F.Y BBA Sem-1 Darshan D.

Vaghani

Unit 5: Cost-Volume-Profit Analysis

❖ Introduction
Marginal costing, as one of the tools of management accounting helps management in making
certain decisions. It provides management with information regarding the behavior of costs and
the incidence of such costs on the profitability of an undertaking.
Cost–volume–profit (CVP) analysis is defined in CIMA’s Official Terminology as ‘The study
of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and
mix.’ It reflects the relationship between costs, sales volume and profits.
❖ Marginal cost
The amount at any given volume of output by which aggregate variable costs are changed if
the volume of output is increased by one unit. In practice this is measured by the total variable
cost attributable to one unit.
Marginal cost refers to the additional cost to produce each additional unit.

Marginal cost is the cost of one unit of product or service which would be avoided if that unit
were not produced or provided.
In accountancy, Marginal cost is nothing but variable cost.

❖ Marginal Costing
Definitions:
According to (CIMA) Chartered Institute of Management Accountants, London, “Marginal
Costing is a costing technique wherein the marginal cost, i.e. variable cost is charged to units
of cost, while the fixed cost for the period is completely written off against the contribution”.
Marginal Costing is a technique which is concerned with the changes in costs and profits
resulting from changes in the volume of output.
According to Dr. Joseph, “Marginal costing is a technique of determining the amount of
change in the aggregate costs due to an increase of one unit over the existing level of
production. As such, it arises from the production of additional increments of output.

❖ Advantages/Significance:
1. Simplified Pricing Policy: The marginal cost remains constant per unit of output whereas
the fixed cost remains constant in total. Since marginal cost per unit is constant from period
to period within a short span of time, firm decisions on pricing policy can be taken. If fixed
cost is included, the unit cost will change from day to day depending upon the volume of
output. This will make decision making task difficult.

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2. Proper recovery of Overheads: Overheads are recovered in costing on the basis of pre-
determined rates. If fixed overheads are included on the basis of pre-determined rates, there
will be under- recovery of overheads if production is less or if overheads are more. There
will be over- recovery of overheads if production is more than the budget or actual expenses
are less than the estimate. This creates the problem of treatment of such under or over-
recovery of overheads. Marginal costing avoids such under or over recovery of overheads.
3. Shows Realistic value of stock: Advocates of marginal costing argues that under the
marginal costing technique, the stock of finished goods and work-in-progress are carried on
marginal cost basis and the fixed expenses are written off to profit and loss account as period
cost. This shows the true profit of the period.
4. Helps in production planning: Marginal costing helps in the preparation of break-even
analysis which shows the effect of increasing or decreasing production activity on the
profitability of the company.
5. More control over expenditure: Segregation of expenses as fixed and variable helps the
management to exercise control over expenditure. The management can compare the actual
variable expenses with the budgeted variable expenses and take corrective action through
analysis of variances.
6. Helps in Decision Making: Marginal costing helps the management in taking a number of
business decisions like Make or buy, discontinuance of a particular product, replacement of
machines, etc.
7. Simple technique: Marginal costing is comparatively simple to operate because it avoids
the complications involved in allocation, appointment and absorption of fixed overheads,
which is, in fact, arbitrary division of indivisible fixed costs.
8. Helps to profit planning: To aid profit planning, marginal costing technique enables data
to be presented to management in such a way as to show cost-volume profit relationship.
Graphic presentation in the form of break even charts and profit-volume charts are also used
to facilitate planning future performance.

❖ BREAK-EVEN ANALYSIS OR COST-VOLUME-PROFIT ANALYSIS

➢ Cost–volume–profit (CVP) analysis is defined in CIMA’s Official Terminology as ‘The
study of the effects on future profit of changes in fixed cost, variable cost, sales price,
quantity and mix’. It reflects the relationship between costs, sales volume and profits.
➢ A break-even analysis is an economic tool that is used to determine the cost structure of a
company or the number of units that need to be sold to cover the cost. Break-even is a
circumstance where a company neither makes a profit nor loss but recovers all the money
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spent.
• Cost-volume-profit (CVP) analysis is a way to find out how changes in variable and
fixed costs affect a firm's profit.
• Companies can use CVP to see how many units they need to sell to break even (cover all
costs) or reach a certain minimum profit margin.
• CVP analysis makes several assumptions, including that the sales price, fixed, and
variable costs per unit are constant.

❖ USES OF COST-VOLUME-PROFIT ANALYSIS

1. C.V.P. analysis helps in forecasting costs and profits as a result of change in volume.
2. It helps fixing a sales volume level to earn or cover a given revenue, return on capital
employed, or rate of dividend.
3. It assists determination of effect of change in volume due to plant expansion or
acceptance of an order, with or without increase in costs or in other words a quantum of
profit to be obtained can be determined with change in volume of sales.
4. C.V.P. analysis helps in determining relative profitability of each product, line, project
or profit plan.
5. Through cost volume-profit analysis inter-firm comparison of profitability can be done
intelligently.
6. It helps in determining cash requirements at a desired volume of output, with the help of
cash breakeven charts.
7. Break-even analysis emphasises the importance of capacity utilisation for achieving
economy.

