No.

1 for CA/CWA & MEC/CEC MASTER MINDS

15. MARGINAL COSTING

SOLUTIONS TO ASSIGNMENT PROBLEMS

Problem No. 1

BES Desired E G
sales
100% Sales 20 (2000) 4500 6000 7000
60% V.C 12 1200 2700 (3600) (4200)
40% Contribution 8 800 1800 2400 2800
Fixed cost - (800) (800) (800) (800)
Profit - - 1000 1600 2000
contribution 8
a. Profit volume ratio = X 100 = X 100 = 40%
sales 20
b. BES = Rs. 2000
2000
c. BES (Quantity) = = 100 units
20 p.u
d. Sales value to earn profit of Rs.1000 = 4500
e. Profit at sales of Rs. 6000 = Rs. 1600
f. Margin of sales = total sales- break even sales
i. Mos of (d) = 4500 – 2000 = 2500
ii. Mos of (e) = 6000 – 2000 = 4000
7000
g. Sales volume to earn profit of Rs. 2000 = = 350 units.
20 p.u

Problem No. 2

Particulars Rs. Per unit Total Rs.

Selling price 20
Less: variable cost (12)
Contribution 8
Fixed costs Rs.9,000 X 4quarters 36,000
Contributi on per unit Rs.8
1. PV Ratio = X100 = X100 = 40%
Sales price per unit Rs.20
Fixed cos ts Rs.36,000
2. Breakeven point(in Rs.) = = = Rs.90,000
PV Ratio 40%
Fixed cos ts Rs.36,000
3. Breakeven quantity = = = 4,500 units.
Contributi on per unit Rs.8
4. Required sales for profit of Rs.12,000:
Desired Contributi on Fixed Cost + Desired Pr ofit Rs.36,000 + Rs.12,000
= = = =Rs.1,20,000
PV Ratio PV Ratio 40%

5. Profit at sales of Rs.2,00,000 = Contribution less fixed cost = (Rs.2,00,000 X 40%) – Rs.36,000 =
Rs.44,000.

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6. Margin of safety:
For (4) above, margin of safety = total sales - breakeven sales = 1,20,000 – 90,000 = Rs.30,000.
For (5) above, margin of safety = total sales – breakeven sales = 2,00,000 – 90,000 = Rs.1,10,000.

Problem No. 3
a. Calculation of profit:
BES % Calculation of Profit
Sales 160000 100% 2,00,000
V.C 1,20,000 75% 1,50,000
Contribution 40,000 25% 50,000
Fixed cost (40,000) (40,000)
Profit - 10,000
40,000
P/v ratio = X 100 = 25%, Profit = Rs. 10,000
1,60,000

b. Calculation of sales:
BES Calculation of Sales
Sales 40,000 60,000 100%
V.C 20,000 30,000 50%
Contribution 20,000 30,000 50%
Fixed cost (20,000) (20,000)
Profit - 10,000
30,000
P/v ratio = X 100 = 50%, Sales = Rs. 60,000
60,000
Problem No. 4

Rs.1,50,000
Note.1: Present selling price per unit = = Rs.10 per unit.
15,000

Note.2: present contribution per unit = selling price per unit – variable cost per unit = Rs.10 –Rs.6 =
Rs.4 per unit.

