Marginal Costing – Problems &

Solutions
 Marginal Costing Formulae
• Sales – Variable Cost = Contribution
• Contribution – Fixed Cost = Profit
• Sales – Variable Cost = Fixed Cost + Profit
• Profit Volume Ratio = Contribution / Sales
• Contribution = Sales * PV Ratio
• Sales = Contribution / PV Ratio
• BEP (in units) = Fixed Cost / Contribution per unit
• BEP (in rupees) = Fixed Cost / Contribution/Sales
• BEP (in rupees) = Fixed Cost / PV ratio
• Required Sales (in rupees) = Fixed Cost + Profit / PV ratio
• Required Sales (in units) = Fixed Cost + Profit / Contribution per unit
• Actual Sales = Fixed Cost + Profit / PV ratio
• Margin of safety (in rupees) = Actual Sales – BEP Sales
• Margin of safety (in units) = Actual Sales (units) – BEP Sales (units)
• Profit = Margin of safety * PV ratio
 Ascertaining Missing figures
• CONTRIBUTION
• = Sales – Variable Cost
• = Fixed Cost + Profit
• = Sales * PV Ratio
• = (BE Sales in units * Contribution per units) + Profit
• = (BE Sales in value * PVR ) + Profit
• = Fixed Cost + (MS in units * Contribution per unit)
• = Fixed Cost + (MS in value * PVR)
• = Profit / MS in %
• = Fixed Cost / BE sales in%
• PROFIT VOLUME RATIO (PVR)
• = Sales - Variable Cost / Sales * 100
• = Contribution / Sales *100
• = Fixed Cost + Profit / Sales *100
• = Fixed Cost / BE Sales in value * 100
• = Fixed Cost / BE Sales in units *100 / Selling price per unit
• = Profit / Margin of safety in value *100
• = Profit / Margin of safety in units *100 / Selling price per unit
• = Change in profit / Change in sales *100
• = 100 – Variable cost to sales ratio
 Ascertaining Missing figures
• BE SALES IN UNITS
• = Fixed Cost / Contribution per unit
• = BE Sales / Selling price
• = Fixed Cost / S.P. per unit – Variable cost P.U
• = Actual Sales per unit – Margin of safety in units
•
• BE SALES IN VALUE
• = Fixed Cost / PVR
• = Actual Sales in value – Margin of safety in value
• = Fixed Cost / Contribution per unit * Selling price per unit
• = BE Sales in units * Selling price per unit
• = Fixed Cost / 1- Variable Cost / Sales
• = Fixed Cost / % of Contribution to sales
•
• BE SALES IN % OF SALES
• = Fixed Cost / Contribution *100
• = BE Sales / Actual Sales *100
• = 100 – margin of safety (in %)
 Ascertaining Missing figures
• MARGIN OF SAFETY IN UNITS
• = Profit / Contribution per unit
• = Actual Sales in units – BE Sales in units
• MARGIN OF SAFETY IN VALUE
• = Profit / PV Ratio
• = Actual Sales in value – BE Sales in value
• = Profit / Contribution per unit * Selling price per unit
• = Margin of Safety in units * Selling price per unit
• PROFIT
• = Sales – Total Cost
• = Sales – (Variable Cost + Fixed Cost)
• = Contribution – Fixed Cost
• = Margin of Safety in Value * PVR
• = Margin of Safety (% of sales) * Total Contribution
• = (Margin of Safety in % of Sales * Actual Sales) * PVR
• SALES
• = Total Cost + Profit
• = Variable Cost + Fixed Cost + Profit
• = Variable Cost + Contribution
• = Contribution / PV ratio * 100
• = BE Sales + Margin of Safety
 QUESTION 1
The Acme Company produces and sells one
product. The revenue and cost structure of the
product is given below:
Particulars Amount in Rs.

