ANM CLASSES CA INTER

Cost and Management

Accounting
TEST SERIES

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MARGINAL COSTING
Question 1
The following data are available from the budget records of Finesign Women’s Handbag Company
for the forthcoming budget period
No Particulars Rs
1 Selling Price per unit 1000
2 Variable cost per unit:
- Cost of Material used 750.00
- Sales commission 50.00
3 Total Variable Cost 800.00
4 Annual Fixed Expenses:
- Rent 7,00,000
- Salaries 11,00,000
- Other fixed expenses 5,00,000
5 Total Fixed Cost 23,00,000
Although the firm manufactures Bags with different styles, they have identical purchase costs and
selling price.
No Particulars
A What is the annual break-even point both in terms of units and value?
B If the store manager is paid 1 per cent commission on sales, what would be the annual
break-even point both in terms of units and value?
C If the firm decides to pay a fixed salary of Rs. 9,00,000 in lieu of sales commission,
what would be the annual break-even point in terms of units and value.
Considering break-even point in requirement (a), if the store’s manager is paid 2 per cent commission
on each bag sold in excess of the break-even point, what would be the profit if 20,000 bags were
sold.
Solution:
a. P/V Ratio: Sales per unit – Variable Cost per unit/ Selling price per unit x 100
= 1000 – 800/1000 x 100
= 200/1000 x 100 = 20%
Annual BEP in units: Annual Fixed Cost/ Contribution per unit
= Rs. 23,00,000/ Rs. 200 = 11,500 units
Annual BEP in value: Annual fixed cost / P/V ratio
= Rs. 23,00,000/ 20% = Rs. 1,15,00,000

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b. Revised P/V ratio and BEP:

Commission on sales per unit = 1% of 1000 = Rs. 10
So. P/V ratio: 1000 – (750 + 50 + 10)/1000
= 190/1000 x100 = 19%
BEP in terms of units: Annual fixed cost/ Contribution per unit
= 23,00,000/190 = 12,106 units
BEP in terms of value: Annual Fixed cost/P/V
= 23,00,000/19% = Rs. 1,21,05,263
c. Break-Even point under fixed salary plan:
P/V ratio = Contribution per unit/ Selling price per unit = 1000 – 750/1000 x 100
= 250/1000 x 100 = 25%
Revised fixed cost:
Original fixed cost = Rs. 23,00,000
Proposed fixed Salary = Rs. 9,00,000
Total = Rs. 32,00,000
BEP in terms of units: Annual Fixed cost/ Contribution per unit = 32,00,000/250 = 12,800 units
BEP in terms of value: Annual Fixed cost/ P/V ratio = 32,00,000/25% = 1,28,00,000
d. Annual break-even point under requirement (a) is 11,500 units
Margin of safety at sales volume of 20,000 unit of bags (20,000 – 11,500) = 8500 units
Contribution on sales beyond break-even sales:
Revised contribution per unit: 200 – (2% of 1000) = 180
Profit = Margin of safety (in units) x Contribution per unit
= 8500 x 180 = Rs. 15,30,000

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Question 2:
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:
(Rs in 000)
Factory Sales Profit
Actual Over/ (Under) Budget Actual Over/(Under) Budget
North 1100 (400) 135 (180)
East 1450 150 210 90
South 1200 (200) 330 (110)
Calculate the following for each factory and for the company as a whole for the period:
No Particulars
1 Fixed Cost
2 Break-even Sales
Solution:
Computation of Profit Volume Ratio
(Rs in 000)
Factory Sales Profit P/V Ratio
Actual Over/ Budgeted Actual Over/ Budgeted (Charge in
(Under) Sales (Under) Sales Profit/ Change
Budget Budget in Sales)
North 1100 (400) 1500 135 (180) 315 45%
East 1450 150 1300 210 90 120 60%
South 1200 (200) 1400 330 (110) 440 55%
i. Computation of Fixed Costs
Factory Actual Sales P/V Ratio Contribution Actual Profit Fixed Cost
(1) (2) (3) x (1) x (2) (4) (5) = (3) * (4)
North 1100 45% 495 135 360
East 1450 60% 870 210 660
South 1200 55% 660 330 330
Total 3750 2025 675 1350
ii. Computation of Break-Even Sales
Factory Fixed Cost (a) P/V Ratio (b) Break-Even Sales (a)/(b)
North 360 45% 800
East 660 60% 1100
South 330 55% 600
2500
Break-Even Sales (Company as Whole) = Fixed cost/ Composite P/V Ratio*
= Rs. 13,50,000/54%
= Rs. 25,00,000
*Composite P/V Ratio = Total Contribution/ Total Actual sales = 2025/3750 = 54%
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Question 3:
A company makes 1500 units of a product for which the profitability statement is given below:
No. Particulars Rs
1 Sales 1,20,000
2 Direct Materials 30,000
3 Direct Labor 35,000
4 Variable Overheads 15,000
5 Fixed Cost 16,800
6 Profit 22,200
After the first 500 units of production, the company has to pay a premium of Rs. 5 per unit towards
overtime labour. The premium so paid has been included in the direct labour cost of Rs. 35,000 given
above. You are required to compute the Break-even point.
Solution:
1-500 501-1500
Data/Unit
(Rs) (Rs)
Sales (Rs. 1,20,000/1500 units) 80 80
Direct Material (Rs. 30,000/1500 units) 20 20
Direct Labour* 20 25
Variable Overheads (Rs. 15,000/ 1500 units) 10 10
Contribution 30 25
Contribution at 500 units = Rs. 15,000
Fixed Cost = Rs. 16,800
Shortfall = Rs. 1800
No. of units to recover shortfall = 72 units (Rs. 1800/Rs. 25)
Break-even point = 572 units (500 units + 72 units)
Let X be the Direct Labour per unit up to 500 units. Total Direct Labour-
500X + 1000 x (X + 5) = 35,000
1500X + 5000 = 35,000
X = 20
Therefore, up to 500 units the Direct Labour is Rs. 20. After 500 units is Rs. 25

