by sachin sharma manipal jaipur

1. Cost – Volume – Profit &
Break-Even Analysis

2. Marginal Costing
• Marginal costing is the process of ascertainment
of marginal cost and of the effect on profit of
changes in volume or type of output by
differentiating fixed cost & variable cost.
• In this technique of costing only variable cost are
charged to operation, processes or products
leaving all indirect cost to be written off against
profits in period in which they arise.
• It is one of the tools of management accounting
that helps in decision making.
• It provides management with information
regarding behavior of costs and incidence of such
costs on profitability of the organisation

3. C-V-P Analysis
• An important tool that analyses the interplay
of various factors that affect profit
• It is a study of relationship between business’s
costs, volume and their impact on profits
• An important aspect of budgeting and assists
management in effectively utilizing the fixed
recourses in short run.
• It is a tool which is extensively used in both
planning and controlling functions

4. C-V-P Analysis as a Planning Tool
• Management wants to find out the desired
profit when the sales volume is known
• Management may begin with a target profit
and then work out the level of sales needed to
reach that profit.
• Management wants to know the minimum
sales needed to avoid losses
• Management wants to find out which product
is most profitable

5. C-V-P Analysis as a Controlling Tool
• It is used to measure performance of different
departments in a company

6. Break-Even Analysis
• It is conducted to identify the level of
operation at which the entity has covered all
costs but has not earned any profit
• It is that volume of activity at which the total
revenue equals the total cost.
• Sales below B.E.P is loss and sales above B.E.P
is profit, i.e., it is a point of no profit & no loss.

7. Contribution Margin
• Contribution margin is the amount of revenue
in excess of variable cost and contributes
towards fixed cost and profit of the company.
• Thus, CM = Sales – Variable Cost
= Fixed Cost +/- Profit

8. How to calculate BEP?
• BEP (in sales units) =
Fixed Cost/ Contribution per unit
• BEP (in sales volume) =
Fixed Cost/ Contribution margin as % of sales
= Fixed Cost/ (C/S* 100)
Or, = Fixed Cost/ (P/V ratio)

9. P/V Ratio
• When CM is expressed as percentage of sales, it
is called CM ratio or Profit-Volume ratio.
• It is calculated as:
P/V ratio = (SP per unit- VC per unit)/ SP per unit
• P/V ratio reveals more about manager’s ability to
control cost, especially in relation to sales
• The firm’ s ability to make profit is measured by
this ratio
• A high P/V ratio firm makes greater profit when
sales increase and more losses when sales
decreases than a firm with a low P/V ratio

10. Margin of Safety (M/S)
• The difference between the actual sales
volume and the break-even sales volume is
called the margin of safety.
• It is calculated as
M/S ratio = (Sales – Break-even Sales)/ Sales
• It can be expressed as an absolute amount or
as a percentage of sales
• It is an ideal index of ranking of firms within
an industry

11. Case -1
PQR Company produces and sales a single product with
following costs and revenues for the year
Total Revenue = 5,00,000
Total Fixed Cost = 1,00,000
Total Variable Cost = 2,00,000
Units produced and sold units = 1,00,000
(a) What is the selling price per unit?
(b) What is the variable cost per unit?
(c) What is the contribution margin per unit
(d) What is the break-even point?
(e) How many units should be produced by the company
to produce a profit of Rs. 2,50,000 for the year?

12. Solution
(a) S.P per unit= Total Revenue/No. of units sold
= 5,00,000/1,00,000 = Rs. 5 per unit
(b) V.C per unit = Total Variable Cost/No. of units produced
= 2,00,000/1,00,000 = Rs. 2 per unit
(c) Contribution margin per unit = (S.P – V.C) per unit
= Rs. 5 – Rs. 2 = Rs. 3 per unit
(d) Break –even point = F.C/ Cont. per unit
= 1,00,000/3 = 33,334 units
(e) Units Produced to achieve desired profit
= (Sales+ Desired Profit)/ Cont. per unit
= (5,00,000+ 2,50,000)/3
= 2,50,000 units

13. Case- 2
• XYZ company manufactures a single product
for which the information is given below;
P/V ratio = 50%
Margin of safety = 40%
Calculate the break-even point and the net
profit if the sales volume is Rs. 50,00,000.

14. Solution-2
Sales = Rs. 50,00,000
Margin of safety (40%) = 20,00,000
Therefore, Break-even point = (Sales – M/S)= Rs
30,00,000
Net Profit = P/V ratio X M/S ratio X Sales
= 50% X 40% X 50,00,000 = 10,00,000

15. Case-3
Pepsi Company produces a single article. Following
cost data is given about its product:‐
Selling price per unit - Rs.40
Marginal cost per unit - Rs.24
Fixed cost per annum - Rs. 16000
Calculate:
(a)P/V ratio (b) break even sales (c) sales to earn a
profit of Rs. 2,000 (d) Profit at sales of Rs. 60,000
(e) New break even sales, if price is reduced by
10%.

