Unit: 6

Decision Making Techniques

Prepared By Mr.

Rupesh Dahake

Marginal Costing

Marginal Cost is defined as, the change in aggregate costs due to change in the volume of production

Contribution/ Gross Margin

Difference between sales and Marginal Cost of Sales. Contribution= Sales Variable Cost Contribution = Fixed Exp. + Profit Or C= S V.C C= F.C+ P

Sales
(-) Variable Cost/Marginal Cost -----------------------------------------

Contribution
(-) Fixed Cost ---------------------------------------

Break Even /Cost Volume Profit Analysis

Measures inter relationship between costs, volume & profit at various level of activity. Break even when its total sales equal to its total costs.

Break Even Point in Units:-

1. BEP in Units= Total Fixed Cost / Contribution per Unit Cost Per Unit Break Even in Sales Volume:1. BEP in Sales = Fixed cost x Sales / Sales V.C 2. BEP in Sales = F x S / S - V

or

2. BEP in Units= Total Fixed Cost / Selling Price Per Unit - Variable

or

Profit Volume Ratio/ Marginal Income Ratio/ Variable Profit Ratio:It is used to measure the relationship of contribution, the relative profitability of

1. Profit Volume Ratio = Contribution / Sales x 100 2. Profit Volume Ratio = S V / S x 100

or

Margin of Safety:Refer to the excess of actual sales over the break even sales.

MOS= Total Sales Break Even Sales =Profit / P/V Ratio Profit = Margin of Safety x P/V Ratio

or

Margin of Safety Expressed in Percentage = Margin of Safety / Total Sales x 100 Other Formula: Fixed Cost = BEP x P/V Ratio Contribution = Sales x P/V Ratio

Fixed Cost : FC= Sales x P/V Ratio Profit Marginal Costing/Variable Cost : Marginal Cost =Sales x (1 P/V Ratio) Profit on Sale : 1. Profit = Sales (FC+VC) or 2. Profit= Sales x P/V Ratio - FC Sales required in units to maintain a desired profit:1. = Fixed Cost + Desired Profit / Profit Volume Ratio x 100

1. From the Following information, calculate The amount of profit using marginal cost technique: Fixed Cost Rs. 300000 Variable Cost Per Unit Rs. 5 Selling Price Per Unit Rs. 10 Output Level 100000 Units. Ex.3 From the following information calculates: 1. P/V Ratio 2. Break Even Point 3. If the selling price is reduced to Rs. 80, calculate New Break Even Point. Total Sales Rs. 500000 Selling price Per Unit Rs. 100 Variable cost per unit Rs. 60 Fixed Cost Rs. 120000 Ex.5 Form the following particulars calculate: a) P/V Ratio b) Profit when sales are Rs. 40000, and c) New break even point if selling price is reduced by 10% Fixed Cost Rs. 8000 Breakeven Point =Rs. 20000 Variable Cost = Rs. 60 Per Unit. Expla: P/V Ratio = Fixed Cost / Break Even Point x 100 = Profit when sales = Sales x P/V Ratio Fixed Cost = Ex.7 Following record are available from the accounting records of Praveen Ltd. Sales Rs. 25000 75000 Profit Rs. 5000

Ex.2 From the following particulars finds out breakeven point: Fixed Expenses Rs.100000 Selling Price Per Unit Rs. 20 Variable Cost Per Unit Rs. 15 Ans: Rs. 400000. Ex.4 Sales Rs. 200000 Profit Rs. 20000 Variable Cost: 60% You are required to calculate: 1. P/V Ratio 2. Fixed Cost 3. Sales Volume to earn a profit of Rs. 50000. Ans: VC Rs. 120000, P/V Ratio: 40%, Contribution: Rs. 80000, Sales Ex.6 The Modern Machine Co.Ltd. Places before you the Following figures: Sales Profit Rs. Rs. 2008 200000 10000 2009 180000 2000 You are required to 1. Determine P/V Ratio 2. Determine Sales at Break Even Profit 3. Predict the expected profit or loss with Sales of a) Rs. 15000 , b) Rs. 300000 Ans: P/V Ratio= 40 % , BEP = Rs.175000, Loss Rs. 10000, Profit Rs. 50000, Ex.8 From a factory records calculate BEP in rupees: Fixed Cost Rs. 20000 Selling Price Per Kg Rs. 20 Variable Cost Per Kg Rs. 15 Estimate the impact of the following on BEP : a. 20% increases in fixed cost b. 20 % increases in variable cost c. 20% increases in fixed cost and 20% decreases in variable cost d. 20% decreases in fixed cost and 20 increases in variable cost Ex.10 From the following find out: 1. P/V Ratio 2. BEP 3. Profit for the sale of Rs. 1000000. 4. Margin of Safety from sale of Rs. 1200000. 5. Required sales to earn a profit of Rs. 200000. Sales 800000 Less:- Variable Cost 600000 Contribution 200000 Less:- Fixed Cost 60000 Net Profit 140000 Ans: P/V Ratio: 25%, BEP Rs. 240000, Profit= Rs.190000, MOS = 960000,

2008 5000(Loss) 2009

Find out : 1. P/V Ratio 2. Fixed Cost 3. Marginal Cost for 2008 and 2009 4. B.E.P. 5. Margin of Safety for the Profit of Rs. 10000. Ex.9 Information regarding available as follows:

ABC

Ltd.

Are

Sales Rs. 600000 Variable Cost Rs. 450000 Contribution Rs. 150000 Fixed Cost Rs. 90000 Profit Rs.60000 You have to Calculate: i. P/V Ratio ii. Profit on sale of Rs. 900000 iii. Sales to Earn a Profit Rs. 90000. Ans: P/V Ratio 40%, Rs. 135000, Rs.72000