Marginal Costing and CVP Analysis

Meaning
According to CIMA (London), Marginal Costing is “the ascertainment of marginal costs
and the effect on profit because of changes in volume or type of output by differentiating
between fixed cost and variable cost”.
It is also known as variable costing as this technique of costing provides more
significance to the variable cost by emphasizing enhanced technical calculations through
changes in variable and marginal costs and its assistance in managerial decision making.

Marginal costing-oriented Income Statement

As marginal costing gives more importance to the marginal and variable costs, it also
provides its own format of income statement which can be called as marginal costing-
oriented Income Statement. The following is its format.
Income Statement
Particulars Rs.
Sales XX
Less: Variable Costs XX
Contribution XX
Less: Fixed Costs XX
Profit XX

CVP Analysis
Cost-Volume-Profit Analysis is the study of the effects of changes in the cost and volume
on the profit of the company. It is very important analysis for the management of a
business as it helps in taking very vital decisions such as pricing of the product,
determining product mix, choosing production facility, discontinuation of product in case
of requirement, etc. Generally, it is observed that higher volume helps in cost reduction
and in turn affects profit for the overall benefit of the business.

Marginal Costing equations and CVP formulas

Marginal costing and Cost-Volume-Profit analysis is carried out with the help of various
equations and formulas which are given as follows.

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Abbreviations used
S = Sales
V = Variable cost
C = Contribution
F = Fixed cost
P = Profit
P/V Ratio = Profit/Volume Ratio
BEP = Break Even Pont (Units of output)
BES = Break Even Sales (Rs. of sales)
MOS = Margin of Safety
Marginal Costing Equations
1) C=S–V
2) P=C–F
3) S=V+C
4) C=F+P
CVP Formulas
5) P/V Ratio = C / S x 100
6) P/V Ratio = S – V / S x 100
7) P/V Ratio = F + P / S x 100
8) P/V Ratio = P / S x 100
9) Desired S = (F + Desired P) / P/V Ratio
10) C = S x P/V Ration
11) V = S x (1 – P/V Ratio)
12) BEP (Units of output) = F / C per unit
13) BES (Amount of Sales) = F / P/V Ratio OR F / C/S Ratio
14) MOS = Actual S – BES
15) MOS (Units of Output) = P / C per unit
16) MOS (Amount of Sales) = P / P/V Ratio
17) MOS (%) = Actual S – BES / Actual S x 100

Numerical Problems
1) AA Ltd. manufacturing unit produces 750 units of product annually. The variable cost of
each product is Rs.480 and the product is sold for Rs.600. Fixed cost incurred by the
company is Rs.24000. Calculate P/V Ratio. What would be BEP and BES?

2) BB Ltd. manufacturing unit produces 2200 units of product annually. The variable cost of
each product is Rs.1250 and the product is sold for Rs.2500. Fixed cost incurred by the
company is Rs.840000. Calculate P/V Ratio. What would be BEP and BES?

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3) From the following information calculate BES and Desired Sales to earn profit of Rs.120000.
Sales Rs.4,00,000
Fixed Cost Rs.1,80,000
Variable Cost Rs.2,80,000

4) From the following information calculate BES and Desired Sales to earn profit of Rs.375000.
Sales Rs.23,00,000
Fixed Cost Rs.8,80,000
Variable Cost Rs.9,20,000

5) From the following information calculate Margin of Safety.

Sales Rs.7,50,000
Fixed Expenses Rs.2,25,000
Profit Rs.1,50,000

6) From the following information calculate Margin of Safety.

Sales Rs.45,00,000
Fixed Expenses Rs.15,00,000
Profit Rs.5,50,000

7) Sales and Profits during last two years are given as under
Years Sales (Rs.) Profit (Rs.)
2023 20,00,000 2,00,000
2024 30,00,000 4,00,000
Calculate P/V Ratio, Fixed cost, BES, Sales to earn profit Rs.5,00,000. Profit when sales are
Rs.40,00,000, MOS at Profit of Rs.4,50,000.