Selling Price Per Unit 10.00

Variable Cost Per Unit 6.00

Total Fixed Cost per year 1,00,000

COMPUTE THE BREAK EVEN VOLUME

IN UNITS AND RUPEES
 ANSWER 1
C = S – V = 10 – 6 = 4
Fixed Expenses 1,00,000
B.E.P.in Units    25,000units
C per unis 4

C 4
P.V .Ratio  100  100  40%
S 10
Fixed Expenses 1,00,000
B. E. P. in A m o u n t    2,50,000
P / V Ratio 40%
 QUESTION 2
Calculate break even point on the basis of the
following information supplied by a manufacturing
firm:

PARTICULARS AMOUNT IN
Rs.
ESTIMATED SALES 10,00,000

ESTIMATED VARIABLE COSTS 6,00,000

ESTIMATED FIXED COSTS 2,00,000

 ANSWER 2
C = S – V = 10,00,000 – 6,00,000 = 4,00,000
C 4,00,000
P.V .Ratio  100  100  40%
S 10,00,000
Fixed Expenses 2,00,000
B.E.P.in Amount    5,00,000
P /V Ratio 40%
 QUESTION 3
COST PER UNIT AMOUNT
(Rs.)
RAW MATERIALS 25
LABOUR 10
VARIABLE OVERHEADS 5
SELLING PRICE 50

Fixed Overheads for the year amount to 20 ,000 Sales and

production was of 10,000 units. Find:
i. Marginal Cost
ii. Contribution per unit
iii. Variable cost
iv. Total Contribution
v. Net Profit
 Answer 3
1. Marginal Cost= Mat + Labour +Variable Overheads=
25+10+5 = 40
2. Contribution per unit = S – M.C. = 50 – 40=10
3. Total Variable Cost = 40 x 10,000 = 4,00,000
4. Total Contribution = C x Units = 10 x10,000 =
1,00,000
5. Net Profit = Total Contribution – Fixed Overhead =
1,00,000 – 20,000 = 80,000
 QUESTON 4
PARTICULARS AMOUNT
(Rs.)
MATERIALS 60
LABOUR 20
VARIABLE 20
OVERHEADS
FIXED OVERHEADS 50
PROFIT 50
SELLING PRICE 200

This is based on the manufacture of 1,00,000 cycles per annum. The

company expe cts that due to competition they will have to reduce
selling price, but they want to keep the total profits intact. What level of
production will have to be reached, i.e. how many cycles will have to be
manufactured to get the same amount of profit, if:-
i. The selling price is reduced by 10%
ii. The selling price is reduced by 20%
 ANSWER 4
Present Profit = 100000 x 50 = 50,00,000
Pr esent S.P.200
90
New S.P.after 10% Re duction  200  180
100
80
New S..P.after 20% Re duction  200  160
100

C  S V  180 100  80
F  P 50,00,000  50,00,000 1,00,00,000
Re quired Sales to earn same amount of Pr ofit     1,25,000 cycles
C 80 80
C  S V 160 100  60
1,00,00,000
cycles  1,66,667
60
 QUESTION 5
PARTICULARS AMOUN T
Given the following figures: (Rs.)
FIXED COSTS 16,000
SELLING PRICE PER 8
UNIT

VARIABLE COST PER 5

UNIT

Show the mpact

i of the following changes on break even point:
i. Fixed Cost increase by 5,000 Rs.
ii. Decrease in Fixed Costs by 4,000 Rs.
iii. 20% increase in variable cost
iv. Fixed Cost increase by 20% and variable costs decreased by
10%
 Answer 5
F 16,000
Pr esent B. E. P.inUnits    5,333units
C 3
Effect of increase in Fixed Costs by 5,000, NowTotal
Fixed Expenses = 16,000+5,000 = 21,000

F 21, 000
N e w B. E . P. inUnits    7,000units
Effect of decrease in FCixed C3ost by 4,000 , Now Fixed
Expenses =16,000 -4,000 = 12,000

F 12,000
New B. E. P.inUnits    4,000units
C 3
 Contd.
Effect of increase in variable cost by 20%
V.C. = 5 + 1 = 6 , New C will be 8 – 6 = 2

F 16,000
New B. E. P.inUnits    8,000units
C 2
 QUESTION 6
The total cost and profits during two period were as follows:
PARTICULARS PERIOD –I PERIOD – II

