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Marginal Costing
Assignment
Q. No. Question / Answers
1. You are given the following data: -
Date Sales Profit
Year 20X1 ₹ 1,20,000 8,000
Year 20X2 ₹ 1,40,000 13,000

Find out: -
a) P/V ratio,
b) B.E. Point,
c) Profit when sales are ₹ 1,80,000.
d) Sales required earn a profit of ₹ 12,000,
e) Margin of safety in year 20X2.
(ICAI SM, May 2014, May 2018, Modified Nov. 2022, Modified MTP May 2019)
Ans. Particulars Sales Profit
Year 20X1 ₹ 1,20,000 8,000
Year 20X2 ₹ 1,40,000 13,000
Difference ₹ 20,000 5,000

a) Computation of P/V ratio

Difference in profit 5,000
P/V Ratio = Difference in Sales × 100 = 20,000 × 100 = 25%
Contribution in 20X1 (1,20,000 × 25%) 30,000
Less: Profit 8,000
Fixed Cost* 22,000
*Contribution = Fixed Cost + Profit
∴ Fixed Cost = Contribution − Profit

b) Computation of Break-even point

Fixed Cost 22,000
Break-even point = P/V ratio
= 25%
= ₹ 88,000

c) Profit when sales are ₹ 1,80,000 (₹)

Contribution (₹ 1,80,000 × 25%) 45,000
Less: Fixed Cost 22,000
Profit 23,000

d) Sales to earn a profit of ₹ 12,000

Fixed cost + Desired profit 22,000+12,000
P/V ratio
= 25%
= ₹1,36,000

e) Margin of safety in year 20X2

Margin of Safety = Actual Sales − Break-even Sales
= 1,40,000 − 88,000 = ₹ 52,000.
2. MNP Ltd. Sold 2,75,000 units ‘of its product at ₹ 37.50 per unit. Variable costs are ₹ 17.50
per unit (manufacturing costs of ₹14 and selling cost of ₹3.50 per unit). Fixed costs are
incurred uniformly throughout the year and amount to ₹ 35,00,000 (including depreciation
of ₹ 15,00,000). There is no beginning or ending inventories.

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Required: -
a) Estimate breakeven sales level quantity and cash breakeven sales level quantity.
b) Estimate the P/V ratio.
c) Estimate the number of units that must be sold to earn an income (EBIT) of ₹ 2,50,000.
d) Estimate the sales level to achieve an after-tax income (PAT) of ₹ 2,50,000. Assume
40% corporate income Tax rate.
(ICAI SM, Nov. 2010, Modified RTP Nov 2019 Modified May 2023)
Ans. Fixed Cost
a) Break even Sales= Contribution per unit =
₹ 35,00,000
=1,75,000 units
₹20
Cash Fixed Cost
Cash Break even Sales = Contribution per unit
₹ 20,00,000
=
₹ 20
= 1,00,000 units

Contribution unit 20
b) P/V ratio= × 100 = × 100 = 53.33%
Selling Price/unit 37.50

c) Number of units that must be sold to earn an income (EBIT) of ₹ 2,50,000

Fixed Cost+Desired EBIT level 35,00,000+2,50,000
=
Contribution per unit 20
= 18,7500 units

d) After Tax Income (PAT) = ₹2,50,000.

Tax rate =40%
Desired level of Profit before tax
₹ 2,50,000
= × 100 = ₹ 4,16,667/−
60
Fixed Cost+Desired Profit
Estimate Sales Level=
P/V ratio
₹ 35,00,000+₹ 4,16,667
= = ₹ 73,44,210/−
53.33%
3. Prisha Limited manufactures three different products and the following information has
been collected from the books of accounts: -
Particulars Products
A B C
Sales Mix 40% 35% 25%
Selling Price ₹ 300 ₹ 400 ₹ 200
Variable Cost ₹ 150 ₹ 200 ₹ 120
Total Fixed Costs ₹ 18,00,000
Total Sales ₹ 60,00,000

The company has currently under discussion, a proposal to discontinue the manufacture of
Product C and replace it with Product E, when the following results are anticipated: -
Particulars Products
A B C
Sales Mix 45% 30% 25%
Selling Price ₹ 300 ₹ 400 ₹ 300
Variable Cost ₹ 150 ₹ 200 ₹ 150
Total Fixed Costs ₹ 18,00,000
Total Sales ₹ 64,00,000

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Required: -
a) Calculate the total contribution to sales ratio and present break-even sales at existing
sales mix.
b) Calculate the total contribution to sales ratio and present break-even sales at proposed
sales mix.
c) State whether the proposed sales mix is accepted or not?
(ICAI SM, May 2021 RTP, Modified MTP Dec 2021, Modified RTP May 2022)
Ans. a) Calculation of Contribution to Sales ratio at existing sales mix: -
Particulars Products Total
A B C
Selling Price (₹) 300 400 200
Less: Variable Cost (₹) 150 200 120
Contribution per unit (₹) 150 200 80
P/V Ratio 50% 50% 40%
Sales Mix 40% 35% 25%
Contribution per rupee of sales (P/V Ratio × 20% 17.5% 10% 47.5%
Sales Mix)
Present Total Contribution (₹ 60,00,000 × 47.5%) ₹ 28,50,000
Less: Fixed Costs ₹ 18,00,000
Present Profit ₹10,50,000
Present Break-Even Sales (₹ 18,00,000/0.475) ₹ 37,89,473.68

b) Calculation of Contribution to sales ratio at proposed sales mix: -

Particulars Products Total
A B E
Selling Price (₹) 300 400 300
Less: Variable Cost (₹) 150 200 150
Contribution per unit (₹) 150 200 150
P/V Ratio 50% 50% 50%
Sales Mix 45% 30% 25%
Contribution per rupee of sales (P/V Ratio × Sales 22.5% 15% 12.5% 50%
Mix)
Proposed Total Contribution (₹ 64,00,000 × 50%) ₹ 32,00,000
Less: Fixed Costs ₹ 18,00,000
Proposed Profit ₹14,00,000
Proposed Break-Even Sales (₹ 18,00,000/0.50) ₹ 36,00,000

c) The proposed sales mix increases the total contribution to sales ratio from 47.5% to
50% and the total profit from ₹ 10,50,000 to ₹ 14,00,000. Thus, the proposed sales mix
should be accepted.
4. A Company manufactures a product, currently utilizing 80% capacity with a turnover of
₹ 8,00,000 at ₹ 25 per unit. The cost data are as under:
i) Material cost ₹7.50 per unit, Labour cost ₹ 6.25 per unit. Semi-variable cost (Including
variable cost of ₹ 3.75 per unit) ₹ 1,80,000.
ii) Fixed cost ₹ 90,000 up to 80% level of output, beyond this an additional ₹ 20,000 will
be incurred.
Calculate: -
a) Activity level at Break-Even-Point
b) Number of units to be sold to earn a net income of 8% of sales.

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c) Activity level needed to earn a profit of ₹ 95,000.
d) What should be the selling price per unit, if break-even-point is to be brought down
to 40% activity level?
(Nov. 2000, Modified Nov-2017, MTP July 2021, Modified MTP May 2019)
Ans. a) Activity level at Break-Even Point: -
✓ Break-even point (units)
Fixed Cost ₹ 1,50,000
✓ = Contribution per unit = ₹ 7.50
= 20,000 units
✓ Activity level at Break-even Point
Break Even Point (units)
✓ = {No.of units at 100% capacity level × 100}
20,000 units
✓ = × 100 = 𝟓𝟎%
40,000 units

b) Number of units to be sold to earn a net income of 8% of sales: -

✓ Let X be the number of units sold to earn a net income of 8% sales.
Mathematically, it means that:
✓ (Sales revenue of X units) = Variable cost of X units + Fixed Cost + Net Income
8
✓ Or ₹ 25 X = ₹ 17.5 X + ₹ 1,50,000 + 100 × (₹ 25X)
✓ Or ₹ 25 X = ₹ 17.5 X + ₹ 1,50,000 + ₹ 2X
✓ Or X = (₹ 1,50,000/₹ 5.5) units
✓ Or X = 𝟐𝟕, 𝟐𝟕𝟑 𝐮𝐧𝐢𝐭𝐬.

c) Activity level needed to earn a profit of ₹ 95,000: -

✓ The profit at 80% capacity level, is ₹ 90,000 which is less than the desired profit of
₹ 95,000, therefore the needed activity level would be more than 80%. Thus the
fixed cost to be taken to determine the activity level needed should be ₹ 1,70,000
units to be sold to earn a profit of ₹ 95,000.
Fixed Cost+Desired Profit
✓ =
Contribution per unit
₹ 1,70,000+₹ 95,000
✓ =
₹ 7.5
✓ = 35,333,33 units
✓ Activity level needed to earn a profit of ₹ 95,000
35,333,33 units
✓ = 40,000 units
× 100
✓ = 𝟖𝟖. 𝟑𝟑%

d) Selling price per unit, if break-even Point is to be brought down to 40% (16,000
units) activity level: -
✓ Let X be the selling price per unit
✓ Units at Break-even-Point = 16,000 units
Fixed Cost
✓ Break-even-Point = Contribution per unit
₹ 1,50,000
✓ At 16,000 units = (𝑋−₹ 17.50)
✓ 16,000(X-17.50) = 1,50,000
✓ 16,000X – 2,80,000 = 1,50,000
✓ 16,000 X = 4,30,000
✓ X = 26.875
✓ S.P, (per unit) = ₹ 𝟐𝟔. 𝟖𝟕𝟓

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Working Notes: -
1)
a) Number of units sold at 80% capacity: -
Turnover ₹ 8,00,000
− = = = 32,000 units.
Selling price p.u. ₹25

b) Number of units sold at 100% capacity: -

32,000 units
− ={ 80
× 100 = 40,000 units. }
2) Component of fixed cost included in semi-variable cost of 32,000 units: -
− Fixed cost = {Total semi variable cost − Total Variable cost}
= ₹ 1,80,000 − 32,000 units × ₹ 3.75
= ₹1,80,000 − ₹ 1,20,000
= ₹ 𝟔𝟎, 𝟎𝟎𝟎
3)
a) Total fixed cost at 80% capacity: -
− = Fixed cost + Component of fixed cost included in semi − variable cost
− = ₹ 90,000 + ₹ 60,000 = ₹ 𝟏, 𝟓𝟎, 𝟎𝟎𝟎

b) Total fixed cost beyond 80% capacity: -

− = Total fixed cost at 80% capacity + Additional fixed cost to be incurred
− = ₹ 1,50,000 + ₹ 20,000 = ₹ 𝟏, 𝟕𝟎, 𝟎𝟎𝟎

4) Variable cost and contribution per unit: -

− Variable cost per unit = Material cost + Labour cost +
Variable cost component in semi variable cost
− = ₹ 7.50 + ₹ 6.25 + ₹3.75 = ₹ 17.50
− Contribution per unit
− = Selling price per unit − Variable cost per unit
− = ₹ 25 − ₹ 17.50 = ₹ 𝟕. 𝟓𝟎

e) Profit at 80% capacity level: -

− = Sales revenue − Variable Cost − Fixed Cost
− = ₹ 8,00,000 − ₹ 5,60,000 (32,000 units × ₹17.50) − ₹ 1,50,000
= ₹ 𝟗𝟎, 𝟎𝟎𝟎
5. Zed Limited sells its product at ₹30 per unit. During the quarter ending on 31st March, 20X1,
it produced and sold 16,000 units and suffered a loss of ₹ 10 per unit. If the Volume of sales
is raised to 40,000 units, it can earn a profit of ₹ 8 per unit.

You are required to Calculate: -

a) Break Even Point in Rupees.
b) Profit if the sale volume is 50,000 units.
c) Minimum level of production where the company needs not to close the production if
unavoidable fixed cost is ₹ 1,50,000.
(Nov. 2014, Nov. 2019, Modified ICAI SM)
Ans. a) Break Even Point = 𝐂𝐨𝐧𝐭𝐫𝐢𝐛𝐮𝐭𝐢𝐨𝐧 𝐏𝐞𝐫 𝐮𝐧𝐢𝐭
Fixed Cost

4,80,000
✓ =
20
✓ = 24,000 units
✓ = 24,000 × 30
✓ = ₹7,20,000

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b) Profit when sales = 50,000 units
Fixed Cost+Profit
✓ 50,000 = Contribution
4,80,000+P
✓ 50,000 =
20
✓ P = 10,00,000 − 4,80,000 = 5,20,000.

Note: -
Total sales – Total variable cost = Fixed cost + (-) Profit/(Loss)
✓ Suppose, Variable Cost=X
✓ Fixed Cost =Y
✓ 30 × 16,000 − 16,000X = y − 1,60,000 …………(1)
✓ 30 × 40,000 − 40,000X = y + 3,20,000 ………...(2)

Putting the value of equation 2 in to 1.

✓ 4,80,000 − 16,000X = 12,00,000 − 40,000X − 3,20,000 − 1,60,000
✓ 4,80,000 − 16,000X = 7,20,000 − 40,000X
✓ −16,000 + 40,000X = 2,40,000
2,40,000
✓ X=
24,000
✓ X = 10
✓ Y = 4,80,000

Note: -
− Contribution= S − V
− = 30 − 10
− = 20

c) Minimum level of production where the company needs not to close the
production, if unavoidable fixed cost is ₹ 1,50,000: -
Avoidable fixed cost
✓ =
Contribution per unit
Total fixed cost−Unavoidable fixed cost
✓ =
Contribution per unit
₹ 4,80,000−₹1,50,000
✓ = 20
₹ 3,30,000
✓ = ₹20
= 16,500 units

At production level ≥ 16,500 units, company needs not to close the production.
6. J Ltd. Manufactures a Product-Y. Analysis of income statement indicated a profit of ₹ 250
lakhs on a sales volume of 5,00,000 units. Fixed costs are ₹ 1,000 lakhs which appears to be
high. Existing selling price is ₹680 per unit. The company is considering revising the profit
target to ₹ 700 lakhs. You are required to Compute: -

a) Break-even point at existing levels in units and in rupees.

b) The number of units required to be sold to earn the target profit.
c) Profit with 10% increase in selling price and drop in sales volume by 10%.
d) Volume to be achieved to earn target profit at the revised selling price as Calculated in
(ii) above, if a reduction of 10% in the variable costs and ₹ 170 lakhs in the fixed cost is
envisaged.
(Nov. 2020 RTP, Nov. 2014)

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Ans. Sales Volume 5,00,000 Units.
Computation of existing Contribution
Particulars Per unit (₹) Total (₹ in lakhs)
Sales 680 3,400
Fixed Cost 200 1,000
Profit 50 250
Contribution = Profit + Fixed Cost 250 1,250
Variable Cost (Sales − Contribution) 430 2,150

Fixed Cost ₹ 10,00,00,000

a) Break-even sales in units = = = 4,00,000 units.
Contribution per unit ₹ 250
− Break-even sales in rupees = 4,00,000 units × ₹ 680 = ₹ 2,720 lakhs
− Or
250
− P/V Ratio= 680 × 100 = 36.76%.
Fixed Cost 10,00,00,000
− Break. -Even Point (Rupees) = P/V Ratio
= 36.76%
=
₹ 2,720 lakhs (approx. )
b) Number of units sold to achieve a target profit of ₹ 700 lakhs: -
− Desired Contribution = Fixed Cost + Target Profit
= 1,000L + 700L = 1,700L
Desired Contribution 17,00,00,000
− Number of units to be sold = Contribution per unit = 250
=
6,80,000 units.
c) Profit if selling price is increased by 10% and sales volume drops by 10% :-
− Existing Selling Price per unit = ₹ 680
− Revised Selling Price per unit = ₹ 680 × 110% = ₹ 748
− Existing Sales Volume = 5,00,000 units
− Revised sales volume = 5,00,000 units − 10% of 5,00,000 =4,50,000 units.

