Practical Problems & Solutions- Class Work

[Marginal Costing]
Introduction:

Example : Given, Total Fixed Cost = Rs. 5,000 ( Remain Fixed in Total)

Selling Price = Rs. 20 ( Will remain Same)

Variable Cost = Rs. 10 ( Varies Proportionately with output)

Per unit remain fixed.

Particulars 1 Unit 2 Units 499 Units 500 Units 501 Units 1000 Units
Selling Price 20 40 9,980 10,000 10,020
Less: Variable Cost 10 20 4,990 5,000 5,010
Contribution 10 20 4,990 5,000 5,010 ?
Less: Fixed Cost 5,000 5,000 5,000 5,000 5,000
Profit (4990) (4980) (10) Nil 10 ?

P/V Ratio 50% 50% 50% 50% 50% Any change?

BEP (Unit) 500 500 Units Any change?

BEP (RS.) 10,000 RS.10,000 Any change?

Margin of safety(MS) (9980) (9960) (20) Nil 20 ?

in Rs.

Margin of (499) ( 498) (01) Nil 01

safety(MS)in Unit
 MS Ratio 0 (0.20) Nil 0.02 %
MS Ratio = (MS/Sales) x 100
Questions: At level 10,000 units, please reply one by one

PV Ratio = ( Change in Contribution / Change in Sales ) x 100

OR
( Change in Profit / Change in Sales ) x 100

MS = Actual Sales – BEP (Sales) OR Profit / PV Ratio and Profit / Contribution per unit

MS Ratio = ( MS / Actual Sales ) x 100

Revision of Formulae:

P = S- TC
P= S – (F+V)
P = S –F- V
P+F=S–V=C
To verify / Back Calculation
Calculation by preparing the Statement of Profit – Marginal Costing
Table :1

Calculation of “PROFIT” (Marginal Costing): Format

Particulars Amount Amount Amount
(Rs.) (Rs.) (Rs.)
Sales xxx ? 80,000
Less : Variable Cost (xxx) 40 ?
CONTRIBUTION xxx 60 60,000
Less : Fixed Cost (xxx) ? ?
PROFIT xxx (5,000) 5,000

Table : 2

Particulars % % %

Sales xx ? ?
Less : Variable Cost (xx) 40 ?
CONTRIBUTION xx ? 40

PV Ratio= (Contribution/ Sales)x100

xx ? ?

Now Please answer

When PV Ratio 60 %
Contribution = ?
Variable cost = ?
For the concept of Marginal Cost
Example 1: Arnav Ltd. produces 10,000 units of product Z by incurring a total cost
of Rs.3,50,000. Break-up of costs are as follows:
(i) Direct Material @ Rs.10 per unit, ` 1,00,000,
(ii) Direct employee (labour) cost @ Rs. 8 per unit, ` 80,000
(iii) Variable overheads @ Rs.2 per unit, Rs. 20,000
(iv) Fixed overheads Rs.1,50,000 (upto a volume of 50,000 units)

In this example, if Arnav Ltd. wants to know marginal cost of producing one extra
unit from the current production i.e. 10,001st unit. The marginal cost would be the
change in the total cost due production of this 10,001st extra unit. The extra cost
would be Rs.20, as calculated below:

10,000 10,001 units Change in

Units Cost
(A) (B) (c) = (B) - (A)

(i) Direct Material @ Rs.10 per 1,00,000 1,00,010 10

unit
(ii) Direct employee (labour) cost 80,000 80,008 8
@ Rs.8 per unit
(iii)Variable overheads @ Rs.2 per 20,000 20,002 2
unit
(iv) Fixed overheads 1,50,000 1,50,000 0
Total Cost 3,50,000 3,50,020 20
SO Marginal Cost ( Variable Cost ) = DM + DL + DE + Variable Overheads

Problem No. 1
MNP Ltd sold 2,75,000 units of its product at Rs.37.50 per unit. Variable costs are
Rs.17.50 per unit (manufacturing costs of ` Rs.14 and selling cost Rs. 3.50 per unit).
Fixed costs are incurred uniformly throughout the year and amounting to Rs.
35,00,000 (including depreciation of Rs. 15,00,000). There are no beginning or ending
inventories.
Required:
COMPUTE breakeven sales level quantity and cash breakeven sales level quantity.
Solution:
Here given,
Selling Price(per unit) = Rs.37.50 per unit
Variable costs = Rs.17.50 per unit (manufacturing costs of ` Rs.14 and selling cost
Rs. 3.50 per unit)
Fixed costs = Rs. 35,00,000 (including depreciation of Rs. 15,00,000)
No beginning or ending inventories. i.e.,
Opening Stock = Nil
Closing Stock = Nil