AMOUNT AMOUNT

TOTAL COST 4,50,000 6,50,000

PROFIT 50,000 1,00,000

Calculate:
i. P/V Ratio
ii. Break Even Sales
iii. Sales required to earn a profit of 1,25,000 Rs.
iv. Profit earned when sales are 3,50,000 Rs.
Answer 6

Change in Pr ofit
P /V Ratio  100  50000 100  20%
Change in Sales 250000

Fixed Expenses  Sales P /V Ratio  Pr ofit  5,00,000 20%  50000  50,000

F 50000
B.E.P.Sale    2,50,000
P / V Ra tio 20%

Fixed Expenses  Desired Pr ofit 50,000 1,25,000

Sales to earna Pr ofit 1,25,000    8,75,000
P /V Ratio 20%

Pr ofit when Sales are 3,50,000 

Pr ofit (Sales P /VRatio ) FixedCost  3,50,000 20%  50,000  20,000
 QUESTION7
XY Co. Sold in two successive years 7,000 and
9,000 units and incurred a loss of 10,000 Rs. and
earned 10,000 as profit respectively. The selling
price per unit is100 Rs.

Calculate (a) the amount of fixed costs, (b) the

number of units to break even, and (c) the
number of units to earn a profit of 50,000 Rs.
 ANSWER 7
Change in Pr ofit 20,000
P / V Ratio  100  100  10%
C hange in Sales 2,00,000
The amount of Fixed Cost:
Contribution of First Year 10% of 7,00,000 = 70,000 + Loss during the year
10,000 = 80,000

Fixed Cost 80,000

B.E.P.   8,00,000
P /V Ratio 10%

Total Sales 8,00,000

B.E.P.in Units   8,000units
S.P. per unit 100
 Contd.

Fixed Cost  Desired Pr ofit 80,000  50,000

Re quired Sales    13,00,000
P / V Ratio 10%

Total Sales 13,00,000

B.E.P.in Units   13,000units
S.P. per unit 100
 Question 8
• Fixed Expenses = 20,000, Variable Cost per
unit 10, Selling Price Unit = 20, Calculate
profit when sales will be 2,00,000.
• Answer
C 10
• P /V Ratio  100  100  50%
• S 20
50
• Pr ofit  (Sales  P /VRatio )  Fixed Expenses  2,00,000   20,000  80,000
100
 Question10
Fixed Expenses = 20,000, Variable Cost per unit 10,
Selling Price Unit = 20, Calculate the required sales if
profit target of Rs. 60,000 has been budgeted.
 Answer 10
C  S V  20 10  10
FP 20,000  60,00,000
Re quired Sales to earn 60,000 amount ofPr ofit   
C 10
80,000
 8000units
10