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Question 4:
The lab corner of New-life Hospital Trust operates two types of specialist MRI scanning machine-
MR10 and MR59. Following details are estimated for the next period:
Machine MR10 MR59
Running hours 1100 2000
Rs Rs
Variable running costs excluding special technology 68,750 1,60,000
Fixed Costs 50,000 2,43,750
A brain scan is normally carried out on machine type MR10. This task uses special technology costing
Rs. 100 each and takes four hours of machine time. Because of the nature of the process, around 10%
of the scans produce blurred and therefore useless results.
Required:
No. Particulars
1 Calculate the total cost of a satisfactory brain scan on machine type MR10
2 Brain scans can also be done on machine type MR59 and would take only 1.8 hours per
scan with a reduced reject rate of 6%. However, the cost of the special technology would
be Rs. 137.50 per scan. Advise which type should be used, assuming sufficient capacity
is available on both types of machines. Consider fixed costs will remain unchanged.
Solution:
01 – Calculation the total cost of a satisfactory brain scan on machine type MR10
Particulars Rs
Variable cost per running hour of Machine MR10 (Rs. 68,750/1100 hours) 62.50
Fixed cost (Rs. 50,000/1100 hours) 45.46
Cost of brain scan on Machine MR10: Rs
Variable machine cost (4 hours x Rs. 62.50) 250.00
Special technology 100.00
Total variable cost 350.00
Fixed machine cost (4 hours x Rs. 45.46) 181.84
Total cost of scan 531.84
Total cost of a satisfactory scan (Rs. 531.84/0.9) 590.93
02 – It is given that fixed cost will remain unchanged and thus they are not relevant for the decision.
The relevant costs would be the incremental costs of an additional scan:
No. Particulars Amount
1 Machine MR10:
- Variable cost per scan 350.00
- Variable cost per satisfactory scan (Rs. 350/0.9) 388.89
2 Machine MR59:
- Variable machine cost per scan (Rs. 1,60,000/2000 hours x 1.8 144.00
hours)
- Special technology 137.50
- Variable cost per scan 281.50
- Variable cost per satisfactory scan (Rs. 281.50/0.94) 299.47
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Te relevant costs per satisfactory scan are cheaper on machine MR59 and therefore brain scans
should be undertaken on said machine
Question 5:
LNP Ltd and MNT Ltd are engaged in manufacturing of identical products. Existing revenue and cost
data is as follows:
No. Particulars LNP Ltd MNT Ltd
(Rs) (Rs)
1 Sales 13,60,000 17,00,000
2 Variable Cost 10,88,000 10,20,000
3 Fixed Cost 1,72,000 5,80,000
You are required to calculate:
No. Particulars
1 Break-even point (in value) for each company
2 Sales at which each company will earn a profit of Rs. 5,00,000
3 Sales at which both companies will have same profits
Solution:
Income Statement
No. Particulars LNP Ltd (Rs) MNT Ltd (Rs)
1 Sales 13,60,000 17,00,000
2 Less: Variable Cost 10,88,000 10,20,000
3 Contribution 2,72,000 6,80,000
4 PV Ratio (contribution/ Sales x 100) 20% 40%
5 Fixed Cost (Rs) 1,72,000 5,80,000
6 Profit (Rs) 1,00,000 1,00,000
01 Break-Even Point = Fixed Cost/ PV Ratio
LNP Ltd = Rs. 1,72,000/20% = Rs. 8,60,000
MNT Ltd = Rs. 5,80,000/40% = Rs. 14,50,000
02 Sales value to earn a profit of Rs. 5,00,000
Sales = Fixed Cost + Desired Profit/ PV Ratio
LNP Ltd = 1,72,000 + 5,00,000/40% = Rs. 33,60,000
MNT Ltd = 5,80,000 + 5,00,000/40% = Rs. 27,00,000
03 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 = Rs. 1,72,000 + P

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Or 0.20S = Rs. 1,72,000 + P ……….(i)