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8. From break-even analysis during severe recession, the comparative effects of a shut down
or continued operation at a loss is indicated.
9. The effect on total cost of a change in the fixed over-head is more clearly demonstrated
through break-even analysis and cost- volume-profit charts.
10. The conditions of a business such as profit potentialities, requirements of capital,
financial stability and incidence of fixed and variable costs can be gauged from a study
of the position of the breakeven point.

❖ LIMITATIONS OF COST-VOLUME-PROFIT ANALYSIS

(i) Fixed costs do not always remain constant.
(ii) Variable costs do not always vary proportionately.
(iii) Sales revenue does not always change proportionately.
(iv) The horizontal axis cannot measure the units sold in as much as many unlike type of
products are sold by the same enterprise.
(v) Break-even analysis is of doubtful validity when the business is selling many products
with different profit margins.

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Practical problems
Ex-1 In a company sales are Rs. 6000, Variable Expenses Rs. 3,600 and Fixed Expenses Rs.
1,200. Find out the sales required to e arn a profit Rs. 1,800.

Ex-2 The following information is supplied in respect of an article manufactured in a factory :

Selling price per unit - Rs. 40
Variable cost per unit - Rs. 30
Total Fixed Cost - Rs. 80,000
(i) Find out break-even point.
(ii) If break-even point is reduced to 5,000 units, find out the new selling price per unit.

Ex-3 From the following information calculate Profit - Volume Ratio :

Variable cost per unit - Rs. 20
Selling price per unit - Rs. 30
Fixed expenses - Rs. 1,200.

Ex-4 Safety margin and profit volume ratio of a company are 40% and 50% respectively. If the
sale is Rs. 6,00,000, find out : (1) Net Profit (2) BEP.

Ex-5 Following are the details regarding cost :

Variable cost per unit - Rs. 20
Fixed cost - Rs. 50,000
Selling price per unit - Rs. 30 .
Calculate :
(1) BEP
(2) Profit when sales are 7,000 units
(3) Margin of safety when sales are 8,000 units.

Ex-6 A company manufacturing a single article sells it at Rs. 10 per unit.

The variable cost is Rs. 6 per unit and fixed cost is Rs. 4,000 per annum.
Calculate :
(1) P/V ratio.
(2) Break-even sales.
(3) Margin of Safety if total Sales are Rs. 15,000.
(4) Sales required to earn a profit of Rs. 5,000.
(5) The amount of profit when sale is Rs. 15,000.

Ex-7 From the following information, in the present circumstances find out Net Profit, Sales at
break-even point and necessary Sales to earn a net profit of Rs. 90,000.
Sales Rs. 3,00,000;
Contribution 30%;
Fixed Expenses Rs. 60,000.

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Ex-8 The following is the information of a business unit :

Year Sales (Rs.) Profit (Rs.)
2021 1,00,000 10,000
2022 1,20,000 14,000
From the above mentioned information calculate :
(1) P/V Ratio
(2) Profit where sales are Rs. 90,000 and Rs. 40,000.
(3) Sales to earn profit of Rs. 20,000.
(4) Fixed Expenses.
(5) Break-even point.

Ex-9 Gujarat Plastics makes plastic buckets. An analysis of their accounting reveals as follow:
Variable cost (per bucket) Rs. 20
Fixed cost Rs. 50,000
Capacity 2,000 Buckets per year
Selling price per bucket Rs. 70
You are required to :
(i) Find the Break-even point.
(ii) Find the number of buckets to be sold to get a profit of Rs. 30,000.

Ex-10 In a unit, Sales are Rs. 2,00,000; Variable Expenses Rs. 1,00,000 and Fixed Expenses Rs.
50,000. If the selling price is reduced by 10%, find out sales at break-even point.

Ex-11 From the data given below, compute:

(1) Break even point
(2) Profit if sales are 8000 units.
(3) Margine of safety when sales are 10,000 units.
Variable cost per unit - Rs. 7
Total fixed cost - Rs. 50,000
Selling price per unit - Rs. 17

Ex-12 Anurag Ltd. has prepared the following budget estimates for the year 2022-23:
Sales units - 15,000
Fixed expenses - Rs. 34,000
Sales value - Rs. 1,50,000
Variable costs per unit - Rs. 6
You are required to :
Find the P/V ratio, Break-even point and margin of safety.

Ex-13 You are given the following data for the year 2021 and 2022 of a company :
Particular 2021 2022
Total cost (Rs.) 15,76,800 19,22,400
Sales (Rs.) 16,20,000 20,52,000
From the above, you are required to compute the following, assuming that the fixed cost remains
the same in both the periods :
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(1) P/V ratio.

(2) Fixed cost.
(3) The amount of profit or loss where sales are Rs. 7,50,000.
(4) The amount of sales required to earn a profit of Rs. 2,59,200.
(5) Margin of safety for the year 2022.

Ex-14 Krutika Co. Ltd. sold in two successive periods 7,000 units and 9,000 units and has
incurred a loss of Rs. 10,000 and earned Rs. 10,000 as profit respectively.
The selling price per unit can be assumed at Rs. 100. You are required to calculate :
(1) The amount of fixed expenses
(2) BEP (in units)
(3) The number of units to earn a profit of Rs. 40,000.