C  S V  2010  10
P /V Ratio C / S X 10010 / 20 X 100  50%
F  P 20,000  60,00,000
Re quired Sales to earn 60000 amount of Pr ofit   
P /V Ratio 50%
80,000
X100  1,60,000
50
Problem
From the following particulars, you are required to calculate :
(i) P/V Ratio
(ii) BEP for sales;
(iii) Margin of Safety;
(iv) Profit when sales are Rs.2,00,000/-
(v) Sales required to earn a profit of Rs.40,000/-
Year Sales Profit
I Rs. 2,40,000 18,000
II Rs. 2,80,000 26,000
You may make possible assumptions. Also evaluate the effect
on II year’s profit of
(a ) 20% decrease in sales quantity.
(b) 20% decrease in sales quantity accompanied by 10%
increase in sales price and reduction of
Rs. 3,500/- in fixed costs
Solution
(1) P/V Ratio
In year 2, additional NP which means additional contribution 8,000
Additional sales 40,000
P/V Ratio 20%
(2) BEP
Fixed cost = Contribution – NP
= (2,40,000 * 20%) – 18,000 48,000 – 18000 30,000
BEP = FC/PV Ratio 30,000/0.20 =1,50,000
(3) Margin of Safety
Year 1 2,40,000 – 1,50,000= 90,000
Year 2 2,80,000 – 1,50,000 =1,30,000
(4) Net Profit
(Contribution*PV Ratio) – Fixed Cost (2,00,000 * 20%) – 30,000= 10,000
OR
Cap Sales 2,00,000
(-) BEP 1,50,000
Margin of Safety 50,000
(-) PV Ratio 20%
NP =10,000
5) Sales Required 100/20 ( 30,000(FC) + 40,000(NP)) = 3,50,000
or BEP 1,50,000
Margin of Safety Req (100/20*40,000) 2,00,000
Sales Required 3,50,000
(6)
a) 20% decrease in sale Qty
Reduction in Contribution & in net profit 20% *(2,80,000*20%)
20% (56,000)
Reduction in Contribution & in net profit Rs.11,200
(b) Revenue Sales ( 2,80,000*80%) *110% 2,46,400
(-) Revenue Cost (2,80,000*80%) * 80% 1,79,200
Revenue contribution 67,200
(-) Revenue Fixed Cost (26,500)
Revenue NP 40,700
(-) Given NP(26,000)
Increase in NP=14,700
 ILLUSTRATION
Ǫ A company is producing a single article and sells
at Rs. 30/- each. The Marginal cost of production
is Rs. 24/- each and fixed cost are Rs. 11,000/
per quarter. Find out
1. Profit Volume Ratio
2. Break even sales in value and volume
3. Sales required to earn a profit of Rs. 15,000
4. Profit at sales of R. 5,00,000
5. Margin of safety for (3) and (4) above
Ḁ We know, PV ratio = Contribution/Sales or
= Contrb p.u/Selling P.u
In the given problem, they have given us Selling
price p.u and Marginal cost p.u.

Contrb p.u = Selling price p.u – Marginal cost p.u

= 30 – 24 = 6
Now PV Ratio = (6/30)*100 = 20%
In order to Calculate Break even Sales : Value
and volume we know
BEP (Sales) = Fixed cost/PV Ratio
= 44,000/.20 = Rs. 2,20,000
Fixed Cost = 11000 per quarter i.e for whole
year (11000*4) = 44,000

BEP (Volume/Qty) = Fixed cost/Contrb p.u

= 44,000/6 = 7,333 Units
In order to find out the desired sales revenue so
that a profit of Rs. 15,000 can be earned
= (Fixed cost + Desired profit )/ P/V Ratio
= (44,000 +15,000)/.20 = Rs. 2,95,000

If you are asked to find Sales Volume (Qty) : can be

found out either by dividing the Sales revenue by
Selling price (2,95,000/30 = 9833 units ) or using
the above formula i,e (FC+P)/Contrib p.u
= (44,000+15000)/6 = 9833 units
 Profit at Sales of Rs. 5,00,000.
We know PV Ratio = 20% hence
contribution = 5,00,000*.20 = 1,00,000
Fixed Cost = 44,000
PROFIT = 56,000 (Contr – FC)

Margin of Safety = Actual Sales – Break even sales

 MOS (Value)
when Sales Rs. 2,95,000 = 2,95,000 – 2,20,000 = 75,000
 MOS (Value)
When Sales Rs. 5,00,000 = 5,00,000 – 2,20,000 = 2,80,000
Ǫ A company gives you the following
information for a financial year. You are
required to find out :
1. P V Ratio
2. Fixed cost
3. Profit or loss where sales are Rs. 8,20,000
4. Sales required to earn a profit of 2,80,000
First 6 months Later 6 months
Sales 12,20,000 15,40,000
Profit earned 62,400 1,58,400
Ḁ In this problem in order to find out P V Ratio
no information of Variable cost is give, instead
comparison for two periods are given, hence
PV Ratio = Change in Profit/Change in Sales
= (1,58,400 – 62,400)
(15,40,000 – 12,20,000)
= 0.3 or 30 %
Fixed cost = Contribution – Profit
= (15,40,000 *.30) – 1,58,400
= Rs. 3,03,600 Fixed cost remains
fixed for the two level
of activity.
Profit or Loss at Sales of Rs. 8,20,000
Contribution = (8,20,000*. 30) = 2,46,000
Less : Fixed cost = 3,03,600
LOSS = (57,600)

