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Cvp practical questions

Management Accounting (Guru Gobind Singh Indraprastha University)

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CVP Analysis

COST-VOLUME-PROFIT ANALYSIS

PRACTICAL QUESTIONS

Illustration No.1. Calculate contribution and profit from the following details:

Sales Rs. 12000

Variable Cost Rs. 7000
Fixed Cost Rs. 4000

Solution:
Contribution = Sales – Variable cost
Contribution = Rs. 12000 – Rs. 7000 = Rs. 5000

Profit = Contribution – Fixed Cost

Profit = Rs. 5000 – Rs. 4000 = Rs. 1000.

Illustration No.2. From the following data calculate:

(a) P/V Ratio (b) Variable Cost and (c) Profit

Sales Rs. 80000

Fixed expenses Rs. 15000
Break even point Rs. 50000

Solution:
Calculation of P/V Ratio
Break even point =Fixed Cost / P/V Ratio
50000 = 15000 / P/V Ratio = 15,000 / 50,000 = 3/10 or 30%

Calculation of variable cost

Contribution = Sales x P/V
= 80,000 x 30 / 100 = Rs.24000
Variable cost = Sales – Contribution
Rs.80000 – Rs.24000 = Rs.56000

Calculation of Profit
Profit = Contribution – Fixed cost
= Rs.24000 – Rs.15000 = Rs.9000

Illustration No.3. From the following data, calculate the break-even point of sales in rupees:

Selling price Rs.20

Variable cost per unit:
Manufacturing Rs.10
Selling Rs.5

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CVP Analysis

Overhead (fixed):
Factory overheads Rs.500000
Selling overheads Rs.200000.

Solution: Selling price per unit: Rs. 20

Variable Cost per unit:
Manufacturing: Rs. 10
Add: Selling: Rs.5
=Rs.15
--------
Contribution per unit Rs. 5
Contribution ratio = Rs.5 / Rs.20 =25%
Fixed overheads Factory- Rs.500000
Add: Selling- Rs.200000
--------------
=Rs.700000

Break even sales in rupees = Fixed overheads /Contribution ratio

= Rs.700000/25%
= Rs.2800000

Break even sales in units = FC/Contribution per unit

= Rs. 700000/Rs.5
= 140000 units.

Illustration No. 4

The following data have been obtained from the records of a company
I Year II Year
Rs. Rs.
Sales 80000 90000
Profit 10000 14000
Calculate the break-even point.

Solution:

Changes in profit
P/V Ratio = ------------------------------- x 100
Changes in sales
= 14000 – 10000
--------------------- X 100 = 40%
90000- 80000

Contribution = Sales x P/V Ratio = 90000 x 40% = Rs.36000

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CVP Analysis

To find the break-even point, we should first find out the fixed cost because
B.E.P = Fixed cost / P/V Ratio
Fixed cost = Contribution – Profit
= 36000- 14000 = 22000

{This can be cross checked by using the first year’s figures (80000 x 40%) –
10000}

Therefore B.E.P. = Fixed cost / P/V Ratio

= 22000/40% = Rs. 55000

Illustration No. 5

A.G. Ltd., furnished you the following related to the year 1996.
First half of the year (Rs.) Second half of the year (Rs.)
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 2 half year periods, calculate for the year
1996:
(a) The profit volume ratio (b) Fixed expenses (c) Break even sales and (d) % of margin of
safety.
Solution:

a) P/V ratio=Change in profit / Change in sales x 100

=2000 / 5000 x 100 = 40%.

Contribution during the first half=Sales x P/V Ratio

=Rs.45000 x 40% = Rs.18000

b)Fixed cost = Contribution – ProfitFor1sthalfyear=18,000 – 5,000 = Rs.13,000

Fixed cost for the full year =13,000 x 2 = Rs.26000

c) Break even sales=Fixed cost / P/V Ratio for the year1996=26000 / 40% = Rs.65000
d)Margin of safety=Sales – Break even sales for the year1996(MOS)=95000 – 65000 = Rs.30000

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CVP Analysis

Percent of margin of safety=Margin of safety / Sales for the year x 100

=30000 / 95000 x 100

Note: (1) Since fixed expenses are incurred equally in the 2 half years, Rs.13000 is multiplied with
2 to get fixed cost of the full year.

(2)Sales of both 1st and 2nd half years are added and are taken as actual sales i.e., Rs.95000 to
calculated margin of safety.