Note.3: in the following calculations

Contributi on per unit
PVR = X100
Sales price per unit

Fixed Costs
BEQ =
Contributi on Per Unit

Computation of PVR, BEP, and MOS

MOS(Qtty) =
BES = MOS (Rs.) =
Particulars PVR = see note BEQ = see note Total Sales -
BEQ X SP p.u. MOS X SP p.u.
BEQ
Data given 10 − 6 Rs.34,000 8,500 X 10 = 15,000 – 8,500 = 6,500 X 10 =
= 40% = 8,500 Rs.85,000 6,500 units Rs.65,000
10 Rs.4
units
10% decrease in 9−6 Rs.34,000 11,333 X 9 = 15,000 – 11,333 = 3,667 X 9 =
selling price = 33.33% = Rs.1,01,997 3,667 units Rs.33,003
9 Rs.3
11,333 units
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10% increase in 10 − 6.6 Rs.34,000 10,000 X 10 = 15,000 – 10,000 = 5,000 X 10 =
variable costs = 34% = Rs.1,00,000 5,000 units Rs.50,000
10 Rs.3.4
10,000 units
Sales Increase by 10 − 6 Rs.34,000 8,500 X 10 = 17,000 – 8,500 = 8,500 X 10 =
2,000 units = 40% = 8,500 Rs.85,000 8,500 units Rs.85,000
10 Rs.4
units
Rs.6,000 increase 10 − 6 Rs.40,000 10,000 X 10 = 15,000 – 10,000 = 5,000 X 10 =
in fixed costs = 40% = Rs.1,00,000 5,000 units Rs.50,000
10 Rs.4
10,000 units

Problem No. 5

Selling price to earn same

Particulars Present Proposed
Contribution
Sales (let) 100 80 20 = 40
160  
80 = ? 
Less: Variable cost (60) (60)* (120)
Contribution 40 20 40

Therefore if selling price is reduced by 20% selling price has to be increased by 60% i.e. from Rs. 100
to Rs. 160.

* Variable cost will not change for change in selling price.

Problem No. 6

a)
M arg in of safety
1. % of margin of safety =
Total sales
M arg in of safety
Total sales =
% of M arg in of safety
2,40,000
=
40%
= 6,00,000
Break even sales = Total sales – Margin of Safety sales
= 6,00,000 – 2,40,000
= 3,60,000

2. Profit = [Total sales – Break even sales] x P/V Ratio

= (9,00,000 – 3,60,000) x 30%
= 1,62,000

b) Fixed cost = Contribution – Profit

= 2,00,000 – 1,50,000
= 50,000 Rs.
Contribution 2,00,000
P/V Ratio = = = 25%
sales 8,00,000
Fixed cos t 50,000
BEP = = = 2,00,000
P / V Ratio 25%
Margin of safety = Total sales – BEP
= 8,00,000 – 2,00,000
= 6,00,000

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Problem No. 7

Contribution  1,50,000 
P/V ratio = X100 =  X100  = 50%
Sales  3,00,000 

i. If in the next period company suffered a loss of Rs. 30,000, then

Contribution = Fixed Cost - Profit
= Rs. 90,000 – Rs. 30,000 (as it is a loss)
= Rs. 60,000.
Contributi on 60,000
Then Sales = or = Rs.1,20,000
P / V Ratio 0.50
So, there will be loss of Rs. 30,000 at sales of Rs. 1,20,000.

Pr ofit 90,000
ii. safety = or = Rs.1,80,000
PV ratio 0.50

Problem No. 8
i. In the First half year:
Contribution = Fixed cost + Profit = 4,50,000 + 3,00,000 = Rs. 7,50,000
Contribution 7,50,000
P/V ratio = X 100 = X 100 = 50%
sales 15,00,000
Fixed cost 4,50,000
Break-even point = = = Rs. 9,00,000
P/V ratio 50%

Margin of safety = Actual sales – Break-even point = 15,00,000 – 9,00,000 = Rs. 6,00,000

ii. In the second half year:

Contribution = Fixed cost – Loss = 4,50,000 – 1,50,000 = Rs. 3,00,000
Fixed cost - loss 3,00,000
Expected sales volume = = = Rs. 6,00,000
P/V ratio 50%

iii. For the whole year:

Fixed cost 4,50,000 X 2
B.E. point = = = Rs.18,00,000
P/V ratio 50%
PROFIT 3,00,000 . 1,50,000
Margin of safety = = = Rs. 3,00,000.
P/V ratio 50%

Problem No. 9
1. Marginal cost sheet for the given data is prepared as under –
Particulars Rs.
Sales (given) 3,00,000
Less: variable cost (balancing figure) 1,20,000
Contribution (fixed cost + profit) 1,80,000
Less: fixed cost (given) 90,000
Profit (given) 90,000

