Decision Making Tools

Some more Problems on Application of Marginal Costing in Decision Making

Problem 1
The sports material manufacturing company budgeted the following data for the coming year.

`
Sales (1,00,000 units) 1,00,000
Variable cost 40,000
Fixed cost 50,000

Find out
(a) P/V Ratio, B.E.P and Margin of Safety
(b) Evaluate the effect of
(i) 20% increase in physical sales volume
(ii) 20% decrease in physical sales volume
(iii) 5% increase in variable costs
(iv) 5% decrease in variable costs
(v) 10% increase in fixed costs
(vi) 10% decrease in fixed costs
(vii) 10% decreases in selling price and 10% increase in sales volume
(viii) 10% increase in selling price and 10% decrease in sales volume
(ix) ` 5,000 variable cost decrease accompanied by ` 15,000 increase in fixed costs.

Answer:
(a) P/V ratio, B.E.P and Margin of Safety
Contribution = Sales – Variable cost
= 1,00,000 – 40,000
= ` 60,000
P/V Ratio = (Contribution / Sales) x 100
= (60,000 / 1,00,000) x 100
= 60%
B.E.P sales = Fixed cost / PV ratio
= 50,000 / 60%
= ` 83,333
Margin of Safety = Total sales – B.E.P sales
= 1,00,000 – 83,333
= `16,667

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(b)

Contribution P/V ratio BE Sales Margin of

(`) (`) safety
(`)
(i) Increase in volume by 20% 1,20,000 – (72,000 / 1,20,000) (50,000 / 60%) 1,20,000 –
48,000 x 100 = 60% = 83,333 83,333
= 72,000 = 36,667
(ii) Decrease in volume by 80,000 – 32,000 (48,000 / 80,000) x (50,000 / 60%) 80,000 – 83,333
20% = 48,000 100 = 60% = 83,333 = (3,333)
(iii) 5% increase in variable 1,00,000 – (58,000 / 1,00,000) (50,000 / 58%) 1,00,000 –
cost 42,000 x 100 = 58% = 86,207 86,207
= 58,000 = 13,793
(iv) 5% decrease in variable 1,00,000 – (62,000 / 1,00,000) (50,000 / 62%) 1,00,000 –
cost 38,000 x100 = 62% = 80,645 80,645
= 62,000 = 19,355
(v) 10% increase in fixed cost 1,00,000 – (60,000 / 1,00,000) (55,000 / 60%) 1,00,000 –
40,000 x 100 = 60% = 91,667 91,667
= 60,000 = 8,333
(vi) 10% decrease in fixed costs 1,00,000 – (60,000 / 1,00,000) (45,000 / 60%) 1,00,000 –
40,000 x 100 = 60% = 75,000 75,000
= 60,000 = 25,000
(vii) 10% decreases in selling 99,000 – 44,000 (55,000 / 99,000) x (50,000 / 99,000 – 90,009
price and 10% increase in = 55,000 100 = 55.55% 55.55%) = = 8,991
sales volume 90,009

(viii) 10% increase in selling 99,000 – 36,000 (63,000 / 99,000) x (50,000 / 99,000 – 78,579
price and 10% decrease in = 63,000 100 = 63.63% 63.63%) = = 20,421
sales volume 78,579
(ix) `5,000 variable cost 1,00,000 – (65,000/1,00,000) x (65,000 / 65%) 1,00,000 –
decrease accompanied 35,000 = 65,000 100 = 65% = 1,00,000 1,00,000 = 0
by `15,000 increase in
fixed costs.

Problem 2
Two businesses AB Ltd and CD Ltd sell the same type of product in the same market. Their budgeted
profits and loss accounts for the year ending 30th June, 2016 are as follows:

AB Ltd (`) CD Ltd (`)

Sales 1,50,000 1,50,000
Less: Variable costs 1,20,000 1,00,000
Fixed Cost 15,000 1,35,000 35,000 1,35,000
Profit 15,000 15,000
You are required to calculate the B.E.P of each business and state which business is likely to earn
greater profits in conditions.

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(a) Heavy demand for the product

(b) Low demand for the product.

Answer:
Statement Showing Computation of P/V ratio, BEP and Determination of Profitability in Different conditions

Particulars AB Ltd CD Ltd

(i) Sales 1,50,000 1,50,000
(ii) Variable cost 1,20,000 1,00,000
(iii) Contribution 30,000 50,000
(iv) P/V ratio [(30,000/1,50,000) x 100] 20%
[(50,000/1.50,000) x 100] 331/3%

(v) Fixed cost 15,000 35,000

(vi) Profit 15,000 15,000
(vii) Breakeven sales (V/IV) 75,000 1,05,000
From the above computation, it was found that the product produced by CD Ltd is more profitable in
conditions of heavy demand because its P/V ratio is higher. On the other hand, in the condition of low
demand, the product produced by AB Ltd is more profitable because its BEP is low.

