12 pu
V Cost =Rs 9 pu
Units produced =10000

Profit when sales are

Profit at diff. Sales Vol. a) Rs 60,000

b) Rs 1,00,000
 Cost- Volume- Profit
Analysis
F Cost=Rs 12000
S Price=Rs12 pu
Profit at diff. Sales Vol. V Cost =Rs 9 pu

Profit when sales are

C
P/V Ratio= ----- = 3/12=25% a) Rs 60,000
S b) Rs 1,00,000

WHEN SALES=Rs 60,000

Contribution=sales x p/vratio
=60000x25%
=Rs 15000
Profit =contribution-fixed cost
=15000-12000
=Rs3000
 Cost- Volume- Profit
Analysis
Other Uses F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu

Sales at Desired Profit Sales if desired profit

a) Rs 6000
b) Rs 15,000

F Cost +Desired Profit

Sales= -------------------------------
P/V Ratio
 Cost- Volume- Profit
Analysis
Sales at Desired Profit F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
F Cost +Desired Profit
Sales= ------------------------------- Sales if desired profit
P/V Ratio a) Rs 6000
b) Rs 15,000

12,000+6000
a)Sales = ---------------
25%

=Rs 72,000
 CVP Analysis -question

P ltd has earned a profit of Rs 1.80 lakh on sales of

Rs 30 lakhs and V Cost of Rs 21 lakhs.
work out

a)BEP
b)BEP When V Cost increases by5%
c)BEP at present level when selling price reduced by5%
CVP Analysis -

S-V
P/V Ratio=--------
S
3000000-2100000
= ------------------------
3000000
=30%
Sales =VC+FC+P
3000000=2100000+FC+180000
FC =Rs 720000
7,20,000
BEP= -------------
30%

=Rs 2400000
CVP Analysis -question

b) When V Cost increases by 5%

New Variable Cost=2100000+5%

=22,05,000

PV Ratio 3000000-2205000
3000000
=26.5%

BEP =7,20,000/ 26.5%

=Rs 27,16,981
 CVP Analysis -question

c)When Selling Price reduced by 5%

New SP=3000000—5%
=Rs 28,50,000

Contribution=28,50,000-21,00,000
=Rs7,50,000

PV Ratio =7500000/2850000
=26.32%

FC+PROFIT
Desired Sales= ------------------ =
720000+1800000
PV Ratio 26.32%

=Rs 34,19,453( appx)

 BEP

Graphical Presentation
 Break-Even Analysis
Costs/Revenu
e Initially a firm
will incur fixed
costs, these do
not depend on
output or sales.

FC

Output/Sales
 Break-Even Analysis
The Break-even
Total revenue point
is
As
The output
lower
Initially is
a by the
firm
The
occurs total
where
determined coststotalthe
Costs/Revenu TR
generated,
price,
will
revenue
therefore incur
equals the
the less
fixed
total
e
TR TC price
firm
costs
charged
will
costs,
– the incur
these
firm,
and
doin –
steep
(assuming
the thecosts
quantity
variable total
sold –
this not
again depend
example
this on
would
will be
accurate
revenue
these vary curve.
have output
to sell
determined orQ1sales.
to
bythe
forecasts!)
directly
generate
is
with
sufficient the
expected
sum of FC+VC
amount forecast
revenue to produced
cover its
sales initially.
costs.

FC

Q1 Output/Sales
 Break-Even Analysis
Costs/Revenue If the firm chose
TR TR TC to set price higher
VC than Rs2 (say
Rs3) the TR curve
would be steeper
– they would not
have to sell as
many units to
break even

FC

Q2 Q1 Output/Sales
 Break-Even Analysis
TR)
Costs/Revenue If the firm chose
TR
TC to set prices lower
VC it would need to
sell more units
before covering
its costs

FC

Q1 Q3 Output/Sales
 Break-Even Analysis
TR
Costs/Revenue TC
Profit VC

Loss
FC

Q1 Output/Sales
 Break-Even Analysis
Margin of
TR TR
TC safety shows
Costs/Revenue A far
how higher
sales can
VC price
fall beforewould
losses
Assume
made. If Q1
lower the=
current
1000 and Q2 sales
=
break
1800,
even
at Q2sales could
point
fall by 800and the
units
margin
before a lossof
would
safetybe made
would
widen
Margin of Safety
FC

Q3 Q1 Q2 Output/Sales
 High initial FC.
Interest on debt
Break Even Analysis rises each year – FC
Costs/Revenue rise therefore
FC 1

FC
Losses get
bigger!
TR
VC

Output/Sales
 Break-Even Analysis

• Remember:
• A higher price or lower price does not
mean that break even will never be
reached!