Note: To proceed in Marginal Costing we should know the amount of:

1.Sales(Total) or Selling Price ( Per unit)
2. Variable Cost (Total) or Variable Cost (Per Unit)
3. Fixed Cost (Total) or Fixed Cost Per Unit where Actual output has Given

Fixed cost Rs 35,00,000

Break even Sales Quantity = =
Contribution margin per Rs.20
unit

= 1,75,000 units
 Cash Fixed Cost Rs. 20,00,000
Cash Break-even Sales Quantity = =
 Contribution margin per unit

=1,00,000 units.

Problem 2

You are given the following particulars CALCULATE:

(a) Break-even point
(b) Sales to earn a profit of Rs. 20,000
i. Fixed cost Rs.1,50,000
ii. Variable cost Rs. 15 per unit
iii. Selling price is `Rs.30 per unit

SOLUTION
Fixed cost ‘1,50,000
(a) Break-even point (BEP) = = = 10,000 Units
Contribution per unit * `15

* (Contribution per unit = Sales per unit – Variable cost per unit = Rs. 30 – Rs.15)

(b) Sales (Rs.) to earn a Profit of Rs. 20,000:

Required Sales (Rs.)

Fixed cost+Desired profit
= ×Selling price per unit
Contribution per unit
`1,50,000+`20,000
= ×`30 = ` 3,40,000
`15
Or
Fixed cost+Desired profit `1,70,000 `1,70,000
= = `3, 40,000
=
P / V Ratio P / V Ratio 50%
Contribution
PV Ratio = 100
Sales

Required Sales (Unit) = ( F + Desired Profit ) / Contribution Per unit

OR
Required Sales (Unit) = Required Sales (Rs.) / Selling Price per Unit
 Problem 3

A company has a P/V ratio of 40%. COMPUTE by what percentage must sales be
increased to offset: 20% reduction in selling price?

SOLUTION

We know,
PV Ratio = Contribution /Sales
So, Contribution = Sales X PV Ratio
Or Sales = Contribution / PV Ratio

PV Ratio 40 % means , Contribution = 40 % and Variable Cost= (100 % - 40 %) = 60 %

Here ,
Desired Contribution 0.40
Revised Sales Value = = = 1.6
Revised P V Ratio * 0.25

Desired Contribution = Revised Sales – Variable Cost

This means Sales value increased to Rs.160 from Rs. 100

So sales value to be increased by 60% of the existing sales.

Revised Contribution 0.80- 0.60
*Revised P/V Ratio = = = 0.25
Revised Selling Price 0.80
Desired Contribution 0.40
Required Sales Quantity = = =2
Revised P / V Ratio*×Revised Selling Price 0.25×0.80

Therefore, Sales value to be increased by 60% and sales quantity to be doubled to

offset the reduction in selling price.
Alternatively:
We know ,S - V = C.

PV= C / S *100

100-V=40. PV =40%

S reduced to 80. To maintain the same C Sales to be increased by 20. 20/80*100=25%.

Proof:
Let selling price per unit is `10 and sales quantity is 100 units.
Data before change in selling price:

(RS.)
Sales (`10 × 100 units) 1,000
Contribution (40% of 1,000) 400
Variable cost (balancing figure) 600

Data after the change in selling price:

Selling price is reduced by 20% that means it became `8 per unit. Since, we have
to maintain the earlier contribution margin i.e. `400 by increasing the sales quantity
only. Therefore, the target contribution will be `400.
The new P/V Ratio will be

(Rs.)
Sales 8.00
Variable cost 6.00
Contribution per unit 2.00
P/V Ratio 25%

DesiredContribution `400
Sales Value = = = `1,600
Revised P / VRatio 0.25
Sales value `1,600
Sales quantity = = = 200 units
Selling price per unit `8
 Problem 4
PQR Ltd. has furnished the following data for the two years:

2019 2020

Sales ` 8,00,000 ?
Profit/Volume Ratio (P/V ratio) 50% 37.5%
Margin of Safety sales as a % of total sales 40% 21.875%

There has been substantial savings in the fixed cost in the year 2020 due to the
restructuring process. The company could maintain its sales quantity level of 2019 in
2020 by reducing selling price.
You are required to CALCULATE the following:
(i) Sales for 2020 in Value,
(ii) Fixed cost for 2020 in Value,
(iii) Break-even sales for 2020 in Value.
SOLUTION

Note: In such type of Problem we must try to establish that there will be some correlation with Known
Figure and Unknown Figure.
In the Given Problem the Sales Quantity of 2019 and 2020 is same. That means the total variable
Cost of both the year will be same as it varies in proportion of units produced. So we must go to
Calculate the variable cost of 2019.
Here Given,
a) Sales
b) PV Ratio
c) MS %
The Sales of 2020 will be same in Quintity.

