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# Marginal Costing & Profit Planning

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come and join AFTERSCHOOOL and change the world of millions of people. Raise your voice for truth, honesty, values and work to change the world - use fair means to become an entrepreneur

come and join AFTERSCHOOOL and change the world of millions of people. Raise your voice for truth, honesty, values and work to change the world - use fair means to become an entrepreneur

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## Marginal Costing & Profit PlanningPresentation Transcript

• MARGINAL COSTING & PROFIT PLANNING AFTERSCHO ☺ OL – DEVELOPING CHANGE MAKERS CENTRE FOR SOCIAL ENTREPRENEURSHIP PGPSE PROGRAMME – World’ Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship OPEN FOR ALL FREE FOR ALL www.afterschoool.tk AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS
• MARGINAL COSTING & PROFIT PLANNING Dr. T.K. Jain. AFTERSCHO ☺ OL Centre for social entrepreneurship Bikaner M: 9414430763 [email_address] www.afterschool.tk , www.afterschoool.tk www.afterschoool.tk AFTERSCHO☺OL's MATERIAL FOR PGPSE PARTICIPANTS
• Jitu Ltd. produces one standard type of article. The result of the last 4 months as follows: Output (Units) 1 200 2 300 3 400 4 600 Prime cost is Rs. 10 per unit. Variable expenses are Rs. 2 per unit. Fixed expenses as 36000 per annum. Find out cost per unit of each month.
• Fixed cost per month : 3000. formula: fixed cost per unit + variable cost per unit. the cost per unit : 1: (3000/200) +10+2 = 27; 2: (3000/300) + 10+2 = 22 per unit, so on….
• Sales of a product amount to 200 units per month at Rs. 10 per unit. Fixed overhead is Rs. 400 per month and variable cost Ps. 6 per unit. There is a proposal to reduce price by 10%. Calculate the present and future P/V ratios and find by applying P/V ratios, how many units must be sold to maintain total profit.
• PV ratio = contribution / price * 100
• Contribution = 10 – 6 = 4 per unit PV R=40%
• Total profit = 400. In order to maintain profit,
• New contribution = 9 – 6 = 3 per unit. Profit=contribution – fixed cost.
• sales required : 3X – 400 = 400 or X = 267
• New PV ratio = 3/9 * 100 = 33.33%
• Based on the following information calculate the break-even point and the turnover required to earn a profit of Rs. 36,000. Fixed overheads Rs. 1,80,000 Variable cost per unit 2 Selling price per unit 20 If the company is earning a profit of Rs. 36,000, express the ‘margin of safety’ available to it ?
• Sales volume at target profit = (Fixed cost + target profit) / contribution per unit
• = (180000+36000) / (20 – 2) = 12000 units or Rs. 240000 (in amount)
• BEP = (180000/(20-2)) = `10000 units or Rs. 200000
• Margin of safety= sales – BEP level or (Sales – BEP) / Sales *100
• Thus margin of safety = 40000 or 16.7% answer.
• ASU furnishes you the following information: Year 1996 First half Second half Sales Rs. 8,10,000 Rs. 10,26,000 Profit earned Rs. 21,600 64,800 Prom the above you are required to compute PV ratio assuming that the fixed cost remains the same in both the periods
• PV Ratio = change in profit / change in sales * 100
• = (64800- 21,600 )/ (10,26,000-8,10,000) * 100 = 20% answer
• At the budgeted activity of 75% of total capacity, a company earns a P/V ratio of 25% a profit of 10% on sales. During the course of the year the company had to reduce its price of the product by 10% due to recession. The company was able to only 50% of its capacity- The sales value at this level was Rs. 13,50,000 at the reduced price of Rs. 9 per unit. Due to reduction in production the actual variable costs went up by 2% of the budget. What is BEP at original and reduced price ?
• Solution…
• Sales at 50% = 1350000
• Sales at 100% = 2700000
• Sales at 100% at original price = 2700000*100/90 = 3000000
• Budget level: 2250000
• Contribution = 562500
• Profit = 225000
• Fixed cost = (562500- 225000) =337500
• BEP level at original = 337500/.25 =Rs1350000
• BEP level at reduced price level =337500/.1666
• What is fixed cost…
• The cost that you have to incur whatever may be the business volume. Even if the production goes up or falls down – the fixed costs remain the same. Thus this is the cost which will always remain at the same level – irrespective of sales volume or production.
• What is variable cost?
• This is cost which varies with production. If production goes up, this cost will also go up. The per unit cost will remain stable. For Example, if per unit variable cost is 20, it will remain 20 even if you double the production. (there are semivariable expenses also – which do donot vary in the same proportion).