Sales required to earn Profit of Rs. 2,80,000

= (FC + P)/PV ratio
= (3,03,600 + 2,80,000)/ .30
= 19,45,333 ~ 19,45,000
Ǫ The following budget estimates are given to
you for a financial year - Find
1. PV Ratio, BEP and MOS
2. Calculate the revised PV Ratio, BE and MOS if
a) Selling price is decreased by 10%
b) Variable cost increases by 10%
c) Sales volume increases by 2000 units
d) Fixed cost increases by 6,000
Sales (Units) 15,000
Fixed Expenses Rs. 34,000
Sales Value Rs, 1,50,000
Variable costs Rs. 6 p.u
 PV Ratio = Contribution/Sales
Contribution : Sale Value = 1,50,000
Less : Variable Cost ( 15,000 units*6 p.u) = 90,000
Contribution = 60,000
PV Ratio = 60,000/ 1,50,000 = 40%

 BEP = FC/PV Ratio = 34,000/.40 = Rs. 85,000

 MOS = Act Sales – BE Sales = 1,50,000 – 85,000

= Rs. 65,000
 Selling Price decrease Variable Cost increases
by 10% by 10%
Current Selling 1,50,000/15000 = Revised = 6*.10 = 6.60 p.u
Price Rs. 10.p.u Variable cost
Revised Selling 10*.10 = 9 p.u Revised 10 – 6.6 = 3.4 p.u
price Contribution
Revised 9–6=3 Revised P V = 3.4 /10 = 34%
contribution p.u Ration
Revised P V (3/9)* 100 = 33.33% BE Q =34,000/3.4
Ratio = 10000 units
BEQ =34,000/3 BE Sales =10,000 * 10
= 11,333 units = 1,00,000
BE sales =11,333 * 9 MOS & MOS = 15,000 – 10000 =
= 1,02,000 (Value) 5,000 units * 10 =
MOS & MOS = 15,000 – 11,333 = 50,000
(Value) 3667 units * 9 =
Rs.33,003
 Increase in Sales Increase of Rs. 6,000
volume by 2,000 units in Fixed costs
Revised Sales 15,000 +2,000 = Revised P V = 4/.10 = 40%
units 17,000 units Ratio
Revised P V =4/10 = 40% Revised Fixed =34,000+6,000
Ratio Cost = 40,000
BEQ 34,000/4 = 8,500 BEQ = 40,000/4
units = 10,000 units
BESales = 8,500 * 10 = BESales = 10,000 * 10
85,000 = 1,00,000
MOS (Q) 17,000 – 8,500 = MOS(Q) = 15,000 – 10,000
8,500 units = 5,000
MOS (Value) = 8,500 * 10 = MOS (V) = 5,000 *10
85,000 = 50,000
Ǫ A company has fixed cost of Rs.1,30,000, Sales Rs.
4,50,000 and Profit of Rs. 50,000. Required:
(i) Sales volume if in the next period, the company
suffered a loss of Rs.15,000.
(ii) What is the margin of safety for a profit of
Rs.70,000?

Ḁ In order to find the sales volume - from the data

given first we need to find the P V ratio. In order to
find the PV ratio we need contribution. In the
problem sales, fixed cost and Profit figures are
given so contribution can be calculated as follows:
Sales = 4,50,000 therefore Contribution
Less: Profit = 50,000 Sales = 4,50,000
COGS = 4,00,000 Less : Variable cost = 2,70,000
Less Fixed cost = 1,30,000 CONTRIBUTION = 1,80,000
VARIABLE COST = 2,70,000
P V Ratio = 1,80,000/ 4,50,000 = 40%

 Desired Sales = 1,30,000 – 15000 (Loss)/.40

= Rs. 2,87,500
MOS for a profit of Rs. 70,000
Desired Sale at Profit of 70,000
= (1,30,000 + 70,000)/.40
= 5,00,000
Break even sales = 1,30,000/.40 = 3,25,000
Therefore MOS = 5,00,000 – 3,25,000
= 1,75,000