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Total Contributi on Rs.1,80,000
2. PV Ratio = X100 = X100 = 60%
Total sales value Rs.3,00,000
3. Required sales if loss is Rs.30,000
Desired Contributi on Fixed Cost + Desired Pr ofit Rs.90,000 + (Rs.30,000 )
= = = = Rs.1,00,000
PV Ratio PV Ratio 60%
Pr ofit Rs.90,000
4. When profit = Rs.90,000, margin of safety = = = Rs.1,50,000 .
PVRatio 60%

Problem No. 10
i. P/V Ratio - 50%
Margin of Safety - 40%
Sales 500 Units for Rs. 5,00,000
Sales Per Unit - Rs. 1000
Calculation of Break Even Point (BEP)
Sales - BEP
Margin of Safety Ratio = x 100
Sales
5,00,000 - BEP
40 = x 100
5,00,000
BEP = Rs. 3,00,000
BEP (Qty) = 3,00,000/1000 = 300 Units

ii. Sales in units to earn a profit of 10 % on sales

Fixed cos t + Desired profit
Sales =
p / v ratio
Let the sales be x
Profit = 10% of x i.e. 0.1X.
Thus -
1,50,000 + 0.1X 
X =  
 50% 
or x = Rs. 3,75,000

To find out sales in units amount of sales Rs. 3,75,000 is to be divided by Selling Price Per unit
Thus -
3,75,000
Sales (in units ) = = 375 Units
1,000

Working Notes:

1. Selling price = Rs. 5,00,000/Rs. 500 = Rs. 1000 per unit

2. Variable cost per unit

Selling Price - (Selling Price x P/V Ratio)
1000 – (1000 x 50%) = Rs. 500

3. Profit at present level of sales

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PROFIT
Margin of Safety =
P/V ratio
Margin of Safety = 40% of Rs. 5,00,000 = Rs. 2,00,000
PROFIT
2,00,000 =
50%
Profit = Rs. 1,00,000

4. Fixed Cost
= (Sales x P/V Ratio) – Profit
= 5,00,000 x 50% – 1,00,000 = Rs.1,50,000

Note: Alternative ways of calculation of ‘Break Even Point’ and required sales to earn aprofit of 10% of
sales’ can be adopted to solve the problem.

Problem No. 11

Difference in profit 5,000

i. P/V Ratio = X 100 = X 100 = 25%
Difference in sales 20,000

Particulars (Rs.)
Contribution in 2010 (1,20,000 × 25%) 30,000
Less: Profit 8,000
Fixed Cost* 22,000

*Contribution = Fixed cost + Profit

∴ Fixed cost = Contribution – Profit

Fixed Cost 22,000

ii. Break-even point = = = Rs.88,000
P / V ratio 25%

iii. Profit when sales are Rs.1,80,000:

Particulars (Rs.)
Contribution (Rs.1,80,000 × 25%) 45,000
Less: Fixed cost 22,000
Profit 23,000
iv. Sales to earn a profit of Rs.12,000
Fixed Cost + Desired Pr ofit 22,000 + 12,000
= = Rs.1,36,000
P /V ratio 25%

v. Margin of safety in 2011:

Margin of safety = Actual sales – Break-even sales = 1,40,000 – 88,000 = Rs. 52,000.

Problem No. 12
Change in Total cos t
a) Variable cost ratio =
Change in sales
4560000 − 3440000 1120000
= = = 70%
4800000 − 3200000 1600000
P/V Ratio = 1 – Variable cost ratio
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= 1 – 70%
= 30%
Fixed cost = Total Cost – Variable (Sales x Variable cost Ratio)
= 34,40,000 – (3200000 x 70%)
= 34,40,000 – 22,40,000
= 12,00,000
Contribution per unit = Selling Price x PL Ratio
= 40 x 30%
= 12
Fixed cos t 12,00,000
BEP(in units) = =
Contribution per unit 12
= 1,00,000 units

b) Profit at 75% of Total capacity

Profit = Contribution – Fixed cost
= 2,00,000 x 75% x 12 – 12,00,000 = 6,00,000

Problem No. 13

i)
T.Variable Cost
a) Variable cost pre unit =
No. of units
1,12,000 + 49,000 + 35,000
=
14000 units
= Rs.14
Rs.2,52,000
Selling Price = = Rs.18
14000 units