• What is contribution….
• Sales – Variable cost is called contribution.
• How do you calculate BEP?
• There are two ways –
• BEP in volume (in units)
• BEP in money terms (in Rupees)
• BEP in Units…
• The formula :
• = Fixed Cost / (Contribution per unit)
• BEP in Amount (in Rupees)
• = Fixed Cost / P.V. Ratio
• P.V. Ratio :
• = Contribution / Sales * 100
• Example….
• If the fixed cost is Rs. 10000 and selling price per unit is Rs. 10, and variable cost per unit is Rs. 6, what is the BEP in units?
• Solution:
• Fixed cost / contribution per unit
• = 10000/(10 – 6)
• = 2500 units.
• Example…
• If the fixed cost is Rs. 10000 and selling price per unit is Rs. 10, and variable cost per unit is Rs. 6, what is the BEP in Amount (Rupees)?
• Solution:
• Fixed cost / PV Ratio
• PV Ratio = 4 / 10 * 100= 40%
• BEP = 10000 / 40%
• = 25000 Rupees amount.
• Calculate BEP from the following…
• Selling price Rs. 20 per unit
• Variable manufacturing costs=11 per unit
• Variable selling costs=3 per unit
• Fixed factory overheads=5,40,000 per yr
• Fixed selling costs 2,52,000 per year
• Solution…
• BEP = Fixed Cost / Contribution per unit
• =7,92,000 / 6
• = 132,000 units
• A company has fixed expenses of Rs. 90,000 with sales at Rs. 3,00,000 and a profit of Rs 60000 Calculate the profit/volume ratio
• Contribution = sales – Variable cost
• Total cost = 3 lakh- 60000 = 2.4 lakhs
• Variable cost = 2,40,000-90000 = 150000
• P.V. Ratio= C/ S * 100
• (150000/300000) * 100 = 50% answer.
• Xyz makes 10,000 units of a product at a cost of Rs. 4 per unit and there is home market for consuming the entire volume of production at the sale price of As. 4.25 per unit. In the year 2008, there is a fall in the demand for home market which can consume 10,000 units only at a sale price of As. 3.72 per unit. The analysis of the cost per 10,000 units is: Materials rs. 15,000 Wages 11,000 Fixed overheads 8,000 Variable overheads 6,000 The foreign market is explored and it is found that this market can consume 20,000 units of the product if offered at a sale price of Rs. 3.55 per unit. It is also discovered that for additional 10,000 units of the product (over initial 10,000 units) that fixed overheads will increase by 10 per cent.
• Bardia’s Solution…
• Total fixed cost now = 8800
• Selling price = 3.55 and 3.72
• Variable cost = 3.2 per unit
• Total variable cost = 30000 * 3.2= 96000
• Total Fixed cost = 8800
• Total Cost = 104800
• Sales = 3.72*10000 + 3.55*20000 = 108200
• Thus there will be profit of 3400. Ans.
• A company purchased a machine two years ago at a cost of Rs. 60,000. The equipment has no salvage value at the end of its six years, useful life and the company is charging depreciation according to straight-line method. The company learns that a new equipment can be purchased at a cost of Rs. 80,000 to do the same job and having an expected economic life of 4 years without any salvage value. The advantage of the new machine lies in its rester operating efficiency which will reduce the variable operating expenses from the present level of Rs. 1,65,000 to Rs.1 30,000 per annum. The sales volume is expected to continue at Rs.2 lacs per annum for the next four years. Rate= 20%
• Vyas’s solution…
• Incremental saving in cost = 35000
• Increased Depreciation = -10000
• Net savings per annum = 25000
• (we can also reduce interest burden and add tax benefits resulting from this change).
• PV analysis –
• Money invested = 80000 – sale price of old machine
• Expected return per annum we are able to recover this money in 4 years. If we look at the present value @ 20%, we are able to get : 64718 as the present value. Thus if we get 16000 from old machine, the change in machine is a good idea.
• Two competing food vendors BIKAJI (a) and Bhikharaam (B) were located side by side at a fair. B occupied buildings of the same size, paid the same rent, Rs.1 250, and charged similar prices t their foods. Vendor a employed three times as many employees as B and had twice as much income as B even though B had more than half the sales of A. Other data are as follows Vendor A Vendor B Sales Rs. 8,000 Rs. 4,500 Cost of goods sold 50 % of Sales Wages Rs. 2,250 Rs.l 750 Explain why vendor A is twice as profitable as Vendor B.
• Bikaji is twice as profitable because it is having lower fixed expenses as % of total sales. Just look at the data :
• A = (1250+2250)/8000 *100 = 43%
• B = (1250+1750)/4500 * 100 = 66%
• Profits are A : 8000-(4000+1250+2250)=500
• B: = 4500 – (2250+1750+1250)= -750
• Thus A is more profitable due to better operating leverage. Answer.
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