Statement of Profit at sales volume of 4,50,000 units @ ₹ 748 per unit

Particulars Per unit (₹) Total (₹ in lakhs)
Sales 748 3,366
Less: Variable Costs 430 1,935
Contribution 318 1,431
Less: Fixed Cost 1,000
Profit 431

d) Volume to be achieved to earn target profit of ₹ 700 lakhs with revised selling price
and reduction of 10% in variable costs and ₹ 170 lakhs in fixed cost: -
Revised Selling Price per unit = ₹ 748
Variable Costs per unit existing = ₹ 430
Revised Variable Costs
Reduction of 10% in variable costs = ₹ 430 − 10% 𝑜𝑓 430
= ₹ 430 − ₹43
= ₹ 387
Total Fixed Cost (existing) = ₹ 1,000 lakhs
Reduction in fixed Cost = ₹ 170 lakhs
Revised fixed Cost = ₹ 1,000 lakhs − ₹ 170 lakhs = ₹ 830 lakhs
Revised Contribution (unit) = Revised selling price per unit − Revised
Varaible Costs per units

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Revised Contribution per unit = ₹ 748 − ₹ 387 = ₹ 361
Desired Contribution = Revised Fixed Cost + Target Profit
= ₹ 830 lakhs + ₹ 700 lakhs = ₹ 1,530 lakhs
No. of units to be sold Desired Contribution ₹ 15,30,00,000
= =
Contribution per unit ₹ 361
= 4,23,823 units.
7. The following information is given by Star Ltd.: -
Particulars (₹)
Margin of Safety ₹ 1,87,500
Total Cost ₹ 1,93,750
Margin of Safety 3,750 units
Break-even Sales 1,250 units

Required: -
Calculate Profit, P/V Ratio, BEP Sales (in ₹) and Fixed Cost.
(ICAI SM, Nov. 2015, Modified MTP May 2020)
Ans. Margin of Safety (%) =
3,750 units
×100
3,750 units+1,250 units
= 75%
Total Sales =
₹ 1,87,500
= ₹ 2,50,000
0.75
Profit = Total Sales − Total Cost
= ₹ 2,50,000 − ₹ 1,93,750
= ₹ 56,250
P/V Ratio =
Profit
× 100
Margin of Safety (₹)
₹56,250
= ₹1,87,500 × 100
= 30%
Break-even Sales = Total Sales × [100 − Margin of Safety %]
= ₹ 2,50,000 × 0.25
= ₹ 62,500
Fixed Cost = Sales × P/V Ratio − Profit
= ₹ 2,50,000 × 0.30 − ₹ 56,250
= ₹ 18,750
8. XYZ Ltd. is engaged in the manufacturing of toys. It can produce 4,20,000 toys at its 70%
Capacity on per annum basis. Company is in the process the determining sales price for the
financial year 20X0-X1. It has provided the following information:
Direct Material ₹ 60 per unit
Direct Labour ₹ 30 per unit
Indirect Overheads:
Fixed ₹ 65,50,000 per annum
Variable ₹ 15 per unit
Semi-Variable ₹ 5,00,000 per annum up to 60%
capacity and ₹ 50,000 for every 5%
increase in capacity or part thereof
up to 80% capacity and thereafter
₹75,000 for every 10% increase in
capacity or part thereof.
Company desires to earn a profit of ₹25,00,000 for the year. Company has planned that the
factory will operate at 50% of capacity for first six months of the year and at 75% of

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capacity for further three months and for the balance three months, factory will operate at
full capacity.
You are required to:
1) Determine the average selling price at which each of the toy should be sold to earn the
desired profit.
2) Given the above scenario, advise whether company should accept an offer to sell each
toy at:
₹130 per Toy
₹129 per Toy
(Jan 2021, Modified Dec 2021, Modified MTP Nov 2022)
Ans. 1) Statement of Cost
For For For Total
first 6 further 3 remaining
months months 3 months
6,00,000 x 6,00,000 x 6,00,000 x 4,12,500
6/12 x 3/12 x 75% 3/12 units
50% = 1,12,500 = 1,50,000
= 1,50,000 units units
units
Direct Material 90,00,000 67,50,000 90,00,000 2,47,50,000
Direct labour 45,00,000 33,75,000 45,00,000 1,23,75,000
Indirect – Variable 22,50,000 16,87,500 22,50,000 61,87,500
Expenses
Indirect – Fixed Expenses 32,75,000 16,37,500 16,37,500 65,50,000
Indirect Semi-variable
expenses
✓ For first six months @ 2,50,000
5,00,000 per annum
✓ For further three months 1,62,500
@ 6,50,000* per annum
✓ For further three months 2,12,500 6,25,000
@ 8,50,000** per annum
Total Cost 1,92,75,000 1,36,12,500 1,76,00,000 5,04,87,500
Desired Profit 25,00,000
Sales value 5,29,87,500
Average Sales price per Toy 128.45

* 5,00,000+ [3 times (from 60% to 75%) x 50,000] = ₹ 6,50,000

**6,50,000+ [1 time (from 75% to 80%) x 50,000] + [2 times (from 80% to 100%) × 75,000]
= ₹ 8,50,000

2)
a) Company Should accept the offer as it is above its targeted sales price of ₹ 128.45 per
toy.
b) Company Should accept the offer as it is above its targeted sales price of ₹ 128.45 per
toy.
9. An Indian soft drink company is planning to establish a subsidiary company in Bhutan to
produce mineral water. Based on the estimated annual sales of 40,000 bottles of the
mineral water, cost studies produced the following estimates for the Bhutanese subsidiary.

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Particulars Total annual costs Percent of Total

Annual Cost which
is variable
Material 2,10,000 100%
Labour 1,50,000 80%
Factory Overheads 92,000 60%
Administration Expenses 40,000 35%

The Bhutanese production will be sold by manufacturer’s representatives who will receive
a commission of 8% of the sale price. No portion of the Indian office expenses is to be
allocated to the Bhutanese subsidiary.

You are required to: -

a) Compute the sale price per bottle to enable the management to realize an estimated
10% profit on sale proceeds in Bhutan.
b) Calculate the break-even point in rupees sales as also in number of bottles for the
Bhutanese subsidiary on the assumption that the sale price is ₹ 14 bottle.
(ICAI SM, Modified MTP Nov 2020)
Ans. a) Computation of Sale Price per Bottle Output: -40,000 Bottles
Particulars (₹)
Variable Cost: -
Material 2,10,000
Labour (₹ 1,50,000 × 80%) 1,20,000
Factory Overheads (₹ 92,000 × 60%) 55,200
Administrative Overheads (₹ 40,000 × 35%) 14,000
Commission (8% on ₹ 6,00,000) (W.N.-1) 48,000
Fixed Cost: -
Labour (₹ 1,50,000 × 20%) 30,000
Factory Overheads (₹ 92,000 × 40%) 36,800
Administrative Overheads (₹ 40,000 × 65%) 26,000
Total Cost 5,40,000
Profit (W.N-1) 60,000
Sales Proceeds (W.N.-1) 6,00,000
Sales Price per bottle (
₹ 6,00,000
) 15
40,000 Bottles

b) Calculation of Break-even Point if Sale price is ₹14.

Sales Price per Bottle = ₹ 14
Variable Cost per Bottle =
₹ 4,44,000 (W,N,−2)
= ₹ 11.10
40,000 Bottles
Contribution per Bottle = ₹ 14 − 11.10 = ₹ 2.90
Break-even Point:
(in number of Bottles) Fixed Costs
= Contribution per Bottle
₹92,800
= ₹2.90
= 32,000 Bottles
(In Sales Value) = 32,000 Bottles × ₹14
= ₹ 4,48,000
Working Notes: -
W.N.-1 Computation of Sales Price
Let the Sales Price be ‘X’

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8𝑥
Commission = 100
10𝑥
Profit= 100
8𝑥 10𝑥
x= 4,92,000 + +
100 100
100𝑥 − 8𝑥 − 10𝑥 = 4,92,00,000
82𝑥 = 4,92,00,000
𝑥 = 4,92,00,000/82 = ₹ 6,00,000

W.N.-2 Computation of Total Variable Cost

Total Variable Cost (₹)
Material 2,10,000
Labour 1,20,000
Factory Overheads 55,200
Administrative Overheads 14,000
Commission [(40,000 Bottles × ₹14) × 8%] 44,800
4,44,000
10. A company has three factories situated in north, east and south with its Head Office in
Mumbai. The management has received the following summary report on the operations
of each factory for a period: -
(₹ in ‘000’)
Particulars Sales Profit
Actual Over/(Under) Actual Over/(Under)
Budget Budget
North 1,100 (400) 135 (180)
East 1,450 150 210 90
South 1,200 (200) 330 (110)

Calculate for each factory and for the company as a whole for the period: -
a) The fixed costs.
b) Break-even sales.
(ICAI SM, RTP Nov-2021)
Ans. a) Calculation of fixed cost
Fixed Cost = (Actual sales × P/V ratio) − Profit
North = (1,100 × 45%) − 135 = 360
East = (1,450 × 60%) − 210 = 660
South = (1,200 × 55%) − 330 = 330
Total Fixed Cost 1,350

b) Calculation break-even sales (in ₹ ‘000’)

Fixed Cost
Break-Even Sales = P/V ratio
360
North = 45% = 800
660
East = 60% = 1,100
330
South = = 600
55%
Total 2,500

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Working notes
Calculation of P/V Ratio (₹ ‘000’)
Particulars Sales Profit
North: - Actual 1,100 135
Add: - Under budgeted 400 180
Budgeted 1,500 315

Difference in Profit 315−135 180

P/V ratio = = =× 100 = × 100 = 45%.
Difference in Sales 1,500−1,100 400
(₹ ‘000’)
Particulars Sales Profit
East: - Actual 1,450 210
Less: - Over budgeted (150) (90)
Budgeted 1,300 120

90
P/V ratio = × 100 = 60%
150
(₹ ‘000’)
Particulars Sales Profit
South: - Actual 1,200 330
Add: - Under budgeted 200 110
Budgeted 1,400 440

110
P/V ratio = × 100 = 55%
200
11. The following are cost data for three alternative ways of processing the clerical work for
cases brought before the LC Court System: -
Particulars A B C
Manual (₹) Semi- Fully-
Automatic (₹) Automatic (₹)
Monthly fixed costs;
Occupancy 15,000 15,000 15,000
Maintenance Contract ---- 5,000 10,000
Equipment lease ---- 25,000 1,00,000
Unit variable costs (per report)
Supplies 40 80 20
Labour ₹200 ₹60 ₹20
(5hrs × ₹40) (1hr × ₹60) (0.25 hr × ₹ 80)

Required: -
a) Calculate cost indifference points, Interpret your results.
b) If the present case load is 600 cases and it is expected to go up to 850 cases in near
future, Select most appropriate on cost considerations?
(ICAI SM, Modified July 2021)
Ans. i) Cost Indifference Point
Particulars A and B (₹) A and C (₹) B and C (₹)
Differential Fixed Cost (I) ₹ 30,000 ₹ 1,10,000 ₹ 80,000
(₹ 45,000 − (₹ 1,25,000 − ₹ (₹ 1,25,000 −
₹ 15,000) 15,000) ₹ 45,000)

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Differential Variable Costs (II) ₹ 100 ₹ 200 ₹ 100
(₹ 240 − ₹ 140) (₹ 240 − ₹ 40) (₹ 140 − ₹
40)
Cost Indifference Point (I/II) 300 550 800
(Differential Fixed Cost / Cases Cases Cases
Differential Variable Costs per
case)

Interpretation of Results: -
At activity level below the indifference points, the alternative with lower fixed costs and
higher variable costs should be used. At activity level above the indifference point
alternative with higher fixed costs and lower variable costs should be used.
No. of Cases Alternative to be Chosen
Cases  300 Alternative ‘A’
300 ≥ Cases  800 Alternative ‘B’
Cases ≥ 800 Alternative ‘C’

Present case load is 600. Therefore, alternative B is suitable. As the number of cases is
expected to go upto 850 cases, alternative C is most appropriate.
12. A Ltd. Manufacture and sales its product R-9. The following figures have been collected
from cost records of last year for the product R-9: -
Elements of Cost Variable Cost portion Fixed Cost
Direct Material 30% of Cost of Goods Sold ----
Direct Labour 15% of Cost of Goods Sold ----
Factory Overhead 10% of Cost of Goods Sold ₹ 2,30,000
Administration Overhead 2% of Cost of Goods Sold ₹ 71,000
Selling & Distribution Overhead 4% of Cost of Sales ₹ 68,000

Last Year 5,000 units were sold at ₹ 185 per unit. From the given Determine the followings:
a) Break-even Sales (in rupees)
b) Profit earned during last year
c) Margin of Safety (in %)
d) Profit if the sales were 10% less than the actual sales.
(Assume that Administration Overhead is related with Production activity)
(May 2020 RTP, Modified MTP Dec 2021)
Ans. a) Break -Even Sales: -
Fixed Costs ₹ 𝟑,𝟔𝟗,𝟎𝟎𝟎
= P/V Ratio
= 𝟓𝟑.𝟒𝟏%
= ₹6,90,882

b) Profit earned during the last year: -

= (Sales − Total Variable Costs) − Total Fixed Costs
= (₹9,25,000 − ₹4,31,000) − ₹ 3,69,000
= ₹ 1,25,000

c) Margin of Safety (%): -

Sales−Breakeven Sales
= × 100
Sales
₹ 9,25,000−₹ 6,90,882
= ₹ 9,25,000
× 100 = 25.31%

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d) Profit if the sales were 10% less than the actual sales: -
Profit = 90% (₹ 9,25,000 − ₹ 4,31,000) − ₹ 3,69,000
= ₹ 4,44,600 − ₹ 3,69,000 = ₹ 75,600

Working Notes: -
1) Calculation of Cost of Goods Sold: -
Let the Cost of Goods sold be x
x = Direct Material + Direct Labour + Factory Overhead + Admin. Overhead
x = {0.3x + 0.15x + (0.10x + ₹ 2,30,000) + (0.02x + ₹ 71,000)}
x = 0.57x + ₹ 3,01,000
₹ 3,01,000
x=
0.43
∴ Cost of goods sold = ₹7,00,000

2) Calculation of Cost of Sales: -

Cost of Sales = Cost of goods sold + Selling & Distribution Overhead
Cost of Sales = ₹ 7,00,000 + (0.04 Cost of Sales + ₹ 68,000)
₹ 7,68,000
Cost of Sales = 0.96
= ₹ 8,00,000

3) Calculation of Variable Costs: -

Direct Material- (0.30 × ₹ 7,00,000) ₹ 2,10,000
Direct Labour (0.15 × ₹ 7,00,000) ₹ 1,05,000
Factory Overhead- (0.10 × ₹ 7,00,000) ₹ 70,000
Administration OH- (0.02 × ₹ 7,00,000) ₹ 14,000
Selling & Distribution OH (0.04 × ₹ 8,00,000) ₹ 32,000
₹ 4,31,000

4) Calculation of total Fixed Costs: -

Factory Overhead: - ₹ 2,30,000
Administration OH- ₹ 71,000
Selling & Distribution OH ₹ 68,000
₹ 3,69,000

5) Calculation of P/V Ratio: -

Contribution Sales−Variable Costs
P/V Ratio = Sales
× 100 = Sales
× 100
(₹185×5,000 Units)−₹ 4,31,000
= × 100 = 53.41%
₹185×5,000 Units
13. A Ltd. Maintains margin of safety of 37.5% with an overall contribution to sales ratio of
40%. Its fixed costs amount to ₹5 lakhs.
Calculate the following: -
a) Break-even sales
b) Total Sales
c) Total Variable Costs
d) Current profit
e) New ‘margin of safety’ if the sales volume is increased by 7 ½ %.
(ICAI SM, Modified May 2023)
Ans. a) P/V Ratio = 40%
Fixed cost 500000
Break-even Sales = P/V ratio
= 40%
= ₹12,50,000
b) Margin of Safety = 37.5%
Break-even sales = 62.5%

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Total sales × 62.5% = Break-even sales
Total sales = ₹ 20,00,000
c) Contribution to Sales Ratio = 40%
Therefore, Variable cost to Sales Ratio = 60%
Variable Cost = 60% of Sales = 60% of 20,00,000
Variable Cost = 12,00,000
d) Current Profit = Total contribution – Fixed cost
= ₹ 20,00,000 × 40% − 5,00,000 = ₹ 3,00,000
e) If Sales Value is increased by 7.5%
New Sales Value = ₹ 20,00,000 × 1.075 = ₹ 21,50,000
New Margin of Safety = New Sales Value − BES
= ₹ 21,50,000 − ₹ 12,50,000 = ₹ 9,00,000
14. A company can make any one of the 3 products X, Y or Z in a year. It can exercise its option
only at the beginning of each year.
Relevant information about the products for the next year is given below.
Particulars X Y Z
Selling Price (₹/unit) 10 12 12
Variable Costs (₹/unit) 6 9 7
Market Demand (unit) 3,000 2,000 1,000
Production Capacity (unit) 2,000 3,000 900
Fixed Costs (₹) 30,000

Required: -
Compute the opportunity costs for each of the products.
(ICAI SM, Modified MTP May 2020)
Ans. Particulars X Y Z
i) Contribution per unit (₹) 4 3 5
ii) Units (lower of production/Market 2,000 2,000 900
Demand)
iii) Possible Contribution (₹) [(i)×(ii)] 8,000 6,000 4,500
iv) Opportunity Cost* (₹) 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).
15. A manufacturing company is producing a product ‘A’ which is sold in the market at ₹45 per
unit. The company has the capacity to produce 40,000 units per year. The budget for the
year 20X1-X2 projects a sale of 30,000 units.