MNT Ltd
40%S = Rs. 5,80,000 + P
Or, 0.40S = Rs. 5,80,000 + P ………..(ii)
By solving these questions, 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
Or S = Rs. 20,40,000
Putting the value of S in equation no (i) we will get the value of P
0.20 x 20,40,000 = 1,72,000 + P
Or, P = Rs. 2,36,000
Therefore, at Sale Value of Rs. 20,40,000 both the companies will earn same profit of Rs. 2,36,000.
Question 6
NG Ltd has an annual fixed cost of Rs. 98,50,000. In the year 2022-23, sales amounted to
Rs. 7,80,60,000 as compared to Rs. 5,93,10,000 in the preceding year 2021-22. Profit in the year
2022-23 is Rs. 37,50,000 more than that in 2021-22.
Required:
No. Particulars
1 Calculate Break-Even sales of the company
2 Determine profit/loss on a forecasted sales volume of Rs. 8,20,00,000
3 If there is a reduction in selling price by 10% in the financial year 2022-23 and
company desires to earn the same amount of profit as in 2021-22, compute the required
sales amount?
Solution:
01 – Break-Even sales = Fixed Cost/P/V Ratio
P/V Ratio = Change in Profit/ Change in Sales x 100,
Or, Rs. 37,50,000/ Rs. 7,80,60,000 – Rs. 5,93,10,000 x 100
Or, Rs. 37,50,000/ Rs. 1,87,50,000 x 100
Or, 20%
Break-Even sales = Rs. 98,50,000/20% = Rs. 4,92,50,000
02 – Profit/Loss = Contribution – Fixed Cost
= Rs. 8,20,00,000 x 20% - Rs. 98,50,000
= Rs. 1,64,00,000 – Rs. 98,50,000 = Rs. 65,50,000

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03 – To earn same amount of profit in 2022-23 as it was in 2021-22, the company has to
earn the same amount of contribution as it had earned in 2021-22
Sales – Variable cost = Contribution equal to 2021-22 contribution
Contribution in 2021-22 = Sales in 2021-22 x P/V Ratio in 2021-22
= Rs. 5,93,10,000 x 20% = Rs. 1,18,62,000
Let the number of units to be sold in 2022-23 = X
Sales in 2022-23 – Variable cost in 2022-23 = Desired Contribution
90X – 80X = Rs. 1,18,62,000
Or 10X = 1,18,62,000
Or, X = 11,86,200 units
Therefore, Sales amount required to earn a profit equal to 2021-22 profit = Rs. 90 x 11,86,200 units
= Rs. 10,67,58,000
Question 7
Prisha Ltd manufacturing 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 Rs. 300 Rs. 400 Rs. 200
Variable Cost Rs. 150 Rs. 200 Rs. 120
Total Fixed Costs Rs. 18,00,000
Total Sales Rs. 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 Rs. 300 Rs. 400 Rs. 300
Variable Cost Rs. 150 Rs. 200 Rs. 150
Total Fixed Costs Rs. 18,00,000
Total Sales Rs. 64,00,000
Required:
No. Particulars
1 Calculate the total contribution to sales ratio and present break-even sales at existing sales
mix
2 Calculate the total contribution to sales ratio and present break-even sales at proposed sales
mix
3 State whether the proposed sales mix is accepted or not?

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Solution:
01 – Calculation of Contribution to sales ratio at existing sales mix:
Products Total
A B C
Selling Price (Rs) 300 400 200
Less: Variable Cost (Rs) 150 200 120
Contribution per unit (Rs) 150 200 80
P/V Ratio 50% 50% 40%
Sales Mix 40% 35% 25%
Contribution per rupee of sales 20% 17.5% 10% 47.5%
(P/V Ratio x Sales Mix)
Present Total Contribution Rs. 28,50,000
(Rs. 60,00,000 x 47.5%)
Less: Fixed Costs Rs. 18,00,000
Present Profit Rs. 10,50,000
Present Break-Even Sales Rs. 37,89,473.68
(Rs. 18,00,000/ 0.475)
02 – Calculation of Contribution to sales ratio at proposed sales mix:
Particulars Products Total
A B E
Selling Price (Rs) 300 400 300
Less: Variable Cost (Rs) 150 200 150
Contribution per unit (Rs) 150 200 150
P/V Ratio 50% 50% 50%
Sales Mix 45% 30% 25%
Contribution per rupee of sales (P/V Ratio x 22.5% 15% 12.5% 50%
Sales Mix)
Present Total Contribution (Rs. 64,00,000 x Rs. 32,00,000
50%)
Less: Fixed Costs Rs. 18,00,000
Proposed Profit Rs. 14,00,000
Present Break-Even Sales (Rs. Rs. 36,00,000
18,00,000/0.50)
03 – The proposed sales mix increase the total contribution to sales ratio from 47.5% to 50% and the
total profit from Rs. 10,50,000 to Rs. 14,00,000.
Thus, the proposed sales mix should be accepted.

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