1,12,000 35,000
Revised Variable cost/ P.4 = 14 + x10% + x5%
14,000 14,000
= 14 + 0.8 + 0.125
= 14.925

Let x be the no. of units to be sold to maintain same profit

Total sales = Variable cost + Fixed cost + Profit
(No. of units x SP)

X × 18 = X × 14.925 + 28,000 + 28,000

18x = 14.925x + 56000
56000
X=
3.075
X = 18211 units

b) Margin of safety

Particulars August 2014 September 2014

Profit 28,000 28,000
 C.Profit  4 3.075
P/V ratio   = 22.22% = 17.08%
 S.P  18 18

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 Pr ofit  Rs.1,26,000 Rs.1,63,934
m arg in of safety  

 P / V Ratio 

Problem No. 14

P/V ratio = 28%

Quarterly fixed Cost = Rs.2,80,000
Desired Profit = Rs.70,000
Sales revenue required to achieve desired profit

Fixed cos t + Desired profit 2,80,000 + 70,000

= = = Rs. 12, 50,000
p / v ratio 28%
Problem No. 15
a) Contribution per unit = Selling Price – Variable cost
= 200 – 100
= 100
Fixed cos t
BEP =
Contribution per unit
40,00,000
= = 40,000
100

b) Contribution per unit = 180 – 100

= 80
40,00,000
New BEP =
80
= 50,000 units

Problem No. 16

Particulars % Amount (Rs.)

Sales 100 50
Less: Variable cost (40) (20)
Contribution 60 30
40% = Rs. 20, 100% = ?

Problem No. 17
i. Contribution Per Unit = 20-14 =6

ii. F.C = Rs.7,92,000

a. BEP = 7,92,000/6 = 1,32,000 units
b. Desired sales level = (60,000+7,92,000)/6 = 1,42,000 units
c. Profit before tax 100% 1,50,000
(-) tax 40% (60,000)
PAT 60% 90,000
Desired sales level = (1,50,000+7,92,000)/6 = 1,57,000 units
d. Variable labour cost = (14 X 50%) X 110% = 7.70
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Fixed labour cost = (7,92,000X20%)X110% = 1,74,240
Total variable manufacturing cost = (14 X 50%) + 7.70 = 14.70
Total fixed manufacturing cost = (7,92,000X80%)+1,74,240 = 8,07,840
Contribution P.U. = 20-14.70 = 5.3
BEP = 8,07,840 / 5.3 = 1,52,423 units

Problem No. 18
7. Total sales = BEP + MOS
= 400 crores + 120 crores
= 520 crores
Variable Cost Ratio = 1 – P/V Ratio
= 1 – 30%
= 70%
Fixed cost = BEP x P/V Ratio
= 400 x 30%
= 120 crores
Current profit = MOS x P/V Ratio
= 120 x 30%
= 36 crores

Fixed cos t + Desired Pr ofit

a) Sales required to earn desired profit =
P / V Ratio
Fixed cost = 120 + 50 + (100 x 15%)
= 185 crores

P/V Ratio

Def current selling price = 100

Variable cost = 100 x 70% = 70
Revised selling price = 100 – 10% = 90
Revised variable cost = 90 x (70% + 2%)
= 64.80
Revised P/V ratio = 64.80/90 = 28%
185 + 56
Sales required to earn desired profit = = 860.71 crores
28%
b)
FixedCost
i) Revised BEP =
P / V Ratio
185 crores
= = 660 .71 crores
28%
ii) Revised P/V Ratio = 28%

iii) Revised MOS = Total sales – BEP

= 860.71 – 660.71
= 200 crores

Problem No. 19
Break even point (in units) is 50% of sales i.e. 12,000 units

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Hence, Break even point (in sales value) is 12,000 units x Rs. 200 = Rs. 24,00,000