16. Solution-3
(A) P/V Ratio = Contribution/sales x 100
= (40‐24)/40 x 100 = 16/40 x 100 = 40%
(B) Break even sales = S x P/V Ratio = Fixed Cost
(At break even sales, contribution is equal to fixed cost)
Putting this values: S x 40/100 = 16,000
S = 16,000 x 100 / 40 = Rs. 40,000
(C) The sales to earn a profit of Rs. 2,000
S x P/V Ratio = F + P
Putting this values: S x 40/100 = 16000 + 2000
S = 18,000 x 100/40 OR S = Rs. 45,000
(D)Profit at sales of 60,000
S x P/V Ratio = F + P
Putting this values: Rs. 60,000 x 40/100 = 16000 + P
24,000 = 16000 + P OR, P = Rs. 8,000
(E) New break even sales, if sale price is reduced by10%
New sales price = 40‐10% = 40‐4 = 36
Marginal cost = Rs. 24 Contribution = Rs. 12
P/V Ratio = Contribution/Sales = 12/36 x100 = 33.33%
Now, S x P/V Ratio = F (at B.E.P. contribution is equal to fixed cost)
S x 100/300 = Rs.16000 OR, S = 16000 x 300/100 Or, S= Rs.48,000

17. Case -4
The following information pertaining to first half year ending 30th
Sep 2015 of ABC Company;
Fixed Expenses = 60,000
Sales Value = 2,40,000
Profit = 60,000
The company has projected a loss of Rs 12,000 for the second half
of the same year ending 31st March 2016.
(a) Calculate the break-even point, P/V ratio and margin of safety
for six months ending 30th september 2015.
(b) If the selling price and fixed expenses remain unchanged in the
second half of the year, what is the expected sales volume for
the second half.
(c) Calculate the break-even point and margin of safety for the
whole year.

18. Solution
(a) P/V ratio = Contribution/ Sales *100
= (Fixed Expenses + Profit)/ Sales * 100
= (60,000 + 60,000)/2,40,000 * 100 = 50%
BEP = Fixed Expenses/ P/V ratio
= 60,000/ 50% = 1,20,000
Margin of Safety = Sales – BEP Sales = 2,40,000 – 1,20,000 = 1,20,000
(b) Contribution= Fixed Expenses – Loss = 60,000-12,000=48,000
P/V ratio = Contribution/Sales
or, 50% = 48,000/ Sales or, Sales = 48000/50% = 96,000
(c ) For full year,
Sales = 2,40,000 + 96,000 = 3,36,000
Fixed Expenses = 60,000 + 60,000= 1,20,000
P/V ratio = 50% (as there is no change in selling price)
Profit = 60,000 – 12,000 = 48,000
BEP = 1,20,000/50% = 2,40,000 and MoS = 3,36,000-2,40,000= 96,000

19. Case-5
The following information is extracted from M/s Remington:
Sales 4000 units @ Rs 20 each = Rs. 80,000
Materials consumed = Rs. 30,000
Variable Overheads = Rs. 10,000
Labour Charges = Rs. 15,000
Fixed Overheads = Rs. 13,000
Net Profit = Rs. 12,000
Calculate:
(a) Break-even point
(b) Sales needed to earn a profit of 5 per cent
(c) Extra units which should be sold to obtain the present
profit it is proposed to reduce the selling price by 10%.

20. Solution-5
(a) V.C per unit = 55,000/4000 = Rs. 13.75
BEP = F.C./Cont. per unit= 13,000/(20-13.75)
= 13,000/6.25 = 2080 units
(b) Assume units to be sold as “X”
Then, Total Sales = V.C + F.C +/- Profit
or, 20X = 13.75X + 13000 + 5X
or, X= 10,400 units
(c ) If S.P. is reduced by 10%, then new S.P will be Rs (20-2)= Rs 18 &
C.M. will be Rs 18 – Rs 13.75= Rs.4.25
Total units to be sold = (F.C. + Desired Profit)/C.M. per unit =5882 units
Thus, extra units to be sold will be (5882 – 4000) = 1882

21. Case -6
The sales turnover and profit during two periods
were as follows;
• Period I Sales 20 Lakhs Profit 2 Lakhs
• Period II Sales 30 Lakhs Profit 4 Lakhs
Calculate
(a) P/V ratio
(b)Sales required to earn a profit of Rs 5 lakhs
(c) Profit when sales are Rs 12 lakh. Assume that
selling price and fixed costs are constant.

22. Solution-6
(a) P/V ratio = Change in Profit/ Change in sales
= (4 lakhs- 2 lakhs)/(30 lakhs – 20 lakhs)* 100 = 20%
OR,
Variable Cost = Increase in Cost/Increase in Sales *100 = 80%
(As fixed costs are constant, the increase in costs reflects the
increase in variable cost. As such, the variable costs are 80% of
sales). Therefore, P/V ratio will be (100 – 80)% = 20%
(b) Fixed expenses = Contribution – Net Profit
= 20% of 20 lakh – 2 lakh = 2 lakh
Therefore, required sales to earn a profit of Rs 5 lakh
= (FC + Profit)/P/V ratio = (2 lakh + 5 lakh)/20% = Rs 35 lakh
(c ) When sales are Rs 12 lakh, the profit will be
Sales = (FC + Profit)/P/V ratio or, Profit= (Sales * P/V ratio) - FC
= (12 lakh *20%) – 2 lakh = Rs. 40,000