• The BE point depends on the sales

needed to generate revenue to cover
costs
 Break-Even Analysis

• Importance of Price Elasticity of Demand:

• Higher prices might mean fewer sales to break-

even

• Lower prices might encourage more customers

but higher volume needed before sufficient
revenue generated to break-even
 Break-Even Analysis
• Links of BE to pricing strategies and
elasticity

• Penetration pricing – ‘high’ volume, ‘low’ price –

more sales to break even
 Break-Even Analysis
• Links of BE to pricing strategies and
elasticity

• Market Skimming – ‘high’ price ‘low’ volumes –

fewer sales to break even
 Break-Even Analysis
• Links of BE to pricing strategies and
elasticity

• Elasticity – what is likely to happen to sales

when prices are increased or decreased?
 BEP-Question

Fixed Cost=Rs 5000

Variable Cost=10 per unit
Selling Price=20 Per Unit
Sales Volume 1000 units
Draw Break even Point and show the effect of the following

A) 10 % decrease in fixed cost

B) 10% Increase in variable Cost
C) 10% increase in selling price
D) 10% increase in sales volume
 Marginal Costing
Cost Volume Chart
 Construction Of PV Chart

1 select a scale on Horizontal axis---sales

2 Select a scale on Vertical axis- FC & Profit

3 Plot FC & Profit

4 Diagonal line crosses sales line at BEP

PV Chart Information

Fixed Cost =Rs 5000

Sales =Rs 20000(pu RS 20)
V Cost= Rs 10000(pu Rs10)

Find
PV Ratio, BEP, Profit?
 Construction Of PV Chart

8000

6000
BEP 5000
4000

2000
Fixed Cost
Rs
Profit
0 5000 10000 15000 20000 Rs
Sales Rs
2000

4000
5000
6000

8000
 Construction Of PV Chart

8000

6000
BEP 5000
4000

2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000 Margin of Safety
5000
6000
--------------------------
8000
 Effect Of Change in Profit- 20% decrease in fixed Cost

New F Cost= 5000- 20%=Rs4000

Fixed Cost
New BEP = PV Ratio
= 4000/50%
=Rs 8000
New Profit=S-F-V
=20000-4000-10000
=Rs 6000
 Effect of Change in profit- 20% decrease in FC

8000
6000

New BEP 5000

4000

2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000

8000
 Effect Of Change in Profit- 10% decrease in V Cost

New V Cost= 10000- 10%=Rs9000

New PV Ratio=20000-9000 =55%
20000

Fixed Cost
New BEP = PV Ratio
= 5000/55%
=Rs 9090 Appx
New Profit=S-F-V
=20000-5000-9000
=Rs 6000
 Construction Of PV Chart

8000
6000
New BEP
5000
4000

2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000

8000
 Effect Of 5% Decrease in Selling Price

8000
6000

5000
4000

2000
Profit
Fixed Cost
Area Profit
Rs
0 5000 10000 15000 20000 Rs
Sales Rs
Loss
2000
Area
4000
5000
6000
ew BEP
N
8000
decision making
 special decision making areas

selling price decisions

make or buy decisions
sales mix decision
selecting suitable method
of production
plant shut down decisions
 special decision making areas

selling price decisions

•Competition & depression

•Additional orders
•Utilizing spare capacity
•Export market
Selling at or below marginal cost

to popularize new product

eliminate competitors
dispose perishables
earning foreign Exchange
to keep pm in operation
prevent future loss of Orders
helping other products making
profits
Keeping employees Occupied
 pricing in competition & depression

•may be priced below total cost

•under marginal costing it may at or above mc

•production may continue

for a short term only

additional orders exploring foreign markets

under utilized capacity

order below total cost but above mc

export sales may result in additional costs

additional cost be deducted from profits

subsidy exemptions be deducted from cost

 make or buy decisions

Other factors

Plant capacity
Mc + loss of contribution
Outside price compared of displaced works
with marginal cost

Outside if mc>op
Non cost factors

Inside if mc<op Assurance of quality

Assurance of continuity
Assurance of maintaining price
 sales mix decisions

proportion in which various products

are produced or sold

Selecting most profitable mix

Selection of a suitable method of production

new product
whether to go for machine or hand labour

ordinary or automatic machine

select -which gives largest contribution
plant shut down- not sufficient business

temporary suspension

permanent suspension
 Introducing an additional shift

Capacity units of VC FC TC DIFF SALES

Incremental

outputs Rs Rs Rs Rs Rs
Revenue
60% 60000 9000 40000 49000 540000 ---

70% 70000 10500 40000 50500 1500 56000 2000

80% 80000 12000 40000 52000 1500 60000 4000

90% 90000 13500 40000 53500 1500 60300 300

100% 100000 15000 40000 55000 1500 61000 700