Fixed Cost
i. We know that Break even sales =
P / V ratio
Fixed Cost
or Rs. 24,00,000 =
25%
or Fixed Cost = Rs. 24,00,000 x 25%
= Rs. 6,00,000
So Fixed Cost for the year is Rs. 6,00,000

ii. Contribution for the year = (24,000 units x Rs. 200) x 25% = Rs. 12,00,000
Profit for the year = Contribution – Fixed Cost
= Rs. 12,00,000 - Rs. 6,00,000 = Rs. 6,00,000
iii. Target net profit is Rs. 11,00,000
Hence, Target contribution = Target Profit + Fixed Cost
= Rs. 11,00,000 + Rs. 6,00,000
= Rs. 17,00,000
Contribution per unit = 25% of Rs. 200 = Rs. 50 per unit
Rs.17,00,000
No. of units = = 34,000 units
Rs.50 per unit
So, 34,000 units to be sold to earn a target net profit of Rs. 11,00,000 for a year.
iv. Net desired total Sales (Number of unit x Selling price) be X , then desired profit is 25% on Cost or
20% on Sales i.e. 0.2 X
Fixed Cost + Desired Pr ofit
Desired Sales =
P / V ratio
6,00,000 + 0.2 X
X =
25%
or, 0.25 X = 6,00,000 + 0.2 X
or, 0.05 X = 6,00,000
or, X = Rs. 1,20,00,000
1,20,00,000
No. of units to be sold - = 60,000 units
200
v. If Break even point is to be brought down by 4,000 units then Breakeven point will be
12000 units – 4000 units = 8000 units
Let selling price be Rs. X and fixed cost and variable cost per unit remain unchanged
i.e. Rs. 6,00,000 and Rs. 150 respectively.
Break even point: Sales revenue = Total cost
8,000 X = 8,000 x Rs. 150 + Rs. 6,00,000
Or, 8,000 X = Rs. 12,00,000 + Rs. 6,00,000
Rs.18,00,000
Or, X = = Rs.225
8,000
∴ Selling Price should be Rs. 225
Hence, selling price per unit shall be Rs. 225 if Breakeven point is to be brought down by 4000
units.

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Problem No. 20
Fixed cos t 30,000
a) BEP = = = 75,000
P / V Ratio 40%
b) P/V ratio = 1 – Variable Cost Ratio
= 1 – 60%
= 40%
c) Margin of safety = Total sales - BEP
= 1,00,000 – 75,000 = 25,000 (or)
Profit ÷ P/V Ratio = 10,000 ÷ 40% = 25,000

Problem No. 21
Profit = Sales – cost of sales
Cost of sales = COGs + Selling & distribution expenses
COGs = Cost of sales - Selling & distribution expenses
COGs = Variable cost of goods sold + Fixed COGs
COGs = 0.57 COGs + 3,01,000
301000
=
0.57
= Rs.7,00,000 /-
COS = COGs + S & DOH
COS = COGs + (COS x 4% + 68,000)
COS = 7,00,000 + 0.04 Cos + 68,000
7,68,000
COS =
4%
= 8,00,000
Variable cost = 0.57 COGs + 0.04 COS
= 0.57 x 7,00,000 + 0.04 x8,00,000
= 43,10,000
Total fixed cost = 3,69,000 (2,30,000 + 71,000 + 68,000)
Contribution 9,25,000 − 4,31,000
a) P/N ratio = = = 53.41%
Sales 9,25,000
Fixed Cost 3,69,000
BEP (z) = = = 6,90,882
P / V Ratio 53.41%
b) Profit earned in Last Year = sales – Cost of sales
= 9,25,000 – 8,00,000
= 1,25,000
c) Margin of safety (in %)
Pr ofit 1,25,000
MOS = = = 2,34,039
P / V Ratio 53.41%
MOS 234039
% of MOS = =
T.sales 925000
= 25.30%

d) Profit = Sales – Variable – Fixed cost

= 90%(925000 – 431000) – 369000
= Rs.75,600
Problem No. 22
a, b, f, g → will not change
c,e, h, j → Will increase
d, i → will decrease