Problem 3
A factory is currently working to 40% capacity and produces 10,000 units. At 50% the selling price falls by
3%. At 90% capacity the selling price falls by 5% accompanied by similar fall in prices of raw material.
Estimate the profit of the company at 50% and 90% capacity production.
The cost at present per unit is:

`
Material 10
Labour 3
Overheads 5 (60% fixed)
The selling price per unit is ` 20/- per unit.

Answer:
Statement Showing Computation of Profit at 50% and 90% Capacity as well as at Current Capacity

Particulars 40% 50% 90%

` ` `
Unit Total Unit Total Unit Total
(i) Selling Price 20.00 2,00,000 19.40 2,42,500 19.00 4,27,500
(ii) Variable Cost
Material 10.00 1,00,000 10.00 1,25,000 9.50 2,13,750
Labour 3.00 30,000 3.00 37,500 3.00 67,500

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Variable OH 2.00 20,000 2.00 25,000 2.00 45,000

15.00 1,50,000 15.00 1,87,500 14.50 3,26,250
(iii) Contribution 5.00 50,000 4.40 55,000 4.50 1,01,250
(iv) Fixed Cost 3.00 30,000 30,000 30,000
(v) Profit 20,000 25,000 71,250
(vi)  F×S  1,20,000 1,32,273 1,26,667
B.E. Sales  
 C 

Problem 4
The sales turnover and profit during two periods were as follows:

Period Sales (`) Profit (`)

1 2,00,000 20,000
2 3,00,000 40,000
What would be probable trading results with sales of `1,80,000? What amount of sales will yield a profit
of ` 50,000?

Answer:
P/V ratio = (Change in profit / Change in sales) x 100

= (20,000 / 1,00,000) x 100 = 20%

Fixed cost = (Sales x P/V ratio) – Profit

= (2,00,000 x 0.2) – 20,000 = ` 20,000

Fixed Cost + Desired Profit

Sales required to earn desired profit = = (20,000 + 50,000) / 20% = ` 3,50,000
P / V Ratio

Problem 5
The following figures for profit and sales obtained from the accounts of X Co. Ltd.

Period Sales (`) Profit (`)

2014 20,000 2,000
2015 30,000 4,000

Calculate:
(a) P/V Ratio
(b) Fixed cost
(c) B.E. Sales
(d) Profit at sales ` 40,000 and
(e) Sales to earn a profit of ` 5,000.

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Answer:
(a) P/V ratio = (Change in profit / Change in sales) × 100
= (2,000 / 10,000) × 100 = 20%
(b) Fixed cost = (Sales × P/V ratio) – Profit
= (20,000 × 0.2) – 2,000 = ` 2,000
(c) Break even sales = Fixed cost / PV ratio
= 2,000 / 20% = ` 10,000
(d) Profit at sales ` 40,000 = (Sales × P/V ratio) – Fixed cost
= (40,000 × 20%) – 2,000 = ` 6,000
Fixed Cost + Desired Profit
(e) Sales required to earn desired profit of ` 5,000 = = (2,000 + 5,000) / 20%
P / V Ratio
= ` 35,000

Problem 6
The following results of a company for the last two years are as follows:

Period Sales (`) Profit (`)

2014 1,50,000 20,000
2015 1,70,000 25,000
You are required to calculate:
(i) P/V Ratio
(ii) B.E.P
(iii) The sales required to earn a profit of ` 40,000
(iv) Profit when sales are ` 2,50,000
(v) Margin of safety at a profit of ` 50,000 and
(vi) Variable costs of the two periods.

Answer:
(i) P/V ratio = (Change in profit / Change in sales) × 100
= (5,000 / 20,000) × 100 = 25%
Fixed cost = (Sales × P/V ratio) – Profit
= (1,50,000 × 25%) – 20,000 = ` 17,500
(ii) Break even sales = Fixed cost / PV ratio
= 17,500 / 25% = ` 70,000
Fixed Cost + Desired Profit
(iii) Sales required to earn a profit of ` 40,000 =
P / V Ratio
= (17,500 + 40,000) / 25% = ` 2,30,000
(iv) Profit at sales ` 2,50,000 = (Sales × P/V ratio) – Fixed cost
= (2,50,000 × 25%) – 17,500 = ` 45,000

