8/7/2019 marginal-b

1/49

marginal costing

8/7/2019 marginal-b

2/49

Cost- Volume- Profit Analysis

Break Even Analysis

Profit VolumeCh

art

8/7/2019 marginal-b

3/49

Cost- Volume- Profit Analysis

Break Even Analysis

Methods

Algebraic Method

Graphic Method

8/7/2019 marginal-b

4/49

Cost- Volume- Profit Analysis

ALGEBRAICMETHODFixed Cost

BEP (Units) = --------------- = F

Contribution PU S-V

Fixed Cost

BEP (Rs ) = ----------------- x Sales

Contribution

Fixed CostBEP (Rs) = ------------------

P/V Ratio

8/7/2019 marginal-b

5/49

Cost- Volume- Profit Analysis

ALGEBRAICMETHODFixed Cost

BEP (Units) = --------------- = F

Contribution PU S-V

Fixed Cost

BEP (Rs ) = ----------------- x Sales

Contribution

Fixed CostBEP (Rs) = ------------------

P/V Ratio

F Cost=Rs 12000

S Price=Rs12 pu

V Cost =Rs 9 pu

Units produced-10000

Find BEP

8/7/2019 marginal-b

6/49

Cost- Volume- Profit Analysis

Other Uses

Profit at diff. Sales Vol.

F Cost=Rs 12000S Price=Rs12 pu

V Cost =Rs 9 pu

Units produced =10000

Profit wh

en sales are

a) Rs 60,000

b) Rs 1,00,000

8/7/2019 marginal-b

7/49

Cost- Volume- Profit Analysis

Profit at diff. Sales Vol.

CP/V Ratio= ----- = 3/12=25%

S

WHEN SALES=Rs 60,000

Contribution=sales x p/vratio

=60000x25%

=Rs 15000

Profit =contribution-fixed cost

=15000-12000

=Rs3000

F Cost=Rs 12000

S Price=Rs12 pu

V Cost =Rs 9 pu

Profit when sales are

a) Rs 60,000

b) Rs 1,00,000

8/7/2019 marginal-b

8/49

Cost- Volume- Profit Analysis

Other Uses

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------P/V Ratio

F Cost=Rs 12000

S Price=Rs12 pu

V Cost =Rs 9 pu

Sales if desired profita) Rs 6000

b) Rs 15,000

8/7/2019 marginal-b

9/49

Cost- Volume- Profit Analysis

Sales at Desired Profit

F Cost +Desired Profit

Sales= -------------------------------P/V Ratio

12,000+6000

a)Sales = ---------------25%

=Rs 72,000

F Cost=Rs 12000

S Price=Rs12 pu

V Cost =Rs 9 pu

Sales if desired profita) Rs 6000

b) Rs 15,000

8/7/2019 marginal-b

10/49

CVP Analysis -question

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

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

a)BEP

b)BEP When V Cost increases by5%

c)BEP at present level wh

en selling price reduced by5%

8/7/2019 marginal-b

11/49

CVP Analysis -

S-V

P/V Ratio=--------

S

3000000-2100000

= ------------------------

3000000

=30%

Sales =VC+FC+P

3000000=2100000+FC+180000

FC =Rs 7200007,20,000

BEP= -------------

30%

=Rs 2400000

8/7/2019 marginal-b

12/49

CVP Analysis -question

b) When V Cost increases by 5%

New Variable Cost=2100000+5%

=22,05,000

PV Ratio 3000000-2205000

3000000

=26.5%

BEP =7,20,000/ 26.5%

=Rs 27,16,981

8/7/2019 marginal-b

13/49

CVP Analysis -question

c)When Selling Price reduced by 5%

New SP=30000005%

=Rs 28,50,000

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

=Rs7,50,000

PV Ratio =7500000/2850000

=26.32%

FC+PROFIT

Desired Sales= ------------------ = 720000+1800000

PV Ratio 26.32%

=Rs 34,19,453( appx)

8/7/2019 marginal-b

14/49

BEP

Graphical Presentation

8/7/2019 marginal-b

15/49

Break-Even Analysis

Costs/Revenue

Output/Sales

Initially a firm

will incur fixed

costs, these do

not depend on

output or sales.

FC

8/7/2019 marginal-b

16/49

Break-Even Analysis

Costs/Revenue

Output/Sales

Initially a firmwill incur fixed

costs, these do

not depend on

output or sales.

FC

As output is

generated, the

firm will incur

variable costs

these vary

directly with the

amount produced

The total coststherefore

(assuming

accurate

forecasts!) is the

sum of FC+VC

TC

Total revenue is

determined by theprice charged and

the quantity sold

again this will be

determined by

expected forecast

sales initially.

TRThe lower theprice, the less

steep the total

revenue curve.

TR

Q1

The Break-even point

occurs where totalrevenue equals total

costs the firm, in

this example would

have to sell Q1 to

generate sufficient

revenue to cover its

costs.

8/7/2019 marginal-b

17/49

Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR

Q1

If the firm chose

to set price higher

than Rs2 (say

Rs3) the TR curve

would be steeper

they would not

have to sell as

many units tobreak even

TR

Q2

8/7/2019 marginal-b

18/49

Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VCTCTR

Q1

If the firm chose

to set prices lower

it would need to

sell more units

before covering its

costs

TR)

Q3

8/7/2019 marginal-b

19/49

Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VC

TCTR

Q1

Loss

Profit

8/7/2019 marginal-b

20/49

Break-Even Analysis

Costs/Revenue

Output/Sales

FC

VC

TCTR

Q1 Q2

Assume

current sales

at Q2

Margin of Safety

Margin of

safety showshow far sales

can fall before

losses made. If

Q1 = 1000 and

Q2 = 1800, sales

could fall by 800

units before aloss would be

made

TR

Q3

A higher price

would lower

the break

even point

and the

margin ofsafety would

widen

8/7/2019 marginal-b

21/49

Costs/Revenue

Output/Sales

FC

VC

TR

High initial FC.