The Costs of each unit are expected as under: -

Particulars (₹)
Materials 12
Wages 9
Overheads 6

Margin of Safety is ₹ 4,12,500.

You are required to: -
a) Calculate fixed cost and break-even point.
b) Calculate the volume of sales to earn profit of 20% on sales.

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c) If management is willing to invest ₹ 10,00,000 with an expected return of 20%,
Calculate units to be sold to earn this profit.
d) Management expects additional sales if the selling price is reduced to ₹ 44. Calculate
units to be sold to achieve the same profit as desired in above C.
(Nov. 2018, MTP May 2023–II)
Ans. Margin of Safety =
Profit
= ₹ 4,12,500
P/V ratio
Profit
= 45−(12+9+6) = ₹ 4,12,500
45
Profit
= 18 = 4,12,500
45

Profit = 1,65,000
P/V ratio = 18/45 X 100 = 40%
a) Fixed Cost
P
Profit = (Contribution = Sales × V Ratio) − Fixed Cost
1,65,000 = ((30,000 × 45) × 40%) − Fixed Cost
Or Fixed Cost = 5,40,000 − 1,65,000
= ₹ 3,75,000
Or
Profit = Contribution − Fixed Cost = ₹ 5,40,000 − ₹ 3,75,000 = ₹ 1,65,000
18
P/V Ratio = = 40%
45
Break-even Point = Total Sales − Margin of Safety
= ₹ (30,000 × 45) − 4,12,500
= 13,50,000 − 4,12,500 = ₹ 9,37,500
𝐎𝐫
Fixed Cost 3,75,000 3,75,000
BEP = P/V ratio
= 18 = 40%
= ₹ 9,37,500 OR 20,833.33 units.
45

b) Let’s assume, Sales Volume = S unit so total sales value is 45 S and

Contribution is 45 S − 27 S = 18 S
Now, Contribution = Fixed Cost + Desired Profit
18 S = 3,75,000 + 9 S (20% of 45 S)
Or, 9S = 3,75,000
3,75,000
So, S = 9
units.
3,75,000×45
Volume of sales = 9
= ₹ 18,75,000 or 41666.67 units
So, ₹ 18,75,000 sales are required to earn profit on 20% of sales
c)
Contribution = Fixed Cost + Desired Profit
18 S = 3,75,000 + Return on Investment
18 S = 3,75,000 + 2,00,000
S =
5,75,000
units = 𝟑𝟏, 𝟗𝟒𝟓 units (approx. )
18
So, 31,945 units to be sold to earn a return of ₹ 2,00,000.

d)
Revised Contribution = Fixed Cost + Desired Profit
17 S = 3,75,000 + 2,00,000
S =
5,75,000
units
17

S = 𝟑𝟑. 𝟖𝟐𝟒 units (approx. )

∴ Additional Sales to be sold to achieve the same profit is 33,824 Units.

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16. ABC Limited started its operations in the year 20X1 with a total production capacity of
2,00,000 units. The following information, for two years, are made available to you: -
Particulars Year (20X1) Year (20X2)
Sales (units) 80,000 1,20,000
Total cost (₹) 34,40,000 45,60,000

There has been no change in the cost structure and selling price and it is anticipated that it
will remain unchanged in the year 20X3 also. Selling Price is ₹ 40 per unit.
Calculate: -
a) Variable cost per unit
b) Profit Volume Ratio
c) Break-Even Point (in units)
d) Profit if the firm operates at 75% of the capacity.
(May 2015, May 2013)
Ans. a) Calculation for variable cost per unit
Particulars 20X1 20X2 Difference
Sale units 80,000 1,20,000 40,000
Sale value @ ₹ 40 32,00,000 48,00,000 16,00,000
Total cost (₹) 34,40,000 45,60,000 11,20,000
Variable cost per unit (₹) 11,20,000
= ₹ 28
40,000

Fixed Cost: -
✓ = 45,60,000 − 1,20,000 × 28
✓ = ₹ 12,00,000
Or
✓ = 34,40,000 − 80,000 × 28
✓ = ₹ 12,00,000
Variable cost per unit = ₹ 28

b) Calculation of P/V Ratio: -

Contribution
✓ PV Ratio = × 100
Sales
✓ Sales = 32,00,000
✓ V.C. = (28 × 80,000)
✓ = (22,40,000)
✓ Contribution = 9,60,000
9,60,000
✓ PV Ratio = 32,00,000 × 100
✓ PV Ratio = 𝟑𝟎%

c) Calculation for Break-even Points (in units): -

Fixed cost
✓ Break-even point (₹ in units) = Contribution per unit
12,00,000
✓ = ₹ (40−28)
12,00,000
✓ = 12
✓ Break-even point = 1,00,000 units

d) Profit if the firm operates at 75% of the capacity: -

✓ Capacity at 75% = 2,00,000 × 75%
✓ = 1,50,000 units

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✓ Contribution per unit = ₹ 12
✓ Contribution (₹) = 1,50,000 × ₹ 12
✓ = ₹ 18,00,000
✓ Fixed Cost = ₹ 12,00,000
✓ Profit = Contribution − Fixed Cost
✓ = ₹ 18,00,000 − ₹ 12,00,000
✓ = ₹ 𝟔, 𝟎𝟎, 𝟎𝟎𝟎
17. LNP Ltd. and MNT Ltd. are engaged in manufacturing of identical products. Existing
revenue and cost data is as follows:
LNP Ltd. (₹) MNT Ltd. (₹)
Sales 13,60,000 17,00,000
Variable Cost 10,88,000 10,20,000
Fixed Cost 1,72,000 5,80,000

You are required to calculate:

i) Break-even point (in Value) for each company
Sales at which each company will earn a profit of ₹5,00,000.
Sales at which both companies will have same profits.
(MTP May 2023-I, RTP May 2023)
Ans. Income Statement
LNP Ltd. (₹) MNT Ltd. (₹)
Sales (₹) 13,60,000 17,00,000
Less: Variable Cost 10,88,000 10,20,000
Contribution 2,72,000 6,80,000
P.V. Ratio (
Contribution
× 100) 20% 40%
Sales
Fixed Cost (₹) 1,72,000 5,80,000
Profit (₹) 1,00,000 1,00,000
Fixed Cost
i) Break-Even Point = P.V.Ratio
₹1,72,000
LNP Ltd. = 20%
= ₹8,60,000
₹5,80,000
MNT Ltd. = 40% = ₹14,50,000
ii) Sales value to earn a profit of ₹5,00,000
Fixed Cost+Desired Profit
Sales =
P.V.Ratio
1,72,000+5,00,000
LNP Ltd. = = ₹33,60,000
40%
5,80,000+5,00,000
MNT Ltd. = = ₹27,00,000
40%
iii) Sales value at which both companies will earn same profit
Let S = Sales value and P = Profit
Sales – Variable cost = Fixed cost + Profit
or, Contribution = Fixed cost + Profit
LNP Ltd.:
20% S = ₹1,72,000 + P
or, 0.20S = ₹1,72,000 + P…………………………………..(i)
MNT Ltd.
40% S = ₹5,80,000 + P
or, 0.40S = ₹5,80,000 + P…………………………………..(ii)
By solving these equations, we will get the value of ‘S’ and ‘P’
0.20S = 1,72,000 + P
0.40S = 5,80,000 + P
- - -
- 0.20S = -4,08,000

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or, S = ₹20,40,000
Putting the value of ‘S’ in equation no. (i) we will get the value of ‘P’
0.20 × 20,40,000 = 1,72,000 + P
or, P = ₹2,36,000
Therefore, at Sale value of ₹20,40,000 both the companies will earn same profit of
₹2,36,000
18. M/s. Gaurav Private Limited is manufacturing and selling two products;

‘BLACK’ and ‘WHITE’ at selling price of ₹20 and ₹30 respectively. The following sales
strategy has been outlined for the financial year 20X1-X2: -
i) Sales planned for the year will be ₹ 81,00,000 in the case of ‘BLACK’ and ₹ 54,00,000 in
the case of ‘WHITE’.
ii) The selling price of ‘BLACK’ will be reduced by 10% and that of ‘WHITE’ by 20%.
iii) Break-even is planned at 70% of the total sales of each product.
iv) Profit for the year to be maintained at ₹ 8,26,200 in the case of ‘BLACK’ and ₹ 7,45,200
in the case of ‘WHITE’. This would be possible by reducing the present annual fixed
cost of ₹ 42,00,000 allocated as ₹ 22,00,000 to ‘BLACK’ and ₹ 20,00,000 to ‘WHITE’.

You are required to Calculate: -

a) Number of units to be sold of ‘BLACK’ and ‘WHITE’ to Break even during the financial
year 20X1-X2.
b) Amount of reduction in fixed cost product-wise to achieve desired profit mentioned at
(iv) above.
(May 2019)
Ans. a) Statement showing Break-Even Sales
Particulars Black White
Sales Planned 81,00,000 54,00,000
Selling Price (₹) 18 24
Number of units to be sold 4,50,000 2,25,000
Break Even-Sales (in units),70% of total sales 3,15,000 1,57,500
unit
Or
Break-Even Sales (In ₹), 70% of total sales 56,70,000 37,80,000

b) Statement Showing Fixed Cost Reduction

Profit to be maintained (₹) 8,26,200 7,45,200
Margin of Safety (30% of Sales) (₹) 24,30,000 16,20,000
P/V Ratio (Profit / Margin of Safety) × 100 34% 46%
Contribution (Sales × 34% or 46%) (₹) 27,54,000 24,84,000
Less: Profit (₹) 8,26,200 7,45,200
Revised Fixed Cost (₹) 19,27,800 17,38,800
Present Fixed Cost (₹) 22,00,000 20,00,000
Reduction in Fixed Cost 2,72,200 2,61,200
19. 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
(ICAI SM)

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Ans. Statement showing Cumulative Sales & Profit
Prod Sales Cumul Variable Contribution Cumulative Cumulative
ucts ative Cost Contribution Profit
Sales
(₹) (₹) (₹) (₹) (₹) (₹)
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

20. ABC Motors assembles and sells motor, vehicles. It uses an actual costing system, in which
unit costs are Calculated on a monthly basis. Data relating to March and April, 20X1 are: -
Particulars March April
Unit data: -
Beginning Inventory 0 150
Production 500 400
Sales 350 520
Variable-cost data: -
Manufacturing Costs per unit Produced ₹10,000 ₹10,000
Distribution Costs per unit sold 3,000 3,000
Fixed-Cost data: -
Manufacturing Costs ₹20,00,000 ₹20,00,000
Marketing Costs 6,00,000 6,00,000
The Selling Price per motor Vehicle is ₹ 24,000.

Required: -

i) Present income statements for ABC Motors in March and April of 20X1 under (a)
variable costing, and (b) absorption costing.
ii) Explain the differences between (a) and (b) for March and April.
(May 2000)

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Ans. i) A) Income statement for ABC Motors
(Under Variable Costing)
(₹’000’)
Particulars March 20X1 April 20X1
Per unit Total Per unit Total
(₹) (₹) (₹) (₹)
Contribution margin (W.N.1) 11 3,850 11 5,720
(350 units (520 units
× ₹11) × ₹11)
Less: Total fixed cost 2,600 2,600
Operating income 1,250 3,120

B) Income statement for ABC Motors

(Under Absorption Costing) (₹’000’)

Particulars March 20X1 April 20X1

Per unit Total Per unit Total
(₹) (₹) (₹) (₹)
Manufacturing Cost
Variable 10 5,000 10 4,000
(500 units (400 units
× ₹10) × ₹10)
Fixed 4 2,000 5 2,000
(500 units (400 units
× ₹4) × ₹5)
Total manufacturing cost 14 7,000 15 6,000
(500 units (400 units
× ₹14) × ₹15)

Add: Beginning inventory - 14 2,100

(150 units
× ₹14)
-
7,000 8,100
Less: Closing inventory 14 2,100 15 450
(W.N.2) (150 units (30 units
× ₹ 14) × ₹15)
4,900 7,650

Add: Variable distribution Costs 3 1,050 3 1,560

(350 units (520 units
× 3) × 3)

Add: Fixed Marketing Costs 600 600

Cost of Sales (A) 6,550 9,810
Sales: (B) 24 8,400 24 12,480
Operating income: {(B) − (A)} 1,850 2,670

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Working Notes: -
(₹’000’)
1) Contribution margin (per unit): - March 20X1 April 20X1
✓ Selling price (per unit) (₹) 24 24
✓ Less: Manufacturing costs (per unit) (₹) 10 10
✓ Less: Distribution cost (per unit) (₹) 3 3
✓ Contribution margin (per unit) (₹) 11 11
2) Closing inventory units: -
✓ Beginning inventory (units) 0 150
✓ Add: Production (units) 500 400
✓ Total (units) 500 550
✓ Less: units sold 350 520
✓ Closing inventory (units) 150 30

ii) Difference between operating income under variable costing and absorption costing is
due to fixed cost. Under absorption costing the closing inventory has the component
of fixed cost, due to which its profit increases under it.

Fixed Fixed
Absorption Variable Manufacturing manufacturing
Costing Costing
( )( )= Cost in cost in
operating operating ending begining
income income
( inventory ) ( inventory )
✓ March 2000: (₹’000’)
✓ ₹ 1,850 − ₹ 1,250 = ₹ 600 − ₹0
✓ April 20X1: (₹’000)
✓ ₹ 2,670 − ₹ 3,120 = ₹ 150 − ₹600.
21. M.K. Ltd. Manufactures and sells a single product X whose selling price is ₹40 per unit and
the variable cost is ₹ 16 per unit.

i) If the Fixed Costs for this year are ₹ 4,80,000 and the annual sales are at 60% margin
of safety, Calculate the rate of net return on sales, assuming an income tax level of
40%.
ii) For the next year, it is proposed to add another product line Y whose selling price
would be ₹50 per unit and the variable cost ₹ 10 per unit. The total fixed costs are
estimated at ₹ 6,66,600. The sales mix of X: Y would be 7: 3. Determine at what level
of sales next year, would M.K. Ltd. Break even? Give separately for both X and Y the
break-even sales in rupee and quantities.
(ICAI SM)
Ans. i) Contribution per unit = Selling Price − Variable Cost
= ₹40 − ₹16 = ₹24
₹4,80,000
Break-even Point = = 20,000 units
₹24
Actual Sale−Break even Sales
Percentage Margin of Safety = Actual Sales
Actual Sales−20,000 units
Or, 60% =
Actual Sales
∴ Actual Sales = 50,000 units

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Particulars (₹)
Sales Value (50,000 units × ₹40) 20,00,000
Less: Variable Cost (50,000 units × ₹16) 8,00,000
Contribution 12,00,000
Less: Fixed Cost 4,80,000
Profit 7,20,000
Less: Income Tax @ 40% 2,88,000
Net Return 4,32,000

₹ 4,32,000
Rate of Net Return on Sales = 21.6% ( × 100)
₹20,00,000
ii) Products
Particulars X (₹) Y (₹)
Selling Price 40 50
Less: Variable Cost 16 10
Contribution per unit 24 40
Sales Ratio 7 3
Contribution in Sales Ratio 168 120

Based on Weighted Contribution: -

24×7+40×3
Weighted Contribution = = ₹ 28.8 per unit
10
Total Fixed Cost 6,66,600
Total Break-even Point = = = 23,145.80 units
Weighted Cost 28.80
Break-even Point
7
X = × 23,145.80 = 16,202 units
10
Or 16,202 × ₹40 = ₹ 6,48,080
3
Y = 10 × 23,145.80 = 6,944 units or 6,944 × ₹50 = ₹ 3,47,200

Based on distributing fixed cost in the weighted Contribution Ratio: -

Fixed Cost
168
X = 288 × 6,66,600 = ₹ 3,88,850
120
Y = 288 × 6,66,600 = ₹2,77,750
Break-even Point
Fixed Cost 3,88,850
X = Contribution per unit = 24
= 16,202 units or ₹ 6,48,000
Fixed Cost 2,77,750
Y = = = 6,944 units or ₹ 3,47,200
Contribution per unit 40
22. X Ltd. Supplies spare parts to an air craft company Y Ltd. The production capacity of X Ltd.
Facilitates production of any one spare part for a particular period of time. The following
are the cost and other information for the production of the two different spare parts A and
B: -
Particulars Part A Part B
Per unit
Alloy usage 1.6 kgs. 1.6 kgs.
Machine Time: Machine P 0.6 hrs 0.25 hrs.
Machine Time: Machine Q 0.5 hrs. 0.55 hrs.
Target Price (₹) 145 115

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Total hours available Machine P 4,000 hours
Machine Q 4,500 hours

Alloy available is 13,000 kgs. @ ₹ 12.50 per Kg.