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(v) Margin of safety at profit of ` 50,000 = Profit / PV ratio

= 50,000 / 25% = ` 2,00,000
(vi) Variable cost for 2011 = 1,50,000 x 75% = ` 1,12,500
Variable cost for 2012 = 1,70,000 x 75% = ` 1,27,500

Problem 7
The Reliable Battery Co. furnishes you the following income information:

Year 2015
First Half (`) Second Half (`)
Sales 8,10,000 10,26,000
Profit earned 21,600 64,800

From the above you are required to compute the following assuming that the fixed cost remains the
same in both periods.
1. P/V Ratio
2. Fixed cost
3. The amount of profit or loss where sales are ` 6,48,000
4. The amount of sales required to earn a profit of ` 1,08,000

Answer:
1. P/V ratio = [(64,800 – 21,600) / (10,26,000 – 8,10,000)] x 100 = 20%
2. Fixed cost = (Sales x P/V ratio) – Profit = (8,10,000 x 20%) – 21,600 = ` 1,40,400
3. Profit/Loss when sales are ` 6,48,000 = (Sales × P/V ratio) – 1,40,400
= (6,48,000 x 20%) – 1,40,400 = 1,29,600 – 1,40,400
= ` 10,800 (loss)
4. Amount of sales to earn profit of ` 1,08,000 = (1,40,400 + 1,08,000) / 20%
= 2,48,400 / 20% = ` 12,42,000

Problem 8
The following figures relate to a company manufacturing a varied range of products:

Total Sales (`) Total Cost (`)

Year ended 31-12-2014 22,23,000 19,83,600
Year ended 31-12-2015 24,51,000 21,43,200

Assuming stability in prices, with variable cost carefully controlled to reflect pre-determined relation.
(a) The profit volume ratio to reflect the rates of growth for profit and sales and
(b) Any other cost figures to be deduced from the data.

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Answer:

31-12-2014 (`) 31-12-2015 (`)

Sales 22,23,000 24,51,000
(-) cost 19,83,600 21,43,200
Profit 2,39,400 3,07,800

Change in profit = 3,07,800 – 2,39,400 = ` 68,400

Change in sales = 24,51,000 – 22,23,000 = ` 2,28,000
(a) P/V ratio = (68,400 / 2,28,000) x 100 = 30%
(b) Fixed cost = (22,23,000 x 30%) – 2,39,400 = ` 4,27,500
(c) Break even sales = 4,27,500 / 30% = ` 14,25,000
(d) M/S for 2014 = 22,23,000 – 14,25,000 = ` 7,98,000
M/S for 2015 = 24,51,000 – 14,25,000 = ` 10,26,000
(e) Variable cost for 2014 = 22,23,000 x 70% = ` 15,56,100
Variable cost for 2015 = 24,51,000 x 70% = ` 17,15,700
(f) % of fixed cost in 2014 = (4,27,500 / 22,23,000) x 100 = 19.23%
% of fixed cost in 2015 = (4,27,500 / 24,51,000) x 100 = 17.44%

Problem 9
SV Ltd a multi product company furnishes you the following data relating to the year 2015:

First Half of the year (`) Second Half of the year (`)
Sales 45,000 50,000
Total cost 40,000 43,000
Assuming that there is no change in prices and variable cost and that the fixed expenses are incurred
equally in the two half year period, calculate for the year, 2015
(i) The P/V Ratio,
(ii) Fixed Expenses
(iii) Break-even sales
(iv) Percentage of Margin of safety.

Answer:
(i) P/V ratio = [(7,000 – 5,000) / (50,000 – 45,000)] × 100 = 40%
(ii) Fixed expenses for first half year = (Sales x PV ratio) – Profit
= (45,000 x 0.4) – 5,000 = ` 13,000
Fixed expenses for the year = 13,000 + 13,000 = ` 26,000
(iii) Break even sales = 26,000 / 40% = ` 65,000

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(iv) Margin of safety = (50,000 + 45,000) – 65,000 = ` 30,000

Margin of safety ratio = [30,000 / (50,000 + 45,000)] x 100 = 31.58%

Problem 10
S Ltd. furnishes you the following information relating to the half year ended 30th June, 2015.

(`)
Fixed expenses 45,000
Sales value 1,50,000
Profit 30,000
During the second half the year the company has projected a loss of `10,000.
Calculate:
(1) The B.E.P and M/S for six months ending 30th June, 2015.
(2) Expected sales volume for the second half of the year assuming that the P/V Ratio and Fixed
expenses remain constant in the second half year also.
(3) The B.E.P and M/S for the whole year for 2015.