Interest on debt

rises each year FC

rise therefore

FC 1

Losses get

bigger!

Break Even Analysis

8/7/2019 marginal-b

22/49

Break-Even Analysis

Remember:

A higher price or lower price does notmean that break even will neverbereached!

The BE point depends on the sales

needed to generate revenue to covercosts

8/7/2019 marginal-b

23/49

8/7/2019 marginal-b

24/49

Break-Even Analysis

Links of BE to pricing strategies andelasticity

Penetration pricing high volume, low price more sales to break even

8/7/2019 marginal-b

25/49

Break-Even Analysis

Links of BE to pricing strategies andelasticity

Market Skimming high price low volumes fewer sales to break even

8/7/2019 marginal-b

26/49

Break-Even Analysis

Links of BE to pricing strategies andelasticity

Elasticity what is likely to happen to saleswhen prices are increased or decreased?

8/7/2019 marginal-b

27/49

BEP-Question

Fixed Cost=Rs 5000

Variable Cost=10 per unit

Selling Price=20 Per Unit

Sales Volume 1000 units

Draw Break even Point and show the effect of the following

A) 10 % decrease in fixed cost

B) 10% Increase in variable CostC) 10% increase in selling price

D) 10% increase in sales volume

8/7/2019 marginal-b

28/49

Marginal Costing

Cost Volume Chart

8/7/2019 marginal-b

29/49

8/7/2019 marginal-b

30/49

PV Chart Information

FixedC

ost =Rs 5000Sales =Rs 20000(pu RS 20)

V Cost= Rs 10000(pu Rs10)

Find

PV Ratio, BEP, Profit?

8/7/2019 marginal-b

31/49

Construction Of PV Chart

0 5000 10000 15000 20000

Sales Rs

Fixed Cost

Rs

2000

4000

5000

6000

8000

8000

6000

5000

4000

2000

Profit

Rs

BEP

8/7/2019 marginal-b

32/49

8/7/2019 marginal-b

33/49

Effect OfChange in Profit- 20% decrease in fixedCost

New F Cost= 5000- 20%=Rs4000

Fixed Cost

New BEP = PV Ratio

= 4000/50%

=Rs 8000New Profit=S-F-V

=20000-4000-10000

=Rs 6000

8/7/2019 marginal-b

34/49

Effect ofChange in profit- 20% decrease in FC

0 5000 10000 15000 20000

Sales Rs

Fixed Cost

Rs

2000

4000

5000

6000

8000

Profit

Rs

New BEP

Loss

Area

Profit

Area

8000

6000

5000

4000

2000

8/7/2019 marginal-b

35/49

Effect OfChange in Profit- 10% decrease in VCost

New V Cost= 10000- 10%=Rs9000

New PV Ratio=20000-9000

20000

Fixed Cost

New BEP = PV Ratio

= 5000/55%

=Rs 9090 AppxNew Profit=S-F-V

=20000-5000-9000

=Rs 6000

=55%

8/7/2019 marginal-b

36/49

Construction Of PV Chart

0 5000 10000 15000 20000

Sales Rs

Fixed Cost

Rs

2000

4000

5000

6000

8000

8000

6000

5000

4000

2000

Profit

Rs

New BEP

Loss

Area

Profit

Area

8/7/2019 marginal-b

37/49

8/7/2019 marginal-b

38/49

Effect Of 5% Decrease in Selling Price

0 5000 10000 15000 20000

Sales Rs

Fixed Cost

Rs

2000

4000

5000

6000

8000

8000

6000

5000

4000

2000

Profit

Rs

Loss

Area

Profit

Area

8/7/2019 marginal-b

39/49

decision making

8/7/2019 marginal-b

40/49

special decision making areas

selling price decisionsmake or buy decisions

sales mix decision

selecting suitable method

of production

plant shut down decisions

8/7/2019 marginal-b

41/49

special decision making areas

selling price decisions

Competition & depression

Additional orders

Utilizing spare capacity

Export market

8/7/2019 marginal-b

42/49

Selling at or below marginal cost

to popularize new producteliminate competitorsdispose perishablesearning foreign Exchangeto keep pm in operationprevent future loss of Ordershelping other products makingprofitsKeeping employees Occupied

8/7/2019 marginal-b

43/49

pricing in competition & depression

may be priced below total cost

under marginal costing it may at or above mc

production may continue

for a short term only

8/7/2019 marginal-b

44/49

8/7/2019 marginal-b

45/49

make or buy decisions

Outside price comparedwith marginal cost

Outside ifmc>op

Inside ifmc

8/7/2019 marginal-b

46/49

sales mix decisions

proportion in which various productsare produced or sold

Selecting most profitable mix

8/7/2019 marginal-b

47/49

Selection of a suitable method of production

new product

whether to go for machine orhand labour

ordinary or automatic machine

select -which gives largest contribution

8/7/2019 marginal-b

48/49

plant shut down- not sufficient business

temporary suspension

permanent suspension

8/7/2019 marginal-b

49/49

Introducing an additional shift

Capacity units of V C FC TC DIFF SALES Incremental

outputs Rs Rs Rs Rs Rs Revenue

60% 60000 9000 40000 49000 540000 ---

70% 70000 10500 40000 50500 1500 56000 2000

80% 80000 12000 40000 52000 1500 60000 4000

90% 90000 13500 40000 53500 1500 60300 300

100% 100000 15000 40000 55000 1500 61000 700