Variable overheads per machine hours Machine P: ₹ 80
Machine Q: ₹ 100
Required: -
a) Identify the spare part which will optimize contribution at the offered price.
b) If Y Ltd. Reduces target price by 10% and offers ₹ 60 per hour of unutilized machine
hour, Calculate the total contribution from the spare part identified above?
(ICAI SM)
Ans. a)
Particulars Part A Part B
(₹) (₹)
Raw material usage 20 20
(12.5×1.6) (12.5×1.6)
Variable Overhead: Machine “P” 48 20
(80×.6) (80×.25)
Variable Overhead: Machine “Q” 50 55
(100×.5) (100×.55)
(B) Total Variable Cost per unit 118 95
(A) Sales Price 145 115
Contribution per unit (A – B) 27 20

b) Since, machine hours and raw material are limited we need to verify maximum
possible production of both products.
Particulars Part A Part B
Allow usage 8125 8125
13000 13000
( ) ( )
1.6kg 1.6kg
Machine P 6666 16000
4000 4000
( ) ( )
0.6 . 25
Machine Q 8800 8000
4400 4400
( ) ( )
.5 . 55
6666 units 8000 units
Total contribution; A = 27 × 6666 = ₹1,79,982
B = 20 × 8000 = ₹1,60,000

Product A should be produced.

Revised Contribution from Part A = 145 – 10% of 145 = ₹130.5
Contribution per unit = Revised sales price – Variable cost = 130.5 – 118 = ₹12.5

On producing 6666 units of Part A, machine hours of machine A will get completely utilised
but machine hours of B: -
⇒6666 × 0.5 = 3333 hours will utilise
Balance hours = 4500 – 3333 = 1167 hours
Total contribution = 6666×12.5+1167×60
= ₹83,325 + ₹70,020 = ₹1,53,345

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23. The profit for the year of R.J Ltd. Works out to 12.5% of the capital employed and the
relevant figures are as under: -

Particulars (₹)
Sales ………………………………………………………………………………. ₹ 5,00,000
Direct Materials ……………………………………………………………… ₹ 2,50,000
Direct Labour …………………………………………………………………. ₹ 1,00,000
Variable Overheads ………………………………………………………… ₹ 40,000
Capital Employed …………………………………………………………… ₹ 4,00,000

The new Sales Manager who has joined the company recently estimates for next year a
profit of about 23% on capital employed, provided the volume of sales is increased by 10%
and simultaneously there is an increase in Selling Price of 4% and an overall cost reduction
in all the elements of cost by 2%.

Required:
Find Out by computing in detail the cost and profit for next year, whether the proposal of
Sales Manager can be adopted.
(ICAI SM)
Ans. Statement showing “Cost and Profit for the Next Year”
Particulars Existing Volume, Costs, etc. Estimated Sale,
Volume, etc. after 10% increase Cost, Profit, etc.*
(₹) (₹) (₹)
Sales 5,00,000 5,50,000 5,72,000
Less: Direct Materials 2,50,000 2,75,000 2,69,500
Direct Labour 1,00,000 1,10,000 1,07,800
Variable 40,000 44,000 43,120
Overheads
Contribution 1,10,000 1,21,000 1,51,580
Less: Fixed Cost # 60,000 60,00 58,800
Profit 50,000 61,000 92,780

(*) for the next year after increase in selling price @ 4% and overall cost reduction by 2%.
(#) Fixed Cost = Existing Sales − Existing Marginal Cost − 12.5% on ₹ 4,00,000
= ₹ 5,00,000 − ₹ 3,90,000 − ₹50,000 = ₹ 60,000
₹92,780
Percentage Profit on Capital Employed equals to 23.19% ( × 100)
₹ 4,00,000
Since the Profit of ₹92,780 is more than 23% of capital employed, the proposal of the Sales
Manager can be adopted.
24. Wonder Ltd. Manufactures a single product, ZEST. The following figures relate to ZEST for
a one-year period: -

Activity Level 50% 100%

Sales and production (units) 400 800
Particulars (₹) (₹)
Sales 8 ,00, 000 16,00,000
Production costs: -
− Variable 3,20 000 6,40,000
− Fixed 1,60,000 1,60,000

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Selling and distribution costs: -
− Variable 1,60,000 3,20,000
− Fixed 2,40,000 2,40,000

The normal level of activity for the year is 800 units. Fixed costs are incurred evenly
throughout the year, and actual fixed costs are the same as budgeted. There were no stocks
of ZEST at the beginning of the year.
In the first quarter, 220 units were produced and 160 units were sold.

Required: -
a) Compute the fixed production costs absorbed by ZEST if absorption costing is used?
b) Calculate the under/over-recovery of overheads during the period?
c) Calculate the profit using absorption costing?
d) Calculate the profit using marginal costing?
(ICAI SM)
Ans. a)

Fixed production costs absorbed: - (₹)

Budgeted fixed production costs 1,60,000
Budgeted output (normal level of activity 800 units)
Therefore, the absorption rate: - 1,60,000/800 200 per
unit
During the first quarter, the fixed production Cost absorbed by ZEST 44,000
would be (220 units × ₹200)

b)
Under/ over-recovery of overheads during the period: - (₹)
Actual fixed production overhead 40,000
(1/4 of ₹ 1,60,000)
Absorbed fixed production overhead 44,000
Over-recovery of overheads 4,000

c) Profit for the quarter (Absorption Costing)

Particulars (₹)
Sales revenue (160 units × ₹ 2,000): (A) 3,20,000
Less: Production costs:
− Variable cost (220 units × ₹800) 1,76,000
− Fixed overheads absorbed (220 units × ₹200) 44,000
− 2,20,000
Add: Opening Stock -
₹ 2,20,000
Less: Closing Stock ( 220 units × 60 units) (60 000)

Cost of Goods sold 1,60,000

Less: Adjustment for over-absorption of fixed production (4,000)
overheads
156000
Add: Selling & Distribution Overheads:
− Variable (160 units × ₹400) 64,000

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− Fixed (1/4th of ₹ 2,40,000) 60,000
Cost of Sales (B) 2,80,000
Profit {(A) − (B)} 40,000

d) Profit for the Quarter (Marginal Costing)

Particulars (₹)
Sales revenue (160 units × ₹ 2,000): (A) 3,20,000
Less: Production costs:
− Variable cost (220 units × ₹ 800) 1,76,000
Add: Opening Stock --
₹ 1,76,000
Less: Closing Stock ( 220 units × 60 units) (48,000)

Variable Cost of goods sold 1,28,000

Add: Selling & Distribution Overheads: -
− Variable (160 units × ₹ 400) 64,000
Cost of Sales (B) 1,92,000
Contribution {(C) = (A) − (B)} 1,28,000
Less: Fixed Costs:
− Production cost (40,000)
− Selling & distribution cost (60,000) (1,00,000)
Profit 28,000
25. The ratio of variable cost to sales is 70%. The break-even point occurs at 60% of the
capacity sales. Find the capacity sales when fixed costs are ₹ 90,000. Also Compute profit
at 75% of the Capacity sales.
(ICAI SM)
Ans. Capacity Sales = ₹ 3,00,000 ÷ 0.60 = ₹ 5,00,000
Computation of Profit of 75% Capacity
75% of capacity Sales (i.e., ₹ 5,00,000 × 75%) = ₹ 3,75,000
Less: Variable cost (i.e. ₹ 3,75,000 × 70%) = ₹ 2,62,500
= ₹ 1,12,500
Less: Fixed Cost = ₹ 90,000
Profit = ₹ 22,500

Working-
Variable cost to sales = 70%, P/V Ratio = 30%,
Break-even Sales × P/V Ratio = Fixed Cost
Break-even Sales × 0.30 = ₹ 90,000
Break-even Sales = ₹ 3,00,000
It is given that break-even occurs at 60% capacity
26. You are required to: -
Particulars (₹)
i) Determine profit, when sales 2,00,000
Fixed Cost 40,000
Break-Even Point 1,60,000
ii) Determine sales, when fixed cost 20,000
Profit 10,000
Break-Even Point 40,000
(ICAI SM)

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Ans. i) We Know that: Break-Even Sales × P/V Ratio = Fixed Cost
Or ₹ 1,60,000 × P/V ratio = ₹ 40,000
P/V ratio = 25%
We also know that Sales × P/V Ratio = Fixed Cost + Profit
Or ₹ 2,00,000 × 0.25 = ₹ 40,000 + Profit
Or Profit = ₹ 10,000

ii) Again, Break-Even Sales × P/V ratio = Fixed Cost

Or ₹ 40,000 × P/V Ratio = ₹ 20,000
Or P/V ratio = 50%
We also know that: Sales × P/V ratio = Fixed Cost + Profit
Or Sales × 0.50 = ₹ 20,000 + ₹ 10,000
Or Sales = ₹ 60,000.
27. A Company manufactures radios, which are sold at ₹ 1,600 per unit. The total cost is
composed of 30% for direct materials, 40% for direct wages and 30% for overheads.
Increase in material price by 30% and in wages rates by 10% is expected in the forthcoming
year, as a result of which the profit at current selling price may decrease by 40% of the
Present profit per unit.
You are required to prepare a statement showing current and future profit at present
Selling Price.
How much Selling Price should be increased to maintain the present rate of profit?
(May 2001)
Ans. Let X be the cost, Y be the profit and ₹ 1,600 selling price per unit of radio manufactured
by a company.
Hence
X+Y=1,600 …….(i)
Statement of present and future cost of a radio
Particulars Present Cost Increase in Cost Anticipated future
(₹) (₹) cost (₹)
(a) (b) (c)=(a)+(b)
Direct material 0.3X 0.09X 0.39X
Direct labour 0.4X 0.04X 0.44X
Overheads 0.3X - 0.30X
Total X 0.13X 1.13X

✓ An increase in material price and wages rates resulted into a decrease in current profit
by 40 percent at present selling price; therefore, we have;
✓ 1.13X + 0.6Y = 1600 …………………(ii)
✓ On Solving (i) and (ii) we get;
✓ X = ₹ 1,207.55
✓ Y = ₹ 392.45
✓ Current profit ₹ 392.45 or 32.5% of cost
✓ Future profit ₹ 235.47 (392.45*60%)
✓ Revised selling price to maintain same level of profit= Revised cost-plus original profit
= 1207.55×1.13+392.45=1756.98
✓ Increase in selling price = 1756.98-1600=156.98
✓ % Increase in selling price = 156.98/1600=9.8%
28. a) If margin of safety is ₹ 2,40,000 (40% of sales) and P/V ratio is 30% of AB Ltd.
Calculate its
1) Break even sales

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2) Amount of profit on sales of ₹ 9,00,000.

b) X Ltd. Has earned a contribution of ₹ 2,00,000 and net profit of ₹ 1,50,000 of sales of
₹ 8,00,000. What is its margin of safety?
(ICAI SM)
Ans. a) Total Sales = 2,40,000 ×
100
= ₹ 6,00,000
40
Contribution = 6,00,000 × 30% = ₹ 1,80,000
P
Profit = 𝑀𝑂𝑆 × ratio = 2,40,000 × 30% = ₹72,000
V
Fixed Cost = Contribution − Profit
= 1,80,000 − 72,000 = ₹ 1,08,000
Fixed Cost 1,08,000
1) Break-even Sales = = = ₹ 3,60,000
P/V ratio 30%
2) Profit = (Sales × P/V ratio) − Fixed Cost
= (9,00,000 × 30%) − 1,08,000 = ₹1,62,000

Contribution 2,00,000
b) P/V ratio = Sales
= 8,00,000 = 25%
Profit 1,50,000
Margin of Safety = = = ₹ 6,00,000
P/V ratio 25%
Alternatively: -
Fixed Cost = Contribution − Profit
= ₹ 2,00,000 − ₹1,50,000 = ₹50,000
B.E. Point = ₹ 50,000 ÷ 25% = ₹2,00,000
Margin of Safety = Actual Sales − B. E. Sales
= 8,00,000 − 2,00,000 = 6,00,000
29. The product mix of a Gama Ltd. Is as under: -

Particulars Products
M N
Units 54,000 18,000
Selling price ₹ 7.50 ₹ 15.00
Variable Cost ₹ 6.00 ₹ 4.50

Find the break-even points in units, if the company discontinues product ‘M’ and replace
with product ‘O’. The quantity of product ‘O’ is 9,000 units and its selling price and variable
costs respectively are ₹ 18 and ₹ 9. Fixed Cost is ₹ 15,000.
(ICAI SM)
Ans. N = 18,000 Units
O = 9,000 Units
Ratio (N : O) = 2 : 1
Let
t = No. of Units of ‘O’ for BEP
2t = No. of units of ‘N’ for BEP
Contribution = Selling price – Variable cost
Contribution of ‘N’ = ₹ 10.5 per unit (15 – 4.50)
Contribution of ‘O’ = ₹ 9 per unit (18 – 9)

At Break Even point:

Contribution – Fixed cost = 0
⇒ (10.5 × (2t) + 9 × t )- 15,000 = 0
⇒ 30t = 15,000

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⇒t 500 units
BEP of ‘N’ = 2t = 1,000 units
BEP of ‘O’ = t = 500 units
30. Mr. X has ₹ 2,00,000 investments in his business firm. He wants a 15 percent return on his
money. From an analysis of recent cost figures, he finds that his variable cost of operating
is 60 per cent of sales, his fixed costs are ₹ 80,000 per year. Show Computations to answer
the following questions.

i) What sales volume must be obtained to break even?

ii) What sales volume must be obtained to get 15 percent return on investment?
iii) Mr. X estimates that even if he closed the doors of his business, he would incur ₹
25,000 as expenses per year. At what sales would he be better off by locking his
business up?
(ICAI SM)
Ans. i) Break-even point= Fixed Cost ÷ P/V ratio = 80,000 ÷ 40 % or ₹ 2,00,000

Particulars (₹)
Suppose sales 100
Variable cost 60
Contribution 40
P/V ratio 40%
Fixed cost = ₹ 80,000

ii) 15% return on ₹ 2,00,000 30,000

Fixed Cost 80,000
Contribution required 1,10,000
Sales volume required = ₹ 1,10,000 ÷ 40% or ₹ 2,75,000

iii) Avoidable fixed cost if business is locked up = ₹ 80,000 − ₹ 25,000 = ₹ 55,000

Minimum sales required to meet this cost: ₹ 55,000 ÷ 40%
₹ 1,37,500
Mr. X will be better off by locking his business up, if the sale is less than ₹ 1,37,500.
31. A company had incurred fixed expenses of ₹ 4,50,000, with sales of ₹ 15,00,000 and earned
a profit of ₹ 3,00,000 during the first half year. In the second half, it suffered a loss of ₹
1,50,000.

Calculate: -
i) The profit-volume ratio, break-even point and margin of safety for the first half year.
ii) Expected sales volume for the second half year assuming that selling price and fixed
expenses remained unchanged during the second half year.
iii) The break-even point and margin of safety for the whole year.
(ICAI SM)
Ans. i) In the First half year: -
Contribution = Fixed Cost + Profit
= 4,50,000 + 3,00,000 = ₹ 7,50,000
Contribution 7,50,000
P/V ratio = × 100 = × 100 = 50%
Sales 15,00,000
Fixed Cost 4,50,000
Break-even point = P/V ratio
= 50%
× 100 = ₹ 9,00,000
Margin of Safety = Actual Sales − Break even point
= 15,00,000 − 9,00,000 = ₹ 6,00,000

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ii) In the second half year: -
Contribution = Fixed cost − Loss
= 4,50,000 − 1,50,000 = ₹ 3,00,000
Fixed cost−Loss 3,00,000
Expected sales volume = = = ₹ 6,00,000
P/V ratio 50%
iii) For the whole year: -
Fixed Cost 4,50,000×2
B.E. point = P = 50%
= ₹ 18,00,000
ratio
V
Profit 3,00,000−1,50,000
Margin of safety = = = ₹ 3,00,000
P/V ratio 50%
32. A single product company sells its product at ₹ 60 per unit. In 20X1, the company operated
at a margin of safety of 40%. The fixed costs amounted to ₹ 3,60,000 and the variable cost
ratio to sales was 80%.
In 20X2, it is estimated that the variable cost will go up by 10% and the fixed cost will
increase by 5%.
i) Find the Selling price required to be fixed in 20X2 to earn the same P/V ratio as in
20X1.
ii) Assuming the same selling price of ₹ 60 per unit in 20X2, Find the number of units
required to be produced and sold to earn the same profit as in 20X1.
(ICAI SM)
Ans. i) Profit earned in 20X1:
Particulars (₹)
Total Contribution (50,000 × ₹ 12) 6,00,000
Less: Fixed Cost 3,60,000
Profit 2,40,000
Selling price to be fixed in 20X2: -
Revised Variable cost (₹ 48 × 1.10) 52.80
Revised fixed cost (3,60,000 × 1.05) 3,78,000
P/V Ratio (Same as of 2019) 20%
Variable cost ratio to selling price 80%
Therefore, revised selling price per unit= ₹ 52.80 ÷ 80% = ₹ 66

ii) No. of units to be produced and sold in 20X2 to earn the same profit: -

We Know that Fixed Cost-plus profit = Contribution

(₹)
Profit in 20X1 2,40,000
Fixed cost in 20X2 3,78,000
Desired Contribution in 20X2 6,18,000
Contribution per unit = Selling price per unit − Variable Cost per unit. = ₹ 60 − ₹ 52.80 =
₹ 7.20.
No. of units to be produced in 20X2 = ₹ 6,18,000 ÷ ₹ 7.20 = 85,834 units.