In 2019, PV ratio = 50% of sales (Contribution Ratio)

Variable cost ratio = 100% - 50% = 50% of Sales
Variable cost in 2019 = S a l e s x V a r i a b l e C o s t R a t i o = Rs.8,00,000  50% = Rs.4,00,000
In 2020, sales quantity has not changed. Thus, variable cost in 2020 is
 Rs.4,00,000

.In 2020, P/V ratio = 37.50%

Thus, Variable cost ratio = 100%  37.5% = 62.5%
4,00,000
(i) Thus, sales in 2020 = = Rs.6,40,000
62.5%
( 62.5% is = Rs. 4,00,000 , so 100 % is = ? )

As , MS = Actual Sales – BEP (sales), so

In 2020, Break-even sales = 100%  21.875% (Margin of safety) = 78.125%

(iii) Break-even sales = 6,40,000  78.125% = Rs. 5,00,000

(ii) Fixed cost = B.E. sales  P/V ratio

= 5,00,000  37.50% = Rs.1,87,500.

( As BEP = Fixed Cost / PV Ratio , so by Cross multiplication we have ,

BEP X PV Ratio = Fixed Cost. )

Problem 5
You are given the following data for the year 2020 of Rio Co. Ltd:

Variable cost 60,000 60%

Fixed cost 30,000 30%
Net profit 10,000 10%
Sales 1,00,000 100%

FIND OUT (a) Break-even point, (b) P/V ratio, and (c) Margin of safety. Also DRAW
a break-even chart showing contribution and profit.
SOLUTION
Sales - Variable Cost 1,00,000 - 60,000
P / V ratio = = = 40%
Sales 1,00,000
Fixed Cost 30,000
Break Even Point = = = ` 75,000
P / V ratio 40%
Margin of safety = Actual Sales – BE point = 1,00,000 – 75,000 = ` 25,000
Break even chart showing contribution is shown below:
Cost and Revenue (` thousands)

Break-even chart
Problem 6
PREPARE a profit graph for products A, B and C and find break-even point from the
following data:

Products A B C Total
Sales (`) 7,500 7,500 3,750 18,750
Variable cost (`) 1,500 5,250 4,500 11,250
Fixed cost (`) --- --- --- 5,000

SOLUTION
Statement Showing Cumulative Sales & Profit

Sales Cumulative Variable Contributio Cumulative Cumulative

Sales Cost n Contribution Profit
(`) (`) (`) (`) (`) (`)
A 7,500 7,500 1,500 6,000 6,000 1,000
B 7,500 15,000 5,250 2,250 8,250 3,250
C 3,750 18,750 4,500 (750) 7,500 2,500

Break Even Point (BEP) = ` 12,500

Problem 7
A company earned a profit of Rs.30,000 during the year 2020. If the marginal cost and
selling price of the product are Rs. 8 and Rs. 10 per unit respectively, FIND OUT the
amount of margin of safety.
SOLUTION
Selling price-Variable cost per unit `10-`8
P/V ratio = = = 20%
Selling price `10
Profit 30,000
Margin of safety = = = Rs. 1,50,000
PV rati 20%
Problem 8
A Ltd. Maintains margin of safety of 37.5% with an overall contribution to sales ratio
of 40%. Its fixed costs amount to Rs. 5 lakhs.

CALCULATE the following:

i. Break-even sales
ii. Total sales

iii. Total variable cost

iv. Current profit
v. New ‘margin of safety’ if the sales volume is increased by 7 ½ %.
SOLUTION

(i) We know that: BES = Fixed Cost / PV Ratio

By Cross multiplication , we have

Break- even Sales (BES) × P/V Ratio = Fixed Cost

Break-even Sales (BES) × 40% = Rs. 5,00,000

Break- even Sales (BES) = Rs. 12,50,000

(ii) Total Sales (S) = Break Even Sales + Margin of Safety

S = Rs. 12,50,000 + 0.375S ( S x 0.375)