Illustration No.6

From the following information relating to Palani Bros. Ltd., you are required to find out:
P/V Ratio (b) Break-even point (c) Profit (d) Margin of safety (e) Volume of sales to earn
profit of Rs.6000.
Rs. Total Fixed Cost 4500
Total variable cost 7500
Total
Sales 15000

Solution:
Marginal Cost and Contribution Statement
Amount
(Rs.)
Sales 15000
Less: Variable cost 7500
--------
Contribution 7500
Less: Fixed cost 4500
--------
Profit 3000

(a)P/V ratio =Contribution / Sales x 100

= 7500 / 15000 x 100 = 50%

(b)Break even sales = Fixed expenses / P/V Ratio

= 4500+ 6000 / 50% = Rs.21000

Illustration No. 7
The sales turnover and profit during two years were as follows:
Year Sales (Rs.) Profit (Rs.)
1991 140000 15000
1992 160000 20000
Calculate:

(a) P/V Ratio (b) Break-even point (c) Sales required to earn a profit of Rs.40000 (d) Fixed
expenses and (e) Profit when sales are Rs.120000
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CVP Analysis

Solution:
When sales and profit or sales and cost of two periods are given, the P/V ratio is obtained by using
the ‘Change formula’
Fixed cost can be found by ascertaining the contribution of one of the periods given by multiplying
sales with P/V Ratio. Then, contribution – Profit can reveal the fixed cost. Ascertaining P/V ratio
using the change formula and finding cost are the essential requirements in these types of problems.

a) P/V ratio
= Change in profit / Change in sales x 100
Change in profit=20000 – 15000 = Rs. 5000
Change in sales
= 160000 – 140000 = Rs.20000
P/V Ratio = 5000 / 20000 x 100 = 25%

b) Break-even point = Fixed expenses / P/V ratio Fixed expenses = contribution – profit

Contribution = Sales x P/V Ratio

Using1991sales, contribution=140000 x 25 / 100 = Rs.35000
Fixed Expenses=35,000 – 15,000 = Rs.20000
Note: The same fixed cost can be obtained using 1992 sales also.
Break-even point=20,000 / 25%= Rs.80000

c) Sales required to earn a profit of Rs.40000.

Required sales = Required profit + Fixed cost / P/V Ratio =40,000 + 20,000 / 25% = Rs.240000

d) Fixed expenses=Rs.20000 (as already calculated)

e) Profit when sales are Rs.120000

Contribution=Sales x P/V Ratio
=120000 x 25/100=Rs.30000
Profit=Contribution – Fixed Cost
=30,000 – 20,000= Rs.10000.

Illustration No. 8. From the following information, calculate

a. Break-even point
b. Number of units that must be sold to earn a profit of Rs.60000 per year.
c. Number of units that must be sold to earn a net income of 10%on sales
Sales Price-Rs.20 per unit
Variable cost-Rs.14 per unit
Fixed cost-Rs.79200

Solution:
Contribution per unit = Sales price per unit – Variable cost per unit =20 – 14 = 6.
P/V Ratio = Contribution / Sales x 100 = 6 / 20 x 100 = 30%
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CVP Analysis

(a)Break even point (in units) = Fixed expenses/contribution per unit = 79200 / 6 = 13,200
units.

Break even point (in rupees) =Fixed expenses / P/V Ratio = 79200 / 30% = Rs.264000

(b) Number of units to be sold to make a profit of Rs.60,000 per year :

Required sales = Fixed expenses + Required Profit / P/V Ratio

= 79200 + 60000 / 30%

= Rs.464000
Total number of Units = 464000 / Selling Price
= 464000 / 20 = 23200 units.

(c) Number of units to be sold to make a net income of 10%on sales

If `x’ is number of units:
20x = Fixed Cost + Variable Cost + Profit
20x = 79200 + 14x + 2x
20x – 16x = 79200
x=79200 / 4 = 19800 units

Proof: Sales = 19800 x 20 = 396000

Less: Variable cost 19800 x 14 = 277200
----------
Contribution = 118000
Less: Fixed Cost = 79200
----------
Profit = 39600
----------
Profit as a % of sales = 39600 / 396000 x 100 = 10%

Illustration No. 9

You are given the following data for the year 1986 for a factory.
Output: 40000 units
Fixed expenses: Rs.200000
Variable cost per unit: Rs.10
Selling price per unit: Rs.20
How many units must be produced and sold in the year 1987, if it is anticipated that selling
price would be reduced by 10%, variable cost would be
Rs.12 per unit, and fixed cost will increase by 10%? The factory would like to make a profit in
1987 equal to that of the profit in 1986.
Solution:

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CVP Analysis

Calculation of units to be produced and sold in 1987 to make the same profit as in 1986:

New Selling Price=20 – (20 x 10%) = 20 – 2 = Rs.18

New variable cost = Rs.12 (given New fixed cost=200000 + (200000 x 10%)
=200000 + 20000 = 220000
New P/V Ratio=Sales – Variable Cost / Sales x 100
=18 – 12 / 18 x 100 = 33 1/3 %
Required sales=Required profit + Fixed expenses / P/V Ratio
=200000 + 220000 / 33 1/3 %
=Rs.1260000
Units to be sold=Required Sales / New Selling Price
=1260000 / 18 = 70,000 units.

Illustration No. 10

The P/V Ratio of a firm dealing in precision instruments is 50%and margin of safety is 40%.
You are required to work-out break-even point and the net profit if the sales volume is
Rs.5000000. If 25% of variable cost is labour cost, what will be the effect on BEP and profit
when labour efficiency decreases by
5%.