Workings: -
1) P/V Ratio in 20X1
Particulars (₹)
Selling price per unit 60
Variable Cost (80% of Selling Price) 48
Contribution 12
P/V Ratio 20%

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2) No. of units sold in 20X1
Break-even point = Fixed Cost ÷ Contribution per unit
= ₹ 3,60,000 ÷ ₹ 12 = 30,000 units.
Margin of Safety is 40%. Therefore, break-even sales will be 60% of units sold.
No. of units sold = Break-even point in units ÷ 60% = 30,000 ÷ 60% = 50,000 units.
33. a) You are given the following data for the coming year for a factory.
Budgeted output 8,00,000 units
Fixed expenses ₹ 40,00,000
Variable expenses per unit ₹ 100
Selling price per unit ₹ 200
Draw a break-even chart showing the break-even point.

b) If price is reduced to ₹ 180. What will be the new break-even point?

(ICAI SM)
Ans. a) Contribution = Sales − Variable Cost = ₹ 200 − ₹ 100 = ₹ 100 per unit.
Fixed Cost 40,00,000
Break-Even Point = = = 40,000 unit.
Contribution per unit ₹ 100

b) When selling price is reduced

New selling price = ₹ 180
New Contribution = ₹ 180 − ₹ 100 = ₹ 80 per unit.
₹ 40,00,000
New Break-Even Point = ₹ 80
= 50,000 units.
34. An automobile manufacturing company produces different models of Cars. The budget in
respect of model 007 for the month of March, 20X1 is as under: -
Budgeted Output 40,000 units
₹ in lakhs ₹ in lakhs
Net Realisation 2,10,000
Variable Costs: -
Materials 79,200
Labour 15,600
Direct expenses 37,200 1,32,000
Specific Fixed Costs 27,000
Allocated Fixed Costs 33,750 60,750
Total Costs 1,92,750
Profit 17,250
Sales 2,10,000

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Calculate: -
a) Profit with 10 percent increase in selling price with a 10 percent reduction in sales
volume.
b) Volume to be achieved to maintain the original profit after a 10 percent rise in material
costs, at the originally budgeted selling price per unit.
(ICAI SM)
Ans. a) Statement of Calculation of Profit: -
Particulars (₹ in lakhs)
Sales 36,000 units at ₹ 5,77,500 2,07,900
Less: - Variable cost: 36,000 × ₹ 3,30,000 1,18,800
Contribution 89,100
Less: - fixed costs 60,750
Profit 28,350

Budgeted selling price = 2,10,000 lakhs / 40,000 units = ₹ 5,25,000 per unit.
Budgeted variable cost = 1,32,000 lakhs/ 40,000 units = ₹ 3,30,000 per unit.
Increased selling price = ₹ 5,25,000 + 10% = ₹ 5,77,500 per unit
New volume 40,000 − 10% = 36,000 units.

b) Budgeted Material Cost = 79,200 Lakhs/40,000 units = ₹1,98,000 per unit

Increased material cost = ₹ 1,98,000 × 110% = 2,17,800
Labour cost 15,600 lakhs /40,000 units = 39,000
Direct expenses, 37,200 lakhs/40,000 units = 93,000
Variable cost per unit 3,49,800
Budgeted selling price per unit 5,25,000
Contribution per unit (5,25,000 − 3,49,800) 1,75,200
Fixed costs+Profit 60,750 lakhs+17,250 lakhs
Sales Volume = Contribution Per Unit = ₹ 1,752 lakhs
= 44,521 units are to be sold to maintain the original profit of ₹ 17,250 lakhs.
35. XYZ Ltd. has a production capacity of 2,00,000 units per year. Normal capacity utilisation
is reckoned as 90%. Standard variable production costs are ₹ 11 per unit. The fixed costs
are ₹ 3,60,000 per year. Variable selling costs are ₹3 per unit and fixed selling costs are
₹ 2,70,000 per year. The unit selling price is ₹ 20.
In the year just ended on 30th June, 20X1, the production was 1,60,000 units and sales were
1,50,000 units. The closing inventory on 30th June was 20,000 units. The actual variable
production costs for the year were ₹ 35,000 higher than the standard.
a) Calculate the Profit for the year: -
i) By absorption costing method and
ii) By marginal costing method.
b) Explain the difference in the profits.
(ICAI SM)
Ans. a)
i) Income Statement (Absorption Costing) for the year ending 30th June 20X1
Particulars (₹)
Sales (1,50,000 units @ ₹ 20) 30,00,000
Production Costs: -
Variable (1,60,000 units @ ₹ 11) 17,60,000
Add: Increase 35,000 17,95,000
Fixed (1,60,000 units @ ₹ 2*) 3,20,000
* Fixed overhead Rate = 3,60,000/(2,00,000 X 90%)

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Cost of Goods Produced 21,15,000
Add: - Opening Stock (10,000 units @ ₹ 13) ** 1,30,000
**Total cost Per unit = Variable (11) + Fixed (2) = 13
22,45,000
₹ 21,15,000
Less: Closing Stock (1,60,000 units × 20,000 units) 2,64,375

Cost of Goods Sold 19,80,625

Add: Under absorbed fixed production overhead 40,000
(3,60,000 − 3,20,000) 20,20,625
Add: Non-production costs: -
Variable selling costs (1,50,000 units @ ₹3) 4,50,000
Fixed selling costs 2,70,000
Total cost 27,40,625
Profit (Sales − Total Cost) 2,59,375

Working Notes: -
1) Fixed production overhead is absorbed at a pre-determined rate based on normal
capacity, i.e., ₹ 3,60,000 ÷ 1,80,000 units = ₹2.
2) Opening stock is 10,000 units, i.e., 1,50,000 units + 20,000 units − 1,60,000 units. It is
valued at ₹ 13 per unit, i.e., ₹11 +₹2 (Variable + Fixed.)

ii) Income Statement (Marginal Costing) for the year ended 30th June, 20X1
Particulars (₹)
Sales (1,50,000 units @ ₹ 20) 30,00,000
Variable production cost (1,60,000 units @ ₹11 + ₹ 35,000) 17,95,000
Variable selling cost (1,50,000 units @ ₹ 3) 4,50,000
22,45,000
Add: Opening Stock (10,000 units @ ₹11) 1,10,000
23,55,000
Less: Closing stock 2,24,375
₹ 17,95,000
(1,60,000 units × 20,000 units)
Variable Cost of goods sold 21,30,625
Contribution (Sales − Variable cost of goods sold) 8,69,375
Less: Fixed cost − Production 3,60,000
− Selling 2,70,000 6,30,000
Profit 2,39,375

b) Reasons for Difference in Profit: - (₹)

Profit as per absorption costing 2,59,375
Add: - Op. stock under − valued in marginal costing 20,000
(₹ 1,30,000 − 1,10,000)
2,79,375
Less: Cl. Stock under − valued in marginal closing 40,000
(₹ 2,64,375 − 2,24,375)
Profit as per marginal costing 2,39,375
36. Jolly Fabrics manufactures quality napkins at its unit in Tirupur. The unit has a capacity of
60,000 napkins per month. Present monthly production for April is 40,000 napkins. Costs
incurred for production are as below: - (per unit).

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Direct Material ₹6 No fixed cost
Direct Labour ₹2 Fixed cost 75%
Manufacturing overhead ₹4 Variable 25%
Total ₹12

The marketing costs per unit is ₹ 7 (₹ 5 is variable). Marketing costs include distribution
costs and customer service costs. Present selling price is ₹ 22.50 per unit.
Due to a strike at its existing napkin supplier, a hotel group has offered to buy 10,000
napkins from jolly Fabrics @ ₹11 per napkin for the month of June. No further sales to the
hotel are anticipated.
Fixed manufacturing costs and marketing costs are tied to the 60,000 napkins. The
acceptance of the special order is not expected to affect the selling price to regular
customers.
No marketing costs involved in special order.

Prepare: -
a) Budgeted income statement for June.
b) Actual income statement under absorption costing for April.
c) Should Jolly Fabrics accept the special order from the hotel or not?
(Nov. 2003)
Ans. a) Budgeted Income Statement for June of M/s. Jolly Fabrics
Particulars Production in April Production in June
40,000 Incremental 50,000
napkins (after accepting
special order)
(a) Per Total Total (₹) (d) (₹)
napkin (₹) (C)= (e)=(d)
(₹) (b) 40,000 × (b) −(C)}
Revenue (A) 22.50 9,00,000 10,10,000 1,10,000
{40,000×₹22.50}
10,000×₹11.00
Variable costs;
Manufacturing costs
(W.N.1) 7.50 3,00,000 3,75,000 75,000
50,000 × ₹7.50
Marketing Costs 5.00 2,00,000 2,00,000
(No marketing
cost involved on
special order)
Total Variable Costs (B) 12.50 5,00,000 5,75,000 75,000
Contribution (C)={(A)−(B)} 10.00 4,00,000 4,35,000 35,000
Fixed Costs: -
Manufacturing (W.N.2)
Marketing (W.N.2) 2,70,000 2,70,000
Total fixed costs: (D) 1,20,000 1,20,000
Operating profit: {(C)−(D)} 3,90,000 3,90,000
10,000 45,000 35,000

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b) Actual Income Statement for April 20X1
(Under absorption costing)
Particulars (₹)
Revenue: (A) 9,00,000
(40,00 units × ₹22.50)
Cost goods sold;
Manufacturing costs 5,70,000
(40,000 napkins × ₹ 7.50 + ₹ 2,70,000)
Marketing costs 3,20,000
(40,000 napkins × ₹5 + ₹1,20,000)
Total costs: (B) 8,90,000
Profit: {(A) − (B)} 10,000

c) Decision of M/s. Jolly about the acceptance of special order of 10,000 napkins from the
hotel:
M/S. Jolly, Fabrics would earn an additional operating profit of ₹ 35,000 on accepting
the special order. Hence this order must be accepted.

Working Notes: -
1) Variable and fixed cost components of manufacturing cost per unit: -
Particulars Variable cost Fixed cost Total cost per
per napkin per napkin napkin (₹)
(₹)
Direct material 6.00 - 6.00
Direct labour 0.50 1.50 2.00
Manufacturing overhead 1.00 3.00 4.00
Manufacturing cost per unit 7.50 4.50 12.00

2) Total fixed cost (tied up with 60,000 napkins): -

Particulars (₹)
Manufacturing fixed cost 2,70,000
60,000 napkins × ₹ 4.50
Marketing fixed cost 1,20,000
60,000 napkins × ₹2.00
Total fixed cost 3,90,000
37. XY Ltd. Makes two products X and Y, whose respective fixed costs are F1 and F2. You are
given that the unit contribution of Y is one fifth less than the unit contribution of X, that the
total of F1 and F2 is ₹ 1,50,000, that the BEP of X is 1,800 units (for BEP of X, F 2 is not
considered) and that 3,000 units is the indifference point between X and Y. (i.e., X and Y
make equal profits at 3,000-unit volume, considering their respective fixed costs). There is
no inventory build-up as whatever is produced is sold.
Required: -
Find out the values F1 and F2 and units’ contributions of X and Y.
(ICAI SM)
Ans. Let Cx be the Contribution per unit of Product X.
Therefore, Contribution per unit of Product Y =C y=4/5Cx = 0.8Cx
Given F1 + F2 = 1,50,000.
F1 = 1,800 Cx (Break even Volume × Contribution per unit)
Therefore, F2 = 1,50,000 − 1,800 Cx.

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At 3000 units both X and Y gives the equal profits therefore,
3,000 Cx − F1=3,000 × 0.8 Cx − F2 or 3,000 Cx − F1 = 2,400 Cx − F2 (Indifference point)
i.e. 3,000 Cx − 1,800 Cx = 2,400 Cx − 1,50,000 + 1,800 Cx
i.e., 3,000 Cx = 1,50,000, Therefore, Cx = ₹ 50/- (1,50,000/3,000)

Therefore, Contribution per unit of X = ₹50

Fixed Cost of X = F1 = ₹ 90,000 (1,800 × 50)
Therefore, Contribution per unit of Y is ₹ 50 × 0.8 = ₹ 40 and
Fixed Cost of Y = F2 = ₹ 60,000 (1,50,000 − 90,000)
The Value of F1 = ₹ 90,000, F2 = ₹ 60,000 and X = ₹ 50 and Y = ₹40
38. Two manufacturing companies A and B are planning to merge. The details are as follows:
-
Particulars A B
Capacity utilisation (%) 90 60
Sales (₹) 63,00,000 48,00,000
Variable Cost (₹) 39,60,000 22,50,000
Fixed Cost (₹) 13,00,000 15,00,000

Assuming that the proposal is implemented, Calculate: -

a) Break-Even sales of the merged plant and the capacity utilization at that stage.
b) Profitability of the merged plant at 80% capacity utilization.
c) Sales Turnover of the merged plant to earn a profit of ₹ 60,00,000.
d) When the merged plant is working at a capacity to earn a profit of ₹ 60,00,000, what
percentage of increase in selling price is required to sustain an increase of 5% in fixed
overheads.
(Jan. 2021)
Ans. At the break-even sales profit is nil and contribution are equal to the Fixed cost and for
combined breakeven point fixed cost of both the plant is need to be recovered which is
computed in the following manner.

a) Computation of Break-Even sales of Plant A & B.

Particulars Amount (₹) A Amount (₹) B
Sales 63,00,000 48,00,000
Less: Variable cost 39,60,000 22,50,000
Contribution 23,40,000 25,50,000
Less: Fixed Cost 13,00,000 15,00,000
Profit 10,40,000 10,50,000
P/V Ratio = (Contribution ÷ Sales) × 100 37.1428% 53.125%
Sales at 100% capacity 70,00,000 80,00,000
Variable cost 44,00,000 37,50,000
Contribution 26,00,000 42,50,000
Merged contribution 68,50,000
Merged sales 1,50,00,000
P/V ratio of merged plant (68,50,000 ÷ 1,50,00,000) 45.6667%
× 100
Breakeven sales of merged plant (28,00,000 ÷ 61,31,386.8614
45.66666%)

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Computation of Capacity utilization of the merged plant: -
✓ Sales at 100% capacity utilization of Plant A and B
63,00,000 48,00,000
✓ For Plant A= = ₹ 70,00,000; For Plant B= = ₹ 80,00,000
90% 60%
✓ Break-even sales = 61,31,386.8614
61,31,386.8614
✓ Capacity utilization of merged Plant = × 100 = 40.8759%
150,00,000

b) Computation of Profitability of the merged plant at 80% capacity utilization: -

Particulars Amount
(₹)
Sales (150,00,000 × 80%) 120,00,000
Less: Variable cost (120,00,000 × 54.33333%) 65,20,000
Contribution (120,00,000 × 45.66667%) 54,80,000
Less: Fixed Cost 28,00,000
Profit 26,80,000

c) Computation of sales to earn a desired profit of ₹60,00,000:

Fixed Cost+Desired Profit
✓ Required Sales= × 100
Profit Volume Ratio
28,00,000+60,00,000
✓ Required Sales= 45.67
× 100 = ₹ 1,92,68,667
d) Percentage increase in selling price –
Increase in fixed cost
= ₹28,00,000 × 5% = ₹1,40,000
Therefore, percentage increase in sales price
₹1,40,000
= ₹1,92,68,667×100 = 0.726% (approx.)
39. During a particular period, ABC Ltd has furnished the following data: -

i) Sales ₹10,00,000
ii) Contribution to Sales ratio 37% and
iii) Margin of safety is 25% of Sales.

A decrease in selling price and decrease in the fixed cost could change the “Contribution to
sales ratio” to 30% and “margin of safety” to 40% of the revised sales.