Or, S – 0.375S=Rs.12,50,000

i. r, 0.625 S = Rs. 12,50,000

O
Or S = Rs.12,50,000 / 0.625

Or S = 20,00,000

(iii) Contribution to Sales Ratio = 40%

Therefore, Variable cost to Sales Ratio = (100 % - 40 % ) = 60 %

Variable cost = 60% of sales = 60% of 20,00,000

Variable cost = 12,00,000

 (iv) Current Profit = Sales – (Variable Cost + Fixed Cost)

= ` 20,00,000 – (12,00,000 + 5,00,000) = Rs. 3,00,000

(v) If sales value is increased by 7 ½ % ( i.e 15/200 )

New Sales value = ` 20,00,000 × 1.075 = Rs. 21,50,000

New Margin of Safety = New Sales value – BES

= Rs. 21,50,000 – Rs. 12,50,000 = Rs. 9,00,000

Hints: PV Ratio ={ Contribution / Sales} x 100 = [ (Sales – Variable Cost ) / S ] x 100

= {(Fixed Cost + Profit )/ Sales )x 100

Problem 9
By noting “P/V will increase or P/V will decrease or P/V will not change”, as the case
may be, STATE how the following independent situations will affect the P/V ratio:
(i) An increase in the physical sales volume;
(ii) An increase in the fixed cost;
(iii) A decrease in the variable cost per unit;
(iv) A decrease in the contribution margin;
(v) An increase in selling price per unit;
(vi) A decrease in the fixed cost;
(vii) A 10% increase in both selling price and variable cost per unit;
(viii) A 10% increase in the selling price per unit and 10% decrease in the physical
sales volume;
(ix) A 50% increase in the variable cost per unit and 50% decrease in the fixed cost.
(x) An increase in the angle of incidence.
SOLUTION

Ite P/V Reason

m Ratio
no.
(i) Will not Sales Volume and Variable Cost Varies proportionately . Selling
change price and Variable Cost per unit remain same.
(ii) Will not Increase in Fixed cost reduces Profit but Contribution remain Same.
change
 (iii) Will Decrease in Variable Cost Increase Contribution.
increase
(iv) Will Numerator decreases without decreasing Denominator(Sales)
decrease
(v) Will Contribution Increases
increase
(vi) Will not Profit Increase but no Change in contribution .
change
(vii) Will not Reasoning 1
change
(viii) Will Reasoning 2
increase
(ix) Will Reasoning 3
decrease
(x) Will Reasoning 4
increase

A 10% increase in both selling price and variable cost per unit.
Reasoning 1. Assumptions: a) Variable cost is less than selling price.
b) Selling price `100 variable cost ` 90 per unit.
100  90
c) P/V ratio =
100
10% increase in S.P. = Rs.110
10% increase in variable cost = s.99
 110  99 ) X 100
P/V ratio =
110
= 10% i.e. P/v ratio will not change
Reasoning 2. Increase or decrease in physical sales volume will
not change P/ V ratio. Hence 10% increase in selling
price per unit will increase P/V ratio.
Reasoning 3. Increase or decrease in fixed cost will not change
P/V ratio. Hence 50% increase in the variable cost
per unit will decrease P/V ratio.
Reasoning 4. Angle of incidence is the angle at which sales line
cuts the total cost line. If it is large, it indicates that
the profits are being made at higher rate. Hence
increase in the angle of incidence will increase the
P/V ratio.
ILLUSTRATION 10
A company can make any one of the 3 products X, Y or Z in a
year. It can exercise itsoption only at the beginning of each year.
Relevant information about the products for the next year is given below.

X Y Z
Selling Price (Rs. / unit) 10 12 12
Variable Costs (Rs. / unit) 6 9 7
Market Demand (unit) 3,000 2,000 1,000
Production Capacity (unit) 2,000 3,000 900
Fixed Costs (Rs.) 30,000

Required
COMPUTE the opportunity costs for each of the products.
(Opportunity costs is the cost of opportunity foregone or the cost of next best
alternative.)
SOLUTION

X Y Z

I. Contribution per unit (Rs) [ S – V] 4 3 5

II. Units ( The Lower of Production and Market 2,000 2,000 900
Demand)
III. Possible Contribution (Rs.) [ I × II ] 8,000 6,000 4,500
 IV. Opportunity Cost* (`Rs.) 6,000 8,000 8,000

(*) Opportunity cost is the maximum possible contribution forgone by

not producing alternative product i.e. if Product X is produced then
opportunity cost will be maximum of(` 6,000 from Y, 4,500 from Z).