Solution:
(1) P/V ratio : = [(45,000 + 30,000) / 1,50,000] × 100 = 50%
BE sales for I half year = 45,000 / 50% = ` 90,000
Margin of safety for I half year = 1,50,000 – 90,000 = ` 60,000
For II half year:
(2) P/V ratio = (Fixed cost + Profit) / Sales
0.5 = [45,000 + (-) 10,000] / Sales
0.5 sales = 35,000
\ Sales = ` 70,000
(3) BE sales for 2015 = (45,000 + 45,000) x 50% = 1,80,000
Margin of safety for 2015 = (1,50,000 + 70,000) – 1,80,000 = ` 40,000

Problem 11
The following is the statement of a Radical Co. for the month of June.

Products Total
L (`) M (`) (`)
Sales 60,000 60,000 1,20,000
Variable costs 42,000 30,000 72,000
Contribution 18,000 30,000 48,000
Fixed cost 36,000
Net Income 12,000

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You are required to compute the P/V ratio for each product and then compute the P/V Ratio,
Breakeven Point and net profit for the following assumption.
(i) Sales revenue divided 60% to Product L & 40% to Product M.
(ii) Sales revenue divided 40% to Product L & 60% to Product M.
Also calculate the profit estimated on sales upto ` 1,80,000/- p.m. for each of the sales mix provided
above.

Answer:
Computation of P/V ratio

Particulars L M Total
P/V ratio (C/S) x 100 30% 50% 40%

(i) For Assumption I

Statement showing computation of P/V ratio, Breakeven point and profit:

Sr. No. Particulars L M Total

(i) Sales 72,000 48,000 1,20,000
(ii) Variable cost (L - 70%); (M – 50%) 50,400 24,000 74,400
(iii) Contribution (L – 30%); (M – 50%) 21,600 24,000 45,600
(iv) Fixed cost 36,000
(v) Profit 9,600
P/V ratio (45,600 x 1,20,000) / 100 = 38% 30% 50% 38%
Break even sales = 36,000 / 38% = ` 94,737

(ii) For Assumption II

Statement showing computation of P/V ratio, Breakeven point and profit:

Sr. No. Particulars L M Total

(i) Sales 48,000 72,000 1,20,000
(ii) Variable cost (L - 70%); (M – 50%) 33,600 36,000 69,600
(iii) Contribution (L – 30%); (M – 50%) 14,400 36,000 50,400
(iv) Fixed cost 36,000
(v) Profit 14,400
P/V ratio (50,400 x 1,20,000) / 100 = 42% 30% 50% 42%
Break even sales = 36,000 / 42% = ` 85,714

Problem 12
Accelerate Co. Ltd., manufactures and sells four types of products under the brand names of A, B,

1 2 2 1
C and D. The sales Mix in value comprises 33 %, 41 %, 16 %, and 8 % of products A, B, C & D
respectively. 3 3 3 3

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The total budgeted sales (100% are `60,000 p.m.). Operating costs are:
Variable Costs:
Product A 60% of selling price
Product B 68% of selling price
Product C 80% of selling price
Product D 40% of selling price
Fixed Costs: ` 14,700 p.m.
(a) Calculate the break - even - point for the products on overall basis and
(b) Also calculate break-even-point, if the sales mix is changed as follows the total sales per month
remaining the same. Mix: A - 25% : B - 40% : C - 30% : D - 5%.

Answer:

Particulars A (`) B (`) C (`) D (`) Total (`)

(i) Sales 20,000 25,000 10,000 5,000 60,000
(ii) Variable cost 12,000 17,000 8,000 2,000 39,000
(iii) Contribution 8,000 8,000 2,000 3,000 21,000
(iv) Fixed cost 14,700
(v) Profit 6,300
P/V ratio (C/S) x 100 40% 32% 20% 60% 35%

(a) Break even sales

Break even sales = 14,700 / 35% = ` 42,000
(b)

Particulars A (`) B (`) C (`) D (`) Total (`)

(i) Sales 15,000 24,000 18,000 3,000 60,000
(ii) Variable cost 9,000 16,320 14,400 1,200 39,000
(iii) Contribution 6,000 7,680 3,600 1,800 21,000
(iv) Fixed cost 14,700
(v) Profit 4,380
P/V ratio (C/S) x 100 40% 32% 20% 60% 31.8%

Break even sales = 14,700 / 31.8% = ` 46,226

Problem 13
Present the following information to show to management:
(i) The marginal product cost and the contribution p.u.
(ii) The total contribution and profits resulting from each of the following sales mix results.

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