Calculate: -
a) Revised Fixed Cost.
b) Revised Sales
c) New Break-Even Point.
(Jan. 2021)
Ans. a) Revised fixed cost = 2,70,000 − 1,08,000 = ₹ 1,62,000
b) Revised sales = ₹ 9,00,000
Revised Fixed cost
c) New Breakeven point= P/V R𝑎𝑡𝑖𝑜
× 100
1,62,000
New Breakeven point= 30%
= ₹ 5,40,000

Working:
1) Sales = ₹ 10,00,000

Contribution to sales ratio = 37%;

Margin of safety = 25%

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✓ Contribution = ₹10,00,000 × 37% = 3,70,000; Margin of Safety = 10,00,000 × 25% =
₹ 2,50,000
✓ Breakeven sales = Total sales − Margin of Safety
✓ Breakeven sales = 10,00,000 − 2,50,000 = ₹ 7,50,000
✓ At Breakeven point, Fixed Cost = Contribution
✓ Contribution = 7,50,000 × 37% = ₹ 2,77,500
✓ Current fixed cost = ₹ 2,77,500
✓ Variable cost = 10,00,000 − 3,70,000 = ₹ 6,30,000
✓ After decrease in the selling price, variable cost amount will remain same i.e.,
₹ 6,30,000
✓ Now, percentage of variable cost after decrease in selling price 100% - 30% = 70% of
sales
₹6,30,000
✓ So, the revised Sales = 70%
= ₹ 9,00,000
✓ Revised sales = ₹ 9,00,000
✓ Margin of Safety = 40% i.e., 9,00,000 × 30% = ₹ 2,70,000
Please check the line in grey if MOS is given 40% then reason for calculating by 30%
✓ Contribution at Margin of Safety = 3,60,000 × 30% = ₹ 1,08,000

Please provide proper working note numbers – Please replace the above workings and
solution with this one.
a) Contribution to sales ratio (P/V ratio) = 37%
Variable cost ratio = 100% – 37% = 63%
Variable cost = ₹10,00,000 × 63% = ₹6,30,000
After decrease in selling price and fixed cost, sales quantity has not changed. Thus,
variable cost is ₹6,30,000.
Revised Contribution to sales = 30%
Thus, Variable cost ratio = 100% – 30% = 70%
₹6,30,000
Thus, Revised sales = 70%
= ₹9,00,000
Revised, Break–even sales ratio = 100% – 40% (revised Margin of safety) = 60%
i) Revised fixed cost = revised breakeven sales × revised contribution
to sales ratio
= ₹5,40,000 (₹9,00,000 × 60%) × 30%
= ₹1,62,000
ii) Revised sales = ₹9,00,000 (as calculated above)
iii) Revised Break–even point = Revised sales × Revised break–even sales ratio
= ₹9,00,000 × 60%
= ₹5,40,000
40. A Pharmaceutical company produces formulations having a shelf life of one year. The
company has an opening stock of 30,000 boxes on 1st January, 20X2 and expected to
produce 1,30,000 boxes as was in the just ended year of 20X1. Expected sale would be
1,50,000 boxes.
Costing department has worked out escalation in cost by 25% on variable cost and 10% on
fixed cost. Fixed cost for the year 20X1 is ₹ 40 per unit. New price announced for 20X2 is ₹
100 per box. Variable cost on opening stock is ₹ 40 per box.

You are required to compute Break-even volume for the year 20X2.
(Nov. 2005)

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Ans. Here, it is assumed that company is following FIFO method for valuing its inventory. Units
available for rate are 30,000 units from opening stock and 1,20,000 units from current year
production. Thus, making a total of 1,50,000 units. Now-
1) Total contribution from opening stock= No. of units of opening stock × (Sale
price−Variable cost)
= 30,000(100 − 40) = ₹ 18,00,000/−
2) New variable cost per unit = VC + Escalation
= 40 + (25% of ₹ 40)
= 50 − per unit.
3) Current years contribution per unit= sale price per unit−new variable cost per unit
= 100 − 50
= ₹ 50 − per unit.

4) Fixed cost in current year = FC in previous year + Escalation

= (1,30,000 × 40) + 10% of ₹ 52,00,000 =
= 𝟓𝟕, 𝟐𝟎, 𝟎𝟎𝟎

(FC in previous year was 1,30,000 units×40/- because Production in previous year was
same as planned for this year)
Break-Even Point (in units) = units from opening stock (Total fixed Cost−Total
Contribution from opening Stock.
57,20,000−18,00,000
= 30,000 + 50
39,20,000
= 30,000 +
50
= 30,000 + 78,400
= 1,08,400 units.
Break-Even Point (in ₹)
Units from SP stock−(Total FC−Total Contribution from opening stock)
= Current year′ s contribution per unit
× price
57,20,000−18,00,000
= 30,000 + 50
× 100 = ₹ 1,08,40,000/−
41. X Ltd. Manufactures a semiconductor for which the cost and price structure is given below:-
Particulars (₹) per unit
Selling Price 500
Direct Material 150
Direct Labour 100
Variable overhead 50
Fixed cost = ₹ 2 lacs.

The product is manufactured by a machine, whose spare part costing ₹ 2,000 needs
replacement after every 100 pieces of output. This is in addition to the above costs. Assume
that no defectives are produced and that the spare part is readily available in the market at
all times at ₹ 2,000.

a) Prepare the profitability statement for production levels of 2,000 units and 3,000 units,
when fixed cost = ₹ 1 lacs.
b) What is the break-even point for the above data?
c) Comment on the BEP. If the fixed cost can be reduced to ₹ 1,80,000 from the existing
level of 2 lacs.
(Nov. 2006)

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Ans. a) X Ltd. Profitability statement (Volume level)
Particulars 2,000 units 3,000 units
(₹’000) (₹’000)
Sales 1000 1500
Variable Costs
Direct Material 300 450
Direct Labour 200 300
Variable Overhead 100 150
Part Costs* 40 60
Fixed cost 100 100
Total cost 740 1060
Profit 260 440
2,000 3,000
* Part cost: 100 × 2,000 = 40,000 ; 100
× 2,000 = ₹ 60,000

b)
✓ For computing the BEP: - Parts cost although a step fixed cost can be considered as
variable for the limited purpose of computing the range in which BEP occur. The
2,000
variable parts cost per unit is ₹ 20( 100 )
1,00,000 2,00,000
✓ Range in which the BEP occur(200−20) − 555.55 , (200−20)
− 1,111.11
Range 501 − 600 1,101 − 1,200
General Fixed Cost ₹ 1,00,00 ₹ 2,00,000
Parts cost (6 × 2,000) = ₹ 12,000 (12 × 2,000) = ₹ 24,000
Total Fixed Cost ₹ 1,12,000 ₹ 2,24,000
Gross ₹ 200 ₹ 200
Contribution/unit*
Break-Even Point 560 units 1,120 units
*Gross Contribution per unit
Sales − Direct Material − Direct Labour − Variable Overheads
= ₹ 500 − ₹ 150 − ₹ 100 − ₹50 = ₹200

1,80,000
c) When fixed cost is ₹ 1,80,000. Range of Break-Even Point will be 180
= 1,000
(901 − 1,000)
✓ Since the Break-Even Point of 1,000 falls on the upper most limits in the range
(901−1,000) there will be one more Break-Even Point in the subsequent range in
1,001−1,100.

Range 901−1,000 (₹) 1,001−1,100 (₹)

Gross fixed cost 1,80,000 1,80,000
Parts cost 20,000 22,000
(10×2,000) (11×2,000)
Total fixed cost 2,00,000 2,02,000
Gross contribution/unit 200 200
BEP 1,000 units 1,010 units
42. A company has introduced a new product and marketed 20,000 units. Variable cost of the
product is ₹ 20 per unit and fixed overheads are ₹ 3,20,000.
You are required to: -
a) Calculate selling price per unit to earn a profit of 10% on sales value, BEP and Margin
of Safety.

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b) If the selling price is reduced by the company by 10%, demand is expected to increase
by 5,000 units, then what will be its impact on profit, BEP and Margin of Safety?
c) Calculate Margin of Safety it profit is ₹ 64,000.
(Nov. 2016)
Ans. a) Calculation of selling price per unit to earn a profit of 10% on sales value: -
✓ Let sales value per unit is X.
✓ ∴ Sales=Variable Cost+Fixed Cost+ Profit
✓ ∴ 20,000X=4,00,000+3,20,000+(10% of 20,000X)
✓ ∴ 20,000X−2,000X=7,20,000
7,20,000
✓ ∴ X= 18,000
✓ ∴ X=40

Hence, Sales price per unit is ₹40.

Calculation of Break-Even Point: -
Fixed Cost
Break-Even Point (in units)=
Contribution P.U
₹ 3,20,000
✓ = ₹ 40−₹20
₹ 3,20,000
✓ =
₹20
✓ 16,000 units

Calculation of Margin of Safety: -

✓ Margin of Safety = Total Sales−Break-even Sales
✓ = ₹(20,000 × 40) − ₹(16,000 × 40)
✓ = ₹ 8,00,000 − ₹ 6,40,000
✓ = ₹ 1,60,000

b) Calculation of New Profit, Break-Even Point & Margin of Safety: -

✓ Profit= Sales − Varibale Cost − Fixed Cost
✓ = (25,000 × 36) − (25,000 × 20) − 3,20,000
✓ = ₹ 9,00,000 − ₹ 5,00,000 − ₹ 3,20,000
✓ = ₹ 80,000

Thus, there is no change in profit if selling price is reduced by 10%.

Fixed Cost
Break-Even Point = Contribution p.u.
₹ 3,20,000
= 16
= 20,000 units
Thus, Break-even point of sales is increase from 16,000 units to 20,000 units it S.P. reduced
by 10%.
✓ Margin of Safety = Total Sales − Break − Even Point
✓ = ₹ (25,000 × 36) − ₹(20,000 × 36)
✓ = ₹ 9,00,000 − ₹ 7,20,000
✓ = ₹ 1,80,000

Thus, Margin of Safety is also increase by ₹ 20,000 in case of reduction in S.P.

c) Calculation of Margin of Safety if profit is ₹ 64,000: -

✓ Margin of Safety = Total Sales−Break-even Sales
Or
Profit
✓ Margin of Safety =
P/V Ratio

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Contribution
✓ ∴ P/V Ratio = Sales
× 100
₹ 4,00,000
✓ = ₹ 8,00,000 × 100 = 50%
Profit
✓ Now, Margin of Safety = P/V Ratio
₹ 64,000
✓ = 50%
✓ = ₹ 1,28,000 or 3200 units.
43. A Company, which manufactures and sells three products, furnishes the following details
for a month: -
Products A B C
No. of units budgeted 1,00,000 38,000 46,000
Selling Price per unit (₹) 50 80 60
Variable costs per unit (₹) 34 52 24

It has been proposed that an intensive advertisement campaign involving an expenditure

of ₹ 1,20,000 per month and reduction of selling prices will increases the sales of product
C as under: -
i) If the selling price is reduced to ₹ 55 per unit. The sales will increase to 59,000 units
per month.
ii) If the selling Price is reduced to ₹ 51 Per unit. The sales will increase to ₹ 65,000 units
per month.

The fixed cost of the company amounts to ₹34,20,000 per month.

a) Calculate the current monthly break-even sales value of the company.
b) Evaluate the two proposals and advise which of the proposals should be implemented.
c) Calculate the sales units required per month of product C to justify the expenditure on
advertisement in respect of your decision in (b) above.
(May 2002)
Ans. i) Current monthly break-even sales value of the company:
Product A B C
No. of units budgeted 1,00,000 38,000 46,000
Selling price per unit (₹) 50 80 60
Variable costs per unit (₹) 34 52 24
Contribution per unit (₹) 16 28 36
P/V ratio [contribution ÷ sales] 32% 35% 60%

Budgeted sales value of A = ₹50 p.u. × 1,00,000 units = ₹50,00,000

Budgeted sales value of B = ₹80 p.u. × 38,000 units =₹30,40,000
Budgeted sales value of C = ₹60 p.u. × 46,000 units =₹27,60,000
Total budgeted sales =₹1,08,00,000
Current sales mix of the products = 500:304:276
500 304 276
Composite P/V ratio = 1080×32% +1080×35% + 1080 × 60% = 40%
Fixed cost ₹34,20,000
Break even sales value = P = 40%
= ₹85,50,000
Composite ratio
V
500
At BEP, sales of A = 1080 × ₹85,50,000 = ₹39,58,333
304
At BEP, sales of B = 1080× ₹85,50,000 = ₹24,06,667
276
At BEP, sales of C = 1080× ₹85,50,000 = ₹21,85,000
= ₹85,50,000

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ii) Evaluation of the two proposals to increase sales of product C:
Particulars Current Proposal 1 Proposal 2
a) Selling price p.u. (₹) 60 55 51
b) Variable cost p.u. (₹) 24 24 24
c) Contribution p.u. (₹) [a-b] 36 31 27
d) Units sold (units) 46,000 59,000 65,000
e) Total contribution (₹) [c×d) 16,56,000 18,29,000 17,55,000
f) Extra Fixed cost (₹) - 1,20,000 1,20,000
g) Profit (₹) [e-f] 16,55,000 17,09,000 16,35,000

Since the profit is maximum under proposal 1, the same should be implemented.

iii) Sales units required per month of product C to justify advertisement

expenditure in respect of decision taken above:
In (iii) above, if is suggested that proposal 1 should be implemented. The minimum
number of additional units to be sold p.m. to justify the extra expenditure of ₹1,20,000
under this proposal

Additional fixed cost ₹1,20,000

= = = 3,871 units.
contribution p.u. ₹31 p.u.
Total number of units sold of product C should be = 46,000 + 3,871 = 49,871 units
44. The following particulars are taken from the records of a company engaged in
manufacturing two products, A and B, from a certain material: -
Particulars Product A Product B
(Per unit) (Per unit)
(₹) (₹)
Sales 2,500 5,000
Material Cost (₹ 50 per kg.) 500 1,250
Direct labour (₹ 30 per hour) 750 1,500
Variable overhead 250 500
Total fixed overheads: - ₹ 10,00,000

Comment on the profitability of each product when: -

a) Total sales in value are limited.
b) Raw materials are in short supply.
c) Production capacity is the limiting factor.
d) Total availability of raw materials is 20,000 kg. and maximum sales potential of each
product is 1,000 units, find the product mix to yield maximum profits.
(Nov. 1998)
Ans. a) Comment on the profitability of each product when total sales in value is limited:-
Contribution
✓ P/V ratio = × 100
Sales
₹ 1,000
✓ P/V ratio of Product A = ₹ 2,500 × 100 = 40%
(Refer to working note 1)
₹ 1,750
✓ P/V ratio of Product B = ₹ 5,000 × 100 = 35%
(Refer to working note 1)
✓ Product A is more profitable as P/V ratio is more than that of B.

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b) Comment on the profitability of each product when raw materials is in short
supply: -
✓ Contribution per kg. of raw materials quantity used in the product
Contribution of the product
✓ = Raw material required in kg.per unit
₹ 1,000
✓ Contribution per kg. of raw material quantity used in product A = = ₹ 100
10 𝑘𝑔.
(Refer to working notes 1 and 2)
₹ 1,750
✓ Contribution per kg. of raw material quantity used in product B = 25 kg.
= ₹ 70
(Refer to working notes 1 and 2)
✓ Since the raw material is in short supply and the contribution per kg of raw
material used in product A is more than that of product B, therefore product A is
more profitable.

c) Comment on the profitability of each product when production capacity is the

limiting factor: -
✓ Contribution per direct labour hour
Contribution of the product
✓ In the case of the product = Labour Hrs.required per unit
✓ Contribution per labour hour in the case of Product A
₹ 1,000
✓ = = ₹ 40
25 hours
(Refer to working notes 1 and 3)
✓ Contribution per labour hour in the case of product B
₹ 1,750
✓ = 50 hours = ₹ 35
(Refer to working notes 1 and 3)
✓ Since the production capacity is the limiting factory and the contribution per
labour hour in the case of product A is more than that of product B therefore
product A is more profitable.

d) Statement of product mix to yield maximum profits

(When total availability of raw material is 20,000 kg)
Products Units Raw material Contribut Total Fixed Profit
to be consumed (kg.) ion per Contribution Cost (₹) (₹)
made unit (₹) (₹)
(a) (b) (c) (d) (e)=(b)×(d) (f) G=
(e)−(f)
A 1,000 10,000 1,000 10,00,000
(1,000 units×10
kg.)