Alternatively, MOS = Profit/PV Ratio

= 70,000/.40
= 1,75,000
Ǫ The ratio of variable cost to sales is 60%. The
break-even point occurs at 80% of the capacity
sales.
(i) Find the capacity sales when fixed costs are `
1,60,000
(ii) Compute profit at 80% of the capacity sales.
(iii) Find profit if sales is Rs.5,70,000 and fixed
cost remain same as above.
(iv) Find sales, if desired profit is Rs.44,000, and
fixed cost is Rs.1,42,000.
Given, Ratio of variable cost to sales = 60%
This means P V Ratio = 40%
 BE Sales : when FC = 1,60,000
= 1,60,000/.40 =Rs. 4,00,000
We know BEP occurs at 80% capacity sales
Therefore, if 80% sales = 4,00,000
100% = ?
Therefore Sales when FC 1,60,000 = 5,00,000
 Profit at 80% capacity sales
It is already given that BEP occurs at 80%
capacity sales. Hence Profit at 80% capacity
sales will be NIL. As at the BEP Costs =
Revenue
 Profit for sales of 5,70,000 and FC = 1,60,000
Variable cost (60% of 5,70,000) = 3,42,000
Fixed Cost = 1,60,000
Total Cost = 5,02,000
Sales = 5,70,000
PROFIT = 68,000
Sales, if desired profit is Rs. 44,000, and fixed
cost is Rs. 1,42,000
Desired Sales = (FC + P)/PV Ratio
= (1,42,000+44,000)/.40
= Rs. 4,65,000

Note : PV Ratio does not change with

the change in the FC or sales value.
Ǫ If margin of safety is Rs 2, 40,000 (40% of sales)
and P/V ratio is 30% of Gupta Ltd, calculate its
(1) Break even sales, and
(2) Amount of profit on sales of ` 9,00,000.

 Margin of safety = Total sales – Besales

Given MOS = 2,40,000 which is 40% of sales
Therefore, Total Sales (100%) = ?
TOTAL Sales = Rs. 6,00,000
Therefore BES = Total Sales – MOS
= 6,00,000 – 2,40,000
= Rs. 3,60,000
 Amount of profit on sales of ` 9,00,000.
Given PV Ratio = 30%
P V Ratio =( Contribution/Sales )* 100
there for Contribution = Sales * PV Ratio
= 6,00,000 * .30
= 1,80,000
We have already found that BE Sales = 3,60,000
Therefore BE Sales = FC/PV Ratio
FC = 1,08,000
Now, Desired Sales =( FC + Profit)/PV Ratio
9,00,000= (1,08,000+ P)/.30
Profit = 1,62,000
Ǫ A company has fixed cost Rs. 1,00,000 and Sales
2,50,000 with Profits at 60,000
1. Calculate the MO Safety for Profit of Rs. 1,00,000
2. Also find the sales volume if in the subsequent
period the company is expected to suffer a loss
of 30,000

 MOS = Total Sales – Break even Sales

BE Sales =FC/PV Ratio Contribution = Profit+ FC
= 60,000 + 1,00,000
PV Ratio = 1,60,000/2,50,000 = 64% = 1,60,000

BE Sales = 1,00,000/.64 = Rs. 1,56,250

Total Sales = (1,00,000+1,00,000)/.64 = Rs. 3,12,500
MOS = 3,12,500 – 1,56,250 = 1,56,250
Sales volume if in the subsequent period the
company is expected to suffer a loss of 30,000
Sales = (FC + Profit )/PV Ratio
= (1,00,000 – 30,000)/.64
= Rs. 1,09,375
Ǫ Product P has a PV ratio of 25%. Fixed
Operating costs directly attributable to
product P during the quarter 1 of the financial
year is Rs, 2,50,000. Calculate the sales
required to earn a quarterly profit of Rs.
80,000.

 Sales = (2,50,000 + 80,000)/.25

= 13,20,000