Ex-15 from the following information calculate :

(i) Break-even sales
(ii) P/V ratio
(iii) Margin of safety and .
(iv) Sales to earn a profit of - Rs. 25,000.
At present sales (Rs. 10 per unit) – Rs.1,00,000
Fixed Cost - Rs. 30,000
Variable cost - Rs. 6 per unit.

Ex-16 The P/V Ratio of a company is 50% and the margin of Safety is 40%. Find out the break-
even point and net profit if the Sales volume is Rs. 50,00,000.

Ex-17 Safety Margin and profit volume ratio of a company are 40% and 50% respectively. If the
sale is Rs. 6,00,000. Find out :
(i) Net Profit and
(ii) Break-even point.

Ex-18 The data of Ekta Limited are as under:

Selling price per unit Rs. 20
Variable cost per unit Rs. 10
Total fixed cost Rs. 40,000
Sales Rs. 1,00,000
Calculate from the above information :
(1) Break-even point (in rupees).
(2) Profit volume ratio.
(3) Margin of safety when sales is Rs. 1,20,000.
(4) Profit when total sales is of Rs. 1,50,000.
(5) Calculate the sales if a profit target of Rs. 50,000 has been fixed.

Ex-19 A company has margin of safety at 20% and earn a profit of Rs. 4 lakhs. If its
contribution : sales ratio is 0.4 calculate sales and fixed costs. (March/April-2020)

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Ex-20 The following information is supplied in respect of a factory :

Variable exp. Per unit Rs. 28
Selling price per unit Rs. 41
Fixed cost Rs. 97,500
If BEP is reduced by 1000 units, what will be the selling price per unit. (March/April-2019)

Ex-21 FB company provide following details:

Year Sales (Rs.) Profit (Rs.)
2021 1,00,000 10,000
2022 1,20,000 14,000
Calculate:
1. Profit Volume Ratio
2. Break Even Point
3. Amount of profit when sales is Rs. 2,00,000.
4. Margin of Safety (MOS) for the year 2022. (December-2023)

Ex-22 Following Details are extracted from the records of the DB company.
Selling price per unit = 150
Variable Cost per unit = 120
Total fixed cost = 15,00,000
Calculate:
1. Break Even Point in rupees
2. Amount of Sales to earn profit of Rs.10,00,000
3. Margin of Safety when Actual Sales is Rs.1,00,00,000. (December-2023)

Ex-23 Y Ltd. Provided Following Details:

Profit Volume Ratio = 30%
Total Fixed Cost = 5,00,000
Find out amount of Sales to earn a Profit of Rs. 4,00,000. (December-2023)

Ex-24 Z Ltd. Provided Following Details:

Fixed cost = 6,00,000
Selling Price = Rs.100 per unit
Variable Cost = Rs.40 per unit
Find out Break point into rupees. (December-2023)

Ex-25 Y Ltd. provided following details:

Fixed cost Rs. 1,00,000
Profit Volume Ratio = 40%.
Calculate BEP. (March-2024)

Ex-26 Z Ltd. provided following details.

Selling price is Rs. 80 per unit,
variable cost is Rs. 50 per unit.
Calculate profit volume ratio. (March-2024)
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Ex-27 NM Ltd. provided following information.

Variable cost per unit - Rs.18
Fixed Cost - Rs.60,000
Selling price per unit - Rs.30
Calculate:
(1) Profit Volume Ratio
(2) BEP in units and rupees
(3) If selling price is reduced by 20%, new breakeven point. (March-2024)

Ex-28 Zoya Ltd. Provided following information for two periods.

Year Sales (Rs.) Profit (Rs.)
2022 8,20,000 (20,000) Loss
2023 11,20,000 80,000 Profit
Calculate:
(1) Profit volume ratio
(2) BEP
(3) Margin of safety for the year 2023. (March-2024)

Ex-29 Y Ltd. provided following details.

Fixed Cost = Rs. 5,00,000
Selling price =Rs. 50 per unit
Variable cost per unit = Rs. 30
Find out Breakeven point in rupees. (August-2024)

Ex-30 Z Ltd. Provided following information for two periods.

Year Sales (Rs.) Profit (Rs.)
2021 10,00,000 7,00,000
2022 12,00,000 7,20,000
Find out Profit volume ratio. (August-2024)

Ex-31 Keni Ltd. Provided following information for two periods.

Year Sales (Rs.) Profit (Rs.)
2022 15,00,000 2,00,000
2023 20,00,000 3,00,000
Calculate:
(1) Profit volume ratio
(2) Fixed cost
(3) Margin of safety when sales is Rs.7,00,000. (August-2024)

Ex-32 LK Ltd. provided the following information.

Selling price = Rs. 100 per unit, Variable cost = Rs. 75 per unit,
Total Fixed cost = Rs. 5,00,000.
Calculate: (1) ΒΕΡ
(2) Margin of Safety (MOS) when actual sales units = 25,000.
(3) Amount of profit when actual sales = Rs. 25,00,000. (August-2024)
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