B 400 (400 1,750 7,00,000

units×25kg.)
20,000 17,00,000 10,00,000 7,00,000

Working Notes: -
1) Contribution per unit: -
Particulars Product A Product B
(₹) (₹) (₹) (₹)
2,500 5,000
Sales
Less: Variable Cost

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Material Cost 500 1,250
Direct labour 750 1,500
Variable overhead 250 1,500 500 3,250
Contribution per unit 1,000 1,750

2) Material in kg. per unit: -

₹ 500
✓ Product A: = 10 kg.
₹ 50
₹ 1,250
✓ Product B: = 25 kg.
₹ 50

3) Labour hours per unit: -

₹ 750
✓ Product A: = 25 hours.
₹ 30
₹ 1,500
✓ Product B: = 50 hours
₹ 30
45. Moon Ltd. produces products 'X', 'Y' and 'Z' and has decided to analyse its production mix
in respect of these three products - 'X', 'Y' and 'Z'.
You have the following information:
X Y Z
Direct Materials ₹ (per unit) 160 120 80
Variable Overheads ₹ (per unit) 8 20 12

Direct labour:
Departments: Rate per Hour (₹) Hours per unit Hours per unit Hours per unit
X Y Z
Department-A 4 6 10 5
Department-B 8 6 15 11

From the current budget, further details are as below:

X Y Z
Annual Production at present (in units) 10,000 12,000 20,000
Estimated Selling Price per unit (₹) 312 400 240
Sales departments estimate of possible sales in the coming 12,000 16,000 24,000
year (in units)

There is a constraint on supply of labour in Department-A and its manpower cannot be

increased beyond its present level.
Required:
i) Identify the best possible product mix of Moon Ltd.
ii) Calculate the total contribution from the best possible product mix.
(Nov 2020, ICAI SM)
Ans. i) Statement Showing “Calculation of Contribution/ unit”
Particulars X (₹) Y (₹) Z (₹)
Selling Price (A) 312 400 240
Variable Cost:
Direct Material 160 120 80
Direct Labour
Dept. A (Rate × Hours) 24 40 20
Dept. B (Rate × Hours) 48 120 88
Variable Overheads 8 20 12
Total Variable Cost (B) 240 300 200

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Contribution per unit (A - B) 72 100 40
Hours in Dept. A 6 10 5
Contribution per hour 12 10 8
Rank I II III

Existing Hours = 10,000 x 6hrs. + 12,000 x 10 hrs. + 20,000 x 5 hrs. = 2,80,000 hrs. Best
possible product mix (Allocation of Hours on the basis of ranking)
Produce ‘X’ = 12,000 units
Hours Required = 72,000 hrs (12,000 units × 6 hrs.)
Balance Hours Available = 2,08,000 hrs (2,80,000 hrs. – 72,000
hrs.)
Produce ‘Y’ (the Next Best) = 16,000 units
Hours Required = 1,60,000 hrs (16,000 units × 10 hrs.)
Balance Hours Available = 48,000 hrs (2,08,000 hrs. – 1,60,000
hrs.)
Produce ‘Z’ (balance) = 9,600 units (48,000 hrs./ 5 hrs.)

ii) Statement Showing “Contribution”

Product Units Contribution/ Unit (₹) Total Contribution (₹)
X 12,000 72 8,64,000
Y 16,000 100 16,00,000
Z 9,600 40 3,84,000
Total 28,48,000
46. When volume is 4,000 units; average cost is ₹ 3.75 per unit. When volume is 5,000 units,
average cost is ₹ 3.50 per unit. The Break-Even point is 6,000 units.
Calculate:
i) Variable Cost per unit
ii) Fixed Cost and
iii) Profit Volume Ratio.
(Nov 2019)
Ans. i) Variable cost per unit =
Change in Total cost
Change in unit
(₹ 3.5 × 5,000 units)− (₹ 3.75 𝑋 4,000 units)
Variable cost per unit = 5,000 − 4,000
₹17,500 − ₹ 15,000
Variable cost per unit = 1,000
= ₹ 2.50
ii) Fixed cost = Total Cost – Variable cost (at 5,000 units level)
Fixed cost = ₹17,500 – ₹2.5 × 5,000 = ₹5,000
Fixed Cost ₹ 5,000
iii) Contribution per unit = = = 0.8333
Break Even Point (in unit) 6,000 (in unit)
Contribution Per unit 0.8333
P/V Ratio = Sales Price per unit
= 2.5+0.833 = 25%.
47. PJ Ltd manufactures hockey sticks. It sells the products at ₹ 500 each and makes a profit of
₹ 125 on each stick. The Company is producing 5,000 sticks annually by using 50% of its
machinery capacity.
The cost of each stick is as under:

Direct Material ₹ 150

Direct Wages ₹ 50
Works Overhead ₹ 125 (50% fixed)

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Selling Expenses ₹ 50 (25% variable)

The anticipation for the next year is that cost will go up as under:
Fixed Charges 10%
Direct Wages 20%
Direct Material 5%

There will not be any change in selling price.

There is an additional order for 2,000 sticks in the next year.
Calculate the lowest price that can be quoted so that the Company can earn the same profit
as it has earned in the current year?
(Nov 2019)
Ans. Selling Price = ₹ 500
Profit = ₹ 125
No of Sticks = 5,000
Particulars Current Year (₹) Next Year (₹)
Direct Material 150 157.50 (150 + 5%)
Direct Wages 50 60 (50 + 20%)
Works Overheads 62.50 62.50
Selling Expenses 12.50 12.50
Total Variable Cost 275 292.50
Fixed Cost (62.5 × 5,000) = 3,12,500; (37.5 × 5,00,000 5,50,000
5,000) = 1,87,500

Let: Lowest Price Quoted = K

Now, Sales = Target Profit (5,000 units × ₹ 125) + Variable Cost + Fixed Cost Or,
= (5,000 × 500) + (2,000 × K) = 6,25,000 + 20,47,500 + 5,50,000 Or, K = ₹ 361.25
So, Lowest Price that can be quoted to earn the profit of ₹ 6,25,000 (same as current year)
is ₹ 361.25
48. Mega Company has just completed its first year of operations. The costs on a normal costing
basis are as under: ₹
Direct material 4 kg @ ₹ 4 = 16.00
Direct labour 3 hrs @ ₹ 18 = 54.00
Variable overhead 3 hrs @ ₹ 4 = 12.00
Fixed overhead 3 hrs @ ₹ 6 = 18.00
100.00
Selling and administrative costs:
Variable ₹ 20 per unit
Fixed ₹ 7,60,000

During the year the company has the following activity:

Units produced; = 24,000
Units sold = 21,500
Unit selling price = 168
Direct labour hours worked = 72,000
Actual fixed overhead was ₹48,000 less than the budgeted fix: overhead. Budgeted variable
overhead was ₹ 20,000 less than the actual variable overhead. The company used an
expected actual activity level: 72,000 direct labour hours to compute the predetermine
overhead rates.

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Required:
i) Compute the unit cost and total income under:
a) Absorption costing
b) Marginal costing.
ii) Under or over absorption of overhead.
iii) Reconcile the difference between the total income at absorption and marginal costing.
(Nov 2009)
Ans. i)
Computation of Unit and Total Income
Unit Cost Absorption Costing Marginal Costing
(₹) (₹)
Direct Material 16.00 16.00
Direct Labour 54.00 54.00
Variable Overhead 12.00 12.00
Fixed Overhead 18.00 --
Unit Cost 100 82

Income Statements
Absorption Costing
Sales (21,500 × ₹168) 36,12,000
Less:
[Cost of goods sold (21,500 × 100)-Over 21,22,000
Absorption (28,000)]
14,90,000
Less: Selling & Distribution Expenses 11,90,000
[(21,500X20) +7,60,000]
Profit 3,00,000

Marginal Costing
Sales (21,500 × ₹168) 36,12,000
Less:
[Cost of goods sold (21,500 × 82) +Under 17,83,000
absorption (20,000)]

18,29,000
Less: Selling & Distribution Expenses 4,30,000
Contribution
Less: Fixed Factory and Selling & 13,99,000
Distribution
Overhead (3,84,000 +7,60,000) 11,44,000
Profit 2,55,000

ii)
Under or over Absorption of Overhead
₹
Budgeted Fixed Overhead (72,000 Hrs. × ₹6) 4,32,000
Less: Actual Overhead was less than Budgeted Fixed Overhead 48,000
∴ Actual Fixed Overhead 3,84,000

Budgeted variable Overhead (72,000 Hrs. × ₹4) 2,88,000

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Add: Actual Overhead was higher than budgeted 20,000
∴ Actual Variable Overhead 3,08,000

Both Fixed & Variable Overhead applied (72,000 Hrs. × ₹10) 7,20,000
Actual Overhead (3,84,000 + 3,08,000) 6,92,000
∴ Over absorption 28,000

iii) Reconciliation of Profit

Difference in Profit: ₹3,00,000 – 2,55,000 = ₹45,000
Due to Fixed Factory Overhead being included in Closing Stock in Absorption Costing
not in Marginal Costing.
Therefore,
Difference in Profit = Fixed Overhead Rate (Production – Sale)
18 (24,000 – 21,500) = ₹45,000.
49. PQR Ltd. Has furnished the following data for the two years: -
Particulars 20X1 20X2
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 20X2 due to the
restructuring process. The company could maintain its sales quantity level of 20X1 in 20X2
by reducing selling price.

You are required to Calculate the following: -

a) Sales for 20X2 in Value.
b) Fixed Cost for 20X2 in Value.
c) Break-even sales for 20X2 in Value.
(ICAI SM)
Ans. In 20X1, PV ratio = 50%
Variable cost ratio = 100% − 50% = 50%
Variable cost in 20X1 = ₹ 8,00,000 × 50% = ₹ 4,00,000
Variable cost is based on per unit basis and since, sales of both years (in terms of
quantity) will be same. Therefore, variable cost of both the years will also be same.
In 20X2, P/V ratio = 37.50%
Thus, Variable cost ratio = 100% − 37.5% = 62.5%

4,00,000
a) Thus, Sales in 20X2 = 62.5%
= ₹ 6,40,000
b) Fixed cost = Break-Even Sales × P/V ratio
= 5,00,000 × 37.50% = ₹ 1,87,500.
c) In 20X2, Break-even sales = 100% − 21.875% (Margin of safety) = 78.125%
Break-even sales = 6,40,000 × 78.125% = ₹ 5,00,000
50. A company manufactures a single product with a capacity of 1,50,000 units per annum. The
summarised profitability statement for the year is as under
₹ ₹
Sales: 1,00,000 units @ ₹15 per unit 15,00,000
Cost of Sales:
Direct Materials 3,00,000
Direct Labour 2,00,000

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Production Overhead: Variable 60,000
Fixed 3,00,000
Administration Overheads (Fixed) 1,50,000
Selling and Distribution Overheads: Variable 90,000
Fixed 1,50,000 12,50,000
Profit 2,50,000

You are required to evaluate the following options:

i) What will be the amount of sales required to earn a target profit of 25% on Sales, if
the packing is improved at a cost of Re. 1 per unit?
ii) There is an offer from a large retailer for purchasing 30,000 units per annum, subject
to providing a packing with a different-brand name at a cost of ₹2 per unit. However,
in this case there will be no selling and distribution expenses. Also, this will not, in any
way, affect the company's existing business. What will be the break-even price for this
additional offer?
(Nov 2001)
Ans. i) P/V ratio =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛
𝑋 100
𝑆𝑎𝑙𝑒𝑠
₹15−₹7.50 ×100
=( ₹15
) = 50%
Let x is the desired sales revenue to earn a target profit of 25% on sales: then the
desired contribution would be
Total fixed cost + 25% × x
𝐶
Since P/V ratio = × 100
𝑆
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡+𝑃𝑟𝑜𝑓𝑖𝑡
= × 100
𝑥
₹6,00,000+25%𝑥
∴x= × (𝑊𝑁2)
50%
Orr x × 50% = ₹6,00,000 + 25% x
𝑥 𝑥
Or [ − ] = 6,00,000
2 4
Or x = ₹24,00,000

Hence, the desired amount of sales required to earn a target Profit of 25% on sales is
₹24,00,000. On the sale of ₹24,00,000 the desired contribution is 50% of sales i.e.
₹12,00,000 and profit is 25% of sales i.e. ₹6,00,000.

ii) Evaluation of an offer of purchasing 30,000 per annum (subject to providing a packing
with a different brand name at a cost of ₹2 per unit) from a large retailer. Determine
also the break-even price for this additional offer.
₹
Present Variable cost per unit 6.50
Less: Variable selling and distribution overheads per unit 0.90
5.60
Add: Special packing cost per unit 2.00
Revised variable cost per unit 7.60

The break-even price per unit for this additional offer of 30,000 units would be ₹7.60 per
unit. In other words, the break-even price for this additional offer here means the price per
unit at which 30,000 units offer can be accepted without earning any profit on it.

Note: The existing business will bear the impact of fixed cost.

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Fixed costs will not affect this additional offer of 30,000 units.
₹
New selling price per unit 18.00
Less: Variable cost per unit 6.50
(Refer to working note) 13,80,000
Contribution per unit 11.50
Total contribution
(1,20,000 units × ₹11.50)
Less: Present Fixed cost 6,00,000
Less: Additional expenditure on advertising 3,00,000
Profit 4,80,000

Justification: The amount of profit on the sale of 1,00,000 units was ₹2,50,000 (Refer to
the statement of the question). On increasing the sale of product units from 1,00,000 to
1,20,000 the profit of the concern increased from ₹2,50,000 to ₹4,80,000 therefore, the
expenditure on advertisement is justifiable and the proposal under consideration is viable.

Justification of reduction in selling price to increase capacity utilization to 100%

₹
Revised selling price per unit 13.00
Less: Variable cost per unit 6.50
(Refer to working note I)
Contribution per unit 6.50
Total contribution at 100% capacity utilization 9,75,000
(1,50,000 units × ₹6.50)
Less: Fixed cost 6,00,000
Profit 3,75,000

Working Note:
1) Contribution / Unit ₹
SP/Unit: (A) 15.00
Variable cost/unit:
Direct material 3.00
(₹3,00,000/1,00,000 unit)
Direct labour 2.00
(₹2,00,000/1,00,000 unit)
Variable prod. OH 0.60
(₹60,000/1,00,000 units)
Variable S&DOH 0.90
(₹90,000/10,000 units)
Total Variable cost/unit: (B) 6.50
Contribution per unit [(A) – (B)] 8.50
(₹15 – ₹6.50)
2) Total fixed cost ₹
Production OH 3,00,000
Admin OH 1,50,000
S & D OH 1,50,000
Total fixed cost 6,00,000
i) Amount of sales required to earn a target profit of
25% on sales after improving the packing.

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Present V. cost/unit 6.50
(Refer W.N.1)
Improved packing cost/unit 1.00
Revised variable cost/unit 7.50
51. ABC Limited produces and sells two product X and Y. The product is highly demanded in
the market. Following information relating to both the products are given as under:
Per Unit (₹)
X Y
Direct Materials 140 180
Direct Wages 60 100
Variable Overheads (₹5 per machine hour) 20 40
Selling price 300 450

The company is facing scarcity of machine hours for working. The availability of machine
hours are limited to 60,000 hrs in a month. At present, the monthly demand of product X
and product Y is 8,000 units and 6,000 units respectively. The fixed expenses of the
company are ₹2,25,000 per month.

You are required to:

DETERMINE the product mix that generates maximum profit to the company in the given
situation and also CALCULATE the profit of the company. (ICAI SM)
Ans. i) Product mix to maximise the profit
Produce ‘X’ = 8,000 units
Hours Required = 32,000 hrs (8,000 units × 4 hrs.)
Balance Hours Available = 28,000 hrs (60,000 hrs. – 32,000 hrs.)
Produce ‘Y’ (balance) = 3,500 units (28,000 hrs./ 8 hrs.)

ii) Profitability of the concern in the best Product mix

X (₹) Y (₹) Total (₹)
Sales (in units) 8,000 units 3,500 units
Contribution per unit 80 130
Contribution 6,40,000 4,55,000 10,95,000
Less: Fixed cost 2,25,000
Profit 8,70,000
Workings –
Calculation of contribution (per unit)
X (₹) Y (₹)
Selling price (A) 300 450
Variable cost:
Direct materials 140 180
Direct wages 60 100
Variable overheads 20 40
Total Variable Cost (B) 220 320
Contribution per unit (A-B) 80 130
Machine hours (MH) 4 8
Contribution per MH 20 16.25
Ranking I II
52. PQR Ltd. manufactures medals for winners of athletic events and other contests. Its
manufacturing plant has the capacity to produce 10,000 medals each month. The company

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has current production and sales level of 7,500 medals per month. The current domestic
market price of the medal is ₹150.
The cost data for the month of August 2021 is as under:
(₹)
Variable
- Direct materials 2,62,500
- Direct labour cost 3,00,000
- Overhead 75,000
Fixed manufacturing costs 2,75,000
Fixed marketing costs 1,75,000
10,87,300
POR Ltd. has received a special one-time only order for 2500 medals at ₹120 per medal

Required:
i) Should PQR Ltd. accept the special order? Why? EXPLAIN briefly.
ii) Suppose the plant capacity was 9,000 medals instead of 10,000 medals each month,
The special order must be taken either in full or rejected totally.
ANALYSE whether PQR Ltd. should accept the special order or not.
(ICAI SM)
Ans. In this question, the existing demand for the medals is 7,500 units per monthagainst the
10,000 units capacity. There is an idle capacity for 2,500 medals in a month. Since, the
capacity of the plant (supply) is more than the demand, any additional order could increase
the existing profit provided the offered price ismore than the marginal cost.
The existing cost and profit structure is as under:
Particulars Amount (₹) Amount (₹)
A. Selling price per unit 150.00
B. Variable Cost per unit:
- Direct material (₹ 2,62,500 ÷ 7,500 units) 35.00
- Direct labour (₹ 3,00,000 ÷ 7,500 units) 40.00
- Overhead (₹ 75,000 ÷ 7,500 units) 10.00 85.00
C. Contribution per unit (A-B) 65.00
D. Total Contribution (₹ 65 × 7,500 units) 4,87,500
E. Fixed Costs:
- Fixed manufacturing costs 2,75,000
- Fixed marketing costs 1,75,000 4,50,000
F. Profit (D-E) 37,500

i) The offered price for the additional demand of 2,500 medals is more than the variable
cost per unit. Any additional demand will contribute towards fixed costs and profit.
Particulars Amount(₹) Amount(₹)
A. Sales Value {(₹ 150 × 7,500) + (₹ 120 × 2,500)} 14,25,000
B. Variable Cost (₹ 85 × 10,000) 8,50,000
C. Contribution (A-B) 5,75,000
D. Fixed Costs:
- Fixed manufacturing costs 2,75,000
- Fixed marketing costs 1,75,000 4,50,000
E. Profit (C-D) 1,25,000
The offer for 2,500 unit be accepted as it increases the profit by ₹ 87,500
(₹ 1,25,000 – ₹ 37,500).