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Problem No. 23

Particulars 2,000 Units 1,500 Units

A. Selling price – prime cost 18 18
(Rs.36,000/2,000) (Rs.27,000/1,500)
B. Variable overheads II 2 2
Variable overheads III 1 1
C. Contribution (A-B) 15 15
D. Fixed overheads I 6,000 6,000
(2,000xRs.3) (2,000xRs.3)
Fixed overheads I 12,000 12,000
18,000 18,000
Fixed cos t 18,000 18,000
E. Break even point = = = 1200 units = = 1200 units
contribution per unit
15 15

Working notes:
Change in amount of overheads
i. Variable overheads III per unit =
Change in activity level
(2,000 xRs.7) − (1,500 xRs.9)
= = Rs.1 per unit
2,000 − 1,500

ii. Fixed Overheads III = Rs.14,000-(2,000xRs.1) = Rs.12,000

Problem No. 24

Particulars A ltd. B ltd.

Sales Rs.5,00,000 Rs.6,00,000
Less: variable cost Rs.4,00,000 Rs.4,00,000
Contribution Rs.1,00,000 Rs.2,00,000
Less: fixed Costs Rs.30,000 Rs.70,000
Profit Rs.70,000 Rs.1,30,000
Total Contributi on 20% 33.33%
PV Ratio = X100
Total Sales Value
Fixed cos ts Rs.1,50,000 Rs.2,10,000
Breakeven sales =
PV Ratio

Difference in Fixed Costs Rs.70,000 − Rs.30,000

Indifference point (Qty) = = = Rs.3,00,000(approx.)
Difference in PV Ratio 33.33% − 20%

Conclusion:

Sales demand Nature Firm with higher profits Reason

< Rs.3,00,000 Low demand A ltd. Lower fixed costs
= Rs.3,00,000 Indifference point Either A ltd. Or B ltd. Equal profits
> Rs.3,00,000 Heavy demand B ltd. Higher PV Ratio

Problem No. 25

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(i) Statement of Cost and Profit under Marginal Costing
for the year ending 31st March, 2008
Output = 3,20,000 units
Particulars Amount (Rs.) Amount (Rs.)
Sales: 3,10,000 units @ Rs. 80 2,48,00,000
Less: Marginal cost / variable cost:
Variable cost of production (3,20,000 X Rs. 40) 1,28,00,000
Add: Opening stock 40,000 units @ Rs. 40 16,00,000
1,44,00,000
Less: Closing Stock
[(3,20,000 + 40,000 – 3,10,000) @ Rs. 40
= 50,000 units @ Rs. 40] 20,00,000
Variable cost of production of 3,10,000 units 1,24,00,000
Add: Variable selling expenses @ Rs. 12 per unit 37,20,000 1,61,20,000
Contribution (sales – variable cost) 86,80,000
Less: Fixed production cost 24,00,000
Fixed selling expenses 16,00,000 40,00,000
Actual profit under marginal costing 46,80,000

(ii) Statement of Cost and Profit under Absorption Costing

for the year ending 31st March, 2008
Output = 3,20,000 units

Particulars Amount (Rs.) Amount (Rs.)

Sales: 3,10,000 units @ Rs. 80 2,48,00,000
Less: Cost of sales:
Variable cost of production(3,20,000 @ Rs. 40) 1,28,00,000
Add: Fixed cost of production absorbed3,20,000 units @ Rs. 19,20,000
6 (1)
1,47,20,000
1,47,20,000 18,40,000
Add: Opening Stock: 40,000 x
3,20,000
1,65,60,000
1,47,20,000 23,00,000
Less: Closing Stock: 50,000 x
3,20,000
Production cost of 3,10,000 units 1,42,60,000
Selling expenses:
Variable: Rs. 12 X 3,10,000 units 37,20,000
Fixed 16,00,000 1,95,80,000
Unadjusted profit 52,20,000
Less: Overheads under absorbed: (2)
Fixed production overheads 4,80,000
Actual profit under absorption costing 47,40,000

Workings:
Rs. 24,00,000
1. Absorption rate for fixed cost of production = = Rs. 6 per unit
4,00,000 units

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2. Fixed production overhead under absorbed = Rs. (24,00,000 – 19,20,000) =Rs. 4,80,000.

THE END

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