Solution: Calculation of Break-even point

Margin of safety is 40% of sales = 5000000 x 40 / 100 = Rs.2000000
Break-even sales = Sales – Margin of safety
= 5000,000 – 2000000
= Rs.3000000

Calculation of fixed cost

Break-even Sales = Break-even sales x p/v ratio
= 3000000 x 50 / 100 = Rs.1500000

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CVP Analysis

(2) Calculation of profit

Contribution = Sales x P/V Ratio = 5000000 x 50 / 100 = Rs.2500000
Net Profit =Contribution – Fixed Cost = 2500000 – 1500000 = Rs.1000000

(3) Effects of decrease in labour efficiency by 5%

Variable cost = Sales – Contribution = 5000000 – 2500000 = Rs.2500000
Labour cost =2500000 x 25 / 100 = Rs.625000
New labour cost when labour efficiency decreases by 5%
= 625000 x 100 / 95 = Rs.657895
= 657895 – 625000 = Rs.32895
Net Variable Cost =2500000 + 32,895=Rs.2532895
Contribution = 5000000 – 2532895 = Rs.2467105
Profit = Contribution – Fixed cost
= 2467105 – 1500000=Rs.967105
New P/V=2467105 / 5000000 x 100=49.3421 %
New BEP= Fixed Cost / P/V
= 1500000 / 49.3421 = Rs.3040000
Note: If for 100 units labour cost is Rs.100, 5% decrease in efficiency makes the labour to produce
only 95 units in the same time.
Cost of 95 units = Rs.100
Cost of 100 units=100 x 100 / 95= 1052635
Original labour cost has to be multiplied with 100 / 95 to get new labour cost.

Illustration No. 11

From the following find out the break-even point

P Q R
Selling price Rs 100 80 50
Variable cost Rs. 50 40 20
Weightage 20% 30% 50%
Fixed cost Rs 1480000

Solution:
P Q R
1. Selling price Rs 100 80 50
2. Variable cost Rs. 50 40 20
3. Weightage 20% 30% 50%
4. Contribution (1-2) 50 40 30
5. P/V Ratio (4/1) 50% 50% 60%
6. Fixed cost (14.8lacx3) 2.96 4.44 7.4
7. BEP (6/5) 5.92 lac 8.88 lac 12.33 lac
Combined p/v ratio = 50% x20% + 50% x30% + 60% x50%
10% + 15% + 30%

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CVP Analysis

= 55%
Combined BEP will be = Fixed cost / 55%
= 1480000 /55% = Rs. 2690909

Illustration No. 12

Raviraj Ltd. Manufactures and sells four types of products under the brand names of A, B, C
and D. The sales mix in value comprises 33 1/3%, 41 2/3%,
16 2/3% and 8 1/3% of products A, B, C and D respectively. The total budgeted sales (100%)
are Rs. 60,000 per month.

Operating costs are

Variable cost:
Product A 60%of selling price
B 68%of selling price
C 80%of selling price
D 40%of selling price
Fixed cost: Rs. 14,700 per month

Calculate the break-even point for the products on an overall basis and also the B.E. Sales of
individual products. Show the proof for your answer.

Solution:

P/V Ratio for individual products = 100-% of variable cost to sales

A = 40 %( 100-60)
B = 32 %( 100-68)
C = 20 %( 100-80)
D = 60 %( 100-40)

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CVP Analysis

Total Fixed cost

Composite BEP in Rs. = -----------------
Composite P / V Ratio
Rs. 14,700
= --------- = Rs. 42,000
35%

Proof of validity of composite B.E.P

Break even sales of:

A Rs. 42000 x 33 1/3% = Rs. 14000 14000 x 40% = 5600
B Rs 42000 x 41 2/3% = Rs. 17500 17500 x 32% = 5600
C Rs. 42000 x 16 2/3 % = Rs. 7000 7000 x 20% = 1400
D Rs. 42000 x 8 1/3% = Rs. 3500 3500 x 60% = 2100

Total contribution 14700

Total fixed cost 14700
Profit/Loss Nil

Test Yourself:

1. Calculate BEP in units and value for the following:

Total cost Rs. 50000
Total variable cost Rs. 30000
Sales (5000 units) Rs. 50000

2. A Ltd. has two factories X and Y producing same article whose selling price is Rs. 150 per unit.
Other details are:
X Y
Capacity in units 10000 15000
Variable cost per unit (Rs) 100 120
Fixed expenses (Rs) 300000 210000

Determine the BEP for the two factories assuming constant sales mix also composite BEP.

3. From the following data calculate:

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CVP Analysis

a. Break-even point (Units)

b. If sales are 10% and 15% above the break even sales volume determine the net profit.
Selling price per unit - Rs.10
Direct material per unit - Rs. 3
Fixed overheads - Rs. 10000
Variable overheads per unit – Rs.2
Direct labour cost per unit - Rs. 2

*****

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