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ii) In this instant case, the capacity to produce medals is decreased by 1,000 unit per
month and the existing demand for the medals is 7,500. The spare capacity is for
1,500 medals only but the special demand is for 2,500 medals.By accepting the offer,
the company has to lose contribution on 1,000 medals from existing customers. The
offer will only be acceptable if the gain from the new offer supersedes the loss from
the existing customers.
Particulars Amount(₹) Amount(₹)
A. Sales Value {(₹ 150 × 6,500) + (₹ 120 × 2,500)} 12,75,000
B. Variable Cost (₹ 85 × 9,000) 7,65,000
C. Contribution (A-B) 5,10,000
D. Fixed Costs:
- Fixed manufacturing costs 2,75,000
- Fixed marketing costs 1,75,000 4,50,000
E. Profit (C-D) 60,000

By accepting the special order at ₹ 120 per unit, the total profit of the company is
increased by ₹ 22,500 (₹ 60,000 – ₹ 37,500) hence the order may be accepted, however,
other qualitative factors may also be taken care-off.
53. A company is considering four alternative proposals for a new toy manufacturing Machine
launched in the market. New machine is expected to produce approximately 25,000 toys
every year. The proposals are as follows:

i) Purchase and maintain the new toy manufacturing Machine and bear all related costs.
These machines will run on fuel. The average cost of a Machine is ₹10,00,000. Life of
the machine is 4 years with annual production of 25,000 toys and the Resale value is
₹2,00,000 at the end of the fourth year.
ii) Hire from Agency-A: It can hire the machine from the Agency-A and pay hire charges
at the rate of ₹20 per toy and bear no other cost.
iii) Hire from Agency-B: It can hire the machine from the Agency-B and pay hire charges
at the rate of ₹12 per toy and also bear insurance costs. All other costs will be borne
by Agency-B.
iv) Hire from Agency-C: Hire machine from Agency-C at ₹2,50,000 per year. These
machines are more advanced and run on electricity and therefore, the running costs
considerably low. The company will have to bear costs of electricity, licensing fees
and spare parts. However, Repairs and maintenance and insurance cost are borne by
Agency-C.

The following further details are available:

The cost of Fuel is ₹8 per toy, the cost of spare parts is ₹0.20 per toy and the cost of
electricity is ₹2 per toy. Further, the cost of Repairs and maintenance is ₹0.25 per toy, the
amount of licensing fees to be paid is ₹5,000 per machine per annum and the cost of
Insurance to be paid is ₹25,000 per machine per annum. Consider no taxes.

You are required to:

i) CALCULATE the relative costs of four proposals on cost per toy basis.
ii) RANK the proposals on the basis of total cost for 25,000 toys per year.
iii) RECOMMEND the best proposal to company in view of (ii) above.
(Old SM)
Ans. Calculation of relative costs of proposals
Proposals

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Particulars Purchase of Hire Hire Hire
machine Agency-A Agency-B Agency-C
(₹) (₹) (₹) (₹)
Depreciation of 2,00,000 - - -
machine (Working
note1)
Hire charges - 5,00,000 3,00,000 2,50,000
(₹ 20 × (₹ 12 ×
25,000) 25,000)
Cost of fuel 2,00,000 - - -
(₹ 8 × 25,000)
Cost of spare 5,000 - - 5,000
parts (₹ 0.2 × 25,000) (₹ 0.2 ×
25,000)
Cost of electricity - - - 50,000
(₹ 2 ×25,000)
Repair & 6,250 - - -
maintenance (₹ 0.25 ×
25,000)
Licensing fees 5,000 - - 5,000
Insurance cost 25,000 - 25,000 -
Total Cost (A) 4,41,250 5,00,000 3,25,000 3,10,000
No. of toys 25,000 25,000 25,000 25,000
(units) (B)
i) Cost per 17.65 20.00 13.00 12.40
toy (A/B)
ii) Ranking of III IV II I
proposals

iii) Recommendation: Proposal of Hire machine from Agency-C is acceptable as the cost
of manufacturing toys is lowest.
Working Note:
1) Depreciation per year:
Cost of machine − Resale value ₹10,00,000 − ₹2,00,000
= = ₹2,00,000
Life of Machine 4 𝑦𝑒𝑎𝑟𝑠
54. AZ company has prepared its budget for the production of 2,00,000 units. The variable cost
per unit is ₹16 and fixed cost is ₹4 per unit. The company fixes its selling price to fetch a
profit of 20% on total cost.
You are required to calculate:
i) Present break-even sales (in Rs and in quantity).
ii) Present profit-volume ratio.
iii) Revised break-even sales in Rs and the revised profit-volume ratio, if it reduces its
selling price by 10%.

What would be revised sales -in quantity and the amount, if a company desires a profit
increase of 20% more than the budgeted profit and selling price is reduced by 10% as
above in point (iii).
(Dec 2021)
Ans. Variable Cost per Unit=₹16
Fixed Cost per Unit =₹ 4,

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Total Fixed Cost= 2,00,000 units × ₹ 4 = ₹8,00,000
Total Cost per Unit =₹20
Selling Price per Unit=Total Cost+ Profit =₹ 20+₹ 4 =₹ 24
Contribution per Unit=₹ 24-₹16=₹ 8

Fixed cost ₹8,00,000

i) Present Break-even Sales (Quantity) = =
Contribution margin per unit ₹8
Present Break-even Sales (₹) = 1,00,000 units × ₹ 24 = ₹ 24,00,000
8
ii) Present P/V Ratio = × 100 = 33.33%
24
iii) Revised Selling Price per Unit = ₹ 24 – 10% of ₹ 24 = ₹ 21.60
Revised Contribution per Unit=₹ 21.60-₹ 16 = ₹ 5.60
5.60
Revised P/V Ratio = × 100 = 25.926%
21.60
Fixed cost 8,00,000
Revised Break-even point (₹) = P = 25.926%
= ₹30,85,705
ratio
V

Or
Fixed cost 8,00,000
Revised Break-even point (units) = = =
Contribution margin per unit 5.60
1,42,857 units
Revised Break-even point (₹) = 1,42,857 units x ₹ 21.60 = ₹ 30,85,711
iv) Present profit =₹ 8,00,000
Desired Profit = 120% of ₹ 8,00,000 =₹ 9,60,000
Sales to earn a profit of ₹ 9,60,000
Total contribution required = 8,00,000 + 9,60,000 = ₹ 17,60,000
Fixed cost+Desired profit 8,00,000+9,60,000
= = 3,14,286 units
Contribution per unit 5.60
Revised sales (in ₹) = 3,14,286 units × ₹ 21.60 = ₹ 67,88,578
55. At budget activity of 80% of total capacity, a company earns a P/V ratio of 30% and a profit
of 15% of total sales. Due to covid pandemic resulting in poor demand, the company has to
reduce its selling price by 10%. The company was able to achieve a production and sales
volume for the year equivalent to 50% of total capacity. The sales value at this level was ₹
27,00,000 at a reduced price of ₹ 18 per unit. Due to reduction in production, the actual
variable cost went up by 5% of the budget.
You are required to:
i) PREPARE statement of profitability at budget and actual activity.
ii) FIND P/V ratio and BES (in ₹ and unit of the actual sales activity).
(MTP May 2022)
Ans. i) Statement of profitability at budget and actual activity
Particulars Budget (80%) Actual (50%)
Units 2,40,000 1,50,000
Sales (₹) (a) 48,00,000 27,00,000
Variable cost (₹) (b) 33,60,000 22,05,000
Contribution (₹) (c = a - b) 14,40,000 4,95,000
Fixed cost (₹) (d) 7,20,000 7,20,000
Profit (₹) (e = c – d) 7,20,000 (2,25,000)

ii) Calculation of P/V ratio and BES

Contribution
P/V Ratio = × 100
Sales
4,95,000
= 27,00,000 × 100 = 18.33%
Fixed Cost
Break Even Sales (in ₹) =
P/V Ratio

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7,20,000
= 18.33%
= ₹39,27,987
Fixed Cost
Break Even Sale (in Units) = Contribution per unit
7,20,000
= = 2,18,182 Units
3.3∗
4,95,000
*Contribution per unit = 1,50,000 units = 3.3 per 𝑢𝑛𝑖𝑡

Working
Actual Sales ₹27,00,000
Actual Selling Price per unit 18
Actual units (50%)
(
(27,00,000)
) 1,50,000
18
Therefore, budgeted units (80%)
(1,50,000 × 50)
80 2,40,000
18 20
Budgeted Selling Price ( )
90%

(2,40,000 ×20)(1−30) 33,60,000

Budgeted Variable cost per unit = = = ₹14
2,40,000 𝑢𝑛𝑖𝑡𝑠 2,40,000 𝑢𝑛𝑖𝑡𝑠
56. Company manufactures and sell 3 types of mobile handset. It also manufactures wireless
charger for mobile. The company has worked out following estimates for next year.
Annual Selling Price Material cost Labour cost
Demand (₹ per unit) (₹ per unit) (₹ per unit)
(In units)
X5 5,000 8,000 2,000 1,000
X6 4,000 9,000 2,500 1,500
X7 3,000 12,000 3,000 2,000
Wireless 15,000 1,500 300 200
Charger

To encourage the sale of wireless charger a discount of 10% in its price is being offered if
it were to be purchased along with mobile. It is expected that customer buying mobile will
also buy the wireless charger. The company factory has an effective capacity of 35,000
labour hours. The labour is paid @ ₹ 500 per hour. Overtime of labour has to be paid at
double the normal rate. Other variable cost work out to be 50% of direct labour cost and
fixed cost is ₹ 1,00,00,000. There will be no inventory at the end of the year.
PREPARE statement of profitability.
(MTP May 2022)
Ans. Statement of Profitability
Particulars Amount (₹) Amount (₹)
Sales
X5 (5,000 × 8,000) 4,00,00,000
X6 (4,000 × 9,000) 3,60,00,000
X7 (3,000 × 12,000) 3,60,00,000
Wireless Charger (12,000 × 1,350) + (3,000 × 1,500) 2,07,00,000 13,27,00,000

Less: Variable cost

Material:

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X5 (5,000 × 2,000) 1,00,00,000
X6 (4,000 × 2,500) 1,00,00,000
X7 (3,000 × 3,000) 90,00,000
Wireless Charger (15,000 × 300) 45,00,000
3,35,00,000
Labour:
X5 (5,000 × 1,000) 50,00,000
X6 (4,000 × 1,500) 60,00,000
X7 (3,000 × 2,000) 60,00,000
Wireless Charger (15,000 × 200) 30,00,000
Overtime (5,000 × 1,000) 50,00,000
2,50,00,000
Other variable overheads 1,25,00,000 7,10,00,000
Contribution 6,17,00,000
Less: Fixed Cost 1,00,00,000
Profit 5,17,00,000

Working
Calculation of Labour overtime hours
Total hours required for production

X5 (5,000 × 2 hrs) 10,000

X6 (4,000 × 3 hrs) 12,000
X7 (3,000 × 4 hrs) 12,000
Wireless Charger (15,000 × 0.40 hrs) 6,000
40,000
Hours available (35,000)
Overtime 5,000
57. NN Ltd. manufactures automobiles accessories and parts. The following are the total cost
of processing 2,00,000 units:

Direct materials cost ₹375 per unit

Direct labour cost ₹80 per unit
Variable factory overhead ₹16 per unit
Fixed factory overhead ₹500 lakhs

The purchase price of the component is ₹485. The fixed overhead would continue to be
incurred even when the component is bought from outside.

REQUIRED:
a) Should the part be made or bought from outside considering that the present facility
when released following a buying decision would remain idle?
b) In case the released capacity can be rented out to another manufacturer for
₹32,00,000 having good demand. What should be the decision?
(Old SM)

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Ans. a) The decision shall be made comparing the marginal cost of making and buying the
component.
Here the variable cost of making the component is ₹471 as compared to buying cost of
₹485. The component shall be made by using own production facility as it would save
the company ₹14 per unit.

Working-
The present cost structure is as follows: Variable cost per unit is:
Direct materials cost ₹375
Direct labour cost ₹80
Variable factory overhead ₹16
Total variable cost per unit ₹471

The fixed cost of ₹500 lakhs is irrelevant for decision making as it would incur in either
case
b) If by releasing the production facility the company can earn a rental income of
₹32,00,000, then the additional cost of buying from outside and the rental income from
releasing the capacity shall be compared for making decision.
i) Rental income ₹32,00,000
ii) Additional cost of buying (₹14 × 2,00,000 units) ₹28,00,000
Additional Income {(i)-(ii)} ₹4,00,000

The component should be bought from outside as it would save the company ₹4,00,000 in
fixed cost.
58. RPP Manufacturers is approached by an international customer for one-time special order
similar to one offered to its domestic customers. Per unit data for sales to regular
customers is provided below:
Direct material ₹ 693
Direct labour ₹ 315
Variable manufacturing support ₹ 504
Fixed manufacturing support ₹ 1092
Total manufacturing costs ₹ 2604
Markup (50%) ₹ 1302
Targeted selling price ₹ 3906

It is provided that RPP Manufacturers has excess capacity.

Required:
i) WHAT is the full cost of the product per unit?
ii) WHAT is the contribution margin per unit?
iii) WHICH costs are relevant for making the decision regarding this one-time special
order? WHY?
iv) For RPP Manufacturers, WHAT is the minimum acceptable price of this one- time
special order only
v) For this one-time-only special order, SHOULD RPP Manufacturers consider a price of
₹2100 per unit? WHY or why not?
(RTP Nov 2022)
Ans. i) Full cost of the product per unit
Direct material ₹ 693
Direct labour ₹ 315

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Variable manufacturing support ₹ 504
Fixed manufacturing support ₹ 1092
Total manufacturing costs ₹ 2604

ii) Contribution margin per unit

Selling price ₹ 3906
Less: Variable costs
Direct material ₹ 693
Direct labour ₹ 315
Variable manufacturing support ₹ 504
Contribution margin per unit ₹ 2394

iii) Costs for decision making are those costs that differ between alternatives, which in
this situation are the incremental costs.
Direct material ₹ 693
Direct labour ₹ 315
Variable manufacturing support ₹ 504
Total incremental costs ₹ 1512

iv) Minimum acceptable price would be the incremental costs in the short term i.e. ₹
1512
v) Yes, RPP Manufacturers may consider a price of ₹ 2100 per unit because this price is
greater than the minimum acceptable price.
59. 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.
(ICAI SM)
Ans. Item No. P/V Ratio Reason
i) Will not change Reasoning 2
ii) Will not change Reasoning 3
iii) Will increase Reasoning 5
iv) Will decrease Reasoning 5
v) Will increase Reasoning 6
vi) Will not change Reasoning 3
vii) Will not change Reasoning 1
viii) Will increase Reasoning 2
ix) Will decrease Reasoning 3
x) Will increase Reasoning 4

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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%
10% increase in S.P. = ₹ 110
10% increase in variable cost = ₹99
110−99 P
P/V ratio = 10
= 10% i. e. V ratiowill 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.

Reasoning 5 = A decrease in variable cost per unit will increase without decrease in
selling price per unit twill increase the contribution hence, PV ratio and
vice versa
Reasoning 6 = Increase in selling price per unit without increase in variable cost per unit
will increase the contribution hence PV ratio.

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