8) Sales and Profits during last two years are given as under
Years Sales (Rs.) Total Cost (Rs.)
2023 55,00,000 42,00,000
2024 75,00,000 52,00,000
Calculate P/V Ratio, Fixed cost, BES, Sales to earn profit Rs.25,00,000. Profit when sales are
Rs.85,00,000, MOS at Profit of Rs.5,00,000.

9) A company had incurred fixed expenses of Rs.2,25,000, Sales Rs.7,50,000 and earned a
profit of Rs.1,50,000 during the first-half of the year. In the second-half, it suffered a loss of
Rs.75,000. Calculate:
a. P/V Ratio, BEP, MOS, for first-half of the year
b. Calculate the sales for the second-half of the year assuming that selling price and Fixed
expenses remail same.

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10) Z Ltd. Produces and sales a single product at a selling price of Rs.10 each. The variable cost
per unit Rs.6 and Fixed Cost is Rs.400 per annum. Calculate:
a. P.V Ratio and BES (Units and Rs. Both)
b. The sales to earn a profit of Rs.500
c. Profit at the sales of Rs.3000
d. New BEP if sales price reduces by 10%
e. MOS at the sale of Rs.1500
f. Selling price per unit if the BEP is reduced to 80 units

11) A product is sold at Rs.80 per unit. Its variable cost is Rs.60, Fixed Cost is Rs.6,00,000.
Compute the following:
a. P/V Ratio
b. BEP
c. MOS at a sale of 50000 units
d. At what sale the producer will earn profit at 15% on sales

12) A, B and C are three similar plants under the same management / company who wants them
to be merged for better operations. The following particulars are available:
Plant A B C
Current Operating Capacity 100% 70% 50%
Turnover 300000 280000 150000
Variable Cost 200000 210000 75000
Fixed Cost 70000 50000 62000
Considering the market conditions, and company’s wish to achieve better economies of
scale, it wants to merge all the three plants in one and operate all of them at full capacity.
Based on this decision, you are required to:
a) Calculate the capacity of the merged plant to break even.
b) Calculate Profit or loss at 50% and 75% Capacity of Merged Plant
c) Calculate Turnover of the merged plant to earn Profit of 150000.

13) X, Y and Z are three similar plants under the same management / company who wants them
to be merged for better operations. The following particulars are available:
Plant X Y Z
Current Operating Capacity 80% 60% 50%
Turnover 1275000 880000 550000
Variable Cost 510000 396000 275000
Fixed Cost 170000 84000 75000
Considering the market conditions, and company’s wish to achieve better economies of
scale, it wants to merge all the three plants in one and operate all of them at full capacity.
Based on this decision, you are required to:
d) Calculate the capacity of the merged plant to break even.

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 e) Calculate Profit or loss at 50% and 75% Capacity of Merged Plant
f) Calculate Turnover of the merged plant to earn Profit of 1000000.

14) You are given the following information for next year:
Sales (10000 Units) Rs.120000
Variable Cost Rs.48000
Fixed Cost Rs.60000
Find out
a) P/V Ratio, BEP and MOS
b) Evaluate the Effect of following on P/V Ratio, BEP and MOS
i. 10% Increase in Variable Cost
ii. 10% Increase in Fixed Cost
iii. 5% Increase in Selling Price
iv. 5% Decrease in Selling Price along with 10% increase in number of units sold.

15) You are given the following information for next year:
Sales (10000 Units) Rs.1080000
Variable Cost Rs.432000
Fixed Cost Rs.148000
Find out
c) P/V Ratio, BEP and MOS
d) Evaluate the Effect of following on P/V Ratio, BEP and MOS
i. 10% Decrease in Variable Cost
ii. 10% Decrease in Fixed Cost
iii. 5% Decrease in Selling Price
iv. 5% Increase in Selling Price along with 10% Decrease in number of units sold.

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