2. MARGINAL COSTING
PROFIT: The margin, earning over the total cost value on total sales done is profit. If this profit is negative value it will be
called as loss. Hear total cost includes both variable cost and fixed costs.
Marginal cost: An additional cost incurred on an extra unit of production is called marginal cost. Hear variable cost is the
marginal cost. Variable cost in the sense all direct expenses and variable overheads.
NAME RS SHORT NAME REMARKS
Sales XXX = S Per unit is constant
(-) Variable Cost XXX = V.C Per unit is constant
=Contribution XXX = S – V.C Per unit is constant
(-)Fixed Cost XXX = F.C Total value is constant
=Profit XXX = S – V.C – F.C Vary according to sales
SAMPLE TABLE TO SHOW RELATION BETWEEN SALES AND PROFIT:
UNITS SALES at 100/-
VARIBLE COST at
50/-
FIXED COST
TOTAL COST
V.C + F.C
PROFIT/
LOSS
0 0 0 200 200 -200
1 100 50 200 250 -150
2 200 100 200 300 -100
3 300 150 200 350 -50
4 400 200 200 400 0
5 500 250 200 450 50
6 600 300 200 500 100
7 700 350 200 550 150
8 800 400 200 600 200
9 900 450 200 650 250
10 1000 500 200 700 300
-400
-200
0
200
400
600
0 200 400 600 800 1000 1200 1400
Profit/Loss
Total Sales
PROFIT/ LOSS BASED ON
TOTAL SALES
-400
-200
0
200
400
600
0 2 4 6 8 10 12 14
Profit/Loss
Units
PROFIT/ LOSS BASED ON
UNITS SOLED
3. Observations:
1) This line locks like a straight line.
2) At ‘0’ units of production the total fixed cost will be the loss.
3) At certain point, the total fixed cost burden will be controlled and total sales will be equal to total cost. That
point of sales is called break-even point of sales. Hear the profit will be zero.
4) After crossing the break-even point only profit will be earned. This is safety level.
5) The total sales beaned break-even point sales is called margin of safety.
Solving the straight line equation:
The line is in increasing direction so the line equation most be (M) X – Y = C [‘.’ y=mx – c]
Hear
‘X’ is sales or units
‘Y’ is profit
‘M’ is slope of line
At 0 level of sale:
Profit = - F.C
So (M)*0 – (-F.C) = C
0 Margin of safety
PROFIT
-Fixed cost
SALES OR UNITS
Break-Even Point Total Sales
C = F.C
4. If ‘X’ is sales, then
If ‘X’ is units, then
change in profit
change in sales
{(contribution1-F.C 1)-(contribution2-F.C 2)}
(sales 1-sales 2)
change in contribution
change in sales
cont. 1- cont. 2
sales 1-sales 2
(cont. per unit 1*no of units 1)- (cont. Per unit 2*no of units 2)
(Selling price per unit 1*no of units 1)-(Selling price per unit 2*no of units 2)
(no of units 1-no of unis 2)*cont. Per unit
(no of units 1-no of unis 2)*selling price per unit
change in contribution
change in sales
cont. Per unit
selling price per
unit
cont.
sales
change in profit
change in sales
change in profit
change in no of units
{(contribution1-F.C 1)-(contribution2-F.C 2)}
(no of units 1-no of units 2)
change in contribution
change in no of units
cont. 1- cont. 2
no of units 1-no of units 2
(cont. per unit 1*no of units 1)- (cont. Per unit 2*no of units 2)
no of units 1-no of units 2
(no of units 1-no of unis 2)*cont. Per unit
(no of units 1-no of unis 2)
change in profit
change in units
cont. Per unit = change in contribution
change in no of units
Slope =
‘.’ F.C is constant.=
Slope =
=
=
=
‘.’ Cont. per unit and selling
price per unit are constant.
= Slope
=
= P/v ration =
Slope =
‘.’ F.C is constant.=
Slope =
=
=
= ‘.’ Cont. per unit is constant.
= Slope =
= profit volume ration
= =
5. The straight line equations will be:
1. If ‘X’ is sales:
2. If ‘X’ is units:
By using this straight line method we can find any formula
1. FINDING THE BREAK-EVEN POINT:
We know that at breakeven point the profit will be ‘0’
BREAK-EVEN POINT IN VOLUME:
P/v ratio x sales – 0 = F.C
Sales = F.C / p/v ratio
BREAK-EVEN POINT IN UNITS:
Cont. per unit x no of units – 0 = F.C
No of units = F.C / cont. per unit
2. FINDING THE TOTAL SALES:
3. FINDING MARGIN OF SAFETY:
So we have no need to remember all these formulas, if we remember those straight lime equations.
TOTAL SALES IN VOLUME:
P/v ratio x sales – profit = F.C
Sales = (F.C + profit) / p/v ratio
TOTAL SALES IN UNITS:
Cont. per unit x no of units – profit = F.C
No of units = (F.C + profit) / cont. per unit
MARGIN OF SAFETY IN VOLUME:
M.O.S = TOTAL SALES – BREAKEVEN
= (F.C + profit – F.C) / p/v ratio
M.O.S in Sales = profit / p/v ratio
MARGIN OF SAFETY IN UNITS:
M.O.S = TOTAL SALES – BREAKEVEN
= (F.C + profit – F.C) / cont. per unit
M.O.S in units = profit / cont. per unit
P/V Ratio x Sales – Profit = F.C
Cont. per Unit x No of Units – Profit = F.C
6. Example problem-1:
At 20 units of sale the profit will be 800/- and at 30 units of sale the profit will be 1300/-. If the selling price per unit is
100/-
Then find (i). Break-even point in units.
(ii). Fixed cost
And (iii). Variable cost per unit
Solution:
(i). At break-even point of ‘x’ units sale the profit = 0
Slope =
=>
X = B.E.P in units = 4 units
(ii). Cont. per unit = = = 50
Cont. at 20 units = 50 X 20 = 1000
Profit at 20 units = 800
We know “cont. – F.C = profit”
1000 – X = 800
F.C = X = 200
(iii).Without knowing selling price we can’t find variable cost per unit.
The given selling price is 100/- and cont. per unit is 50/-
So variable cost per unit is 100 – 50 = 50/-
Example problem-2:
At 20 units of sale the profit will be 37.5% and at 30 units of sale the profit will be 50%. If the selling price per unit is
100/- what will be the sale to ern profit of 12.5%.
Solution:
At 20 units of sale the profit = 20 x 100 x 37.5% = 750
At 30 units of sale the profit = 30 x 100 x 50% = 1500
Slope =
=>
X = 1200
change in profit
change in units
1300 - 800
30 - 20
800 - 0
20 - x
change in profit
change in units
1300 - 800
30 - 20
change in profit
change in sales
1500 - 750
(30x100 - 20x100)
750 – (X)50%
2000 – (X)100%
=
=
7. PROJECT SELECTION CRITERIA
So many alternatives may be available on market for producing same products. We can exchange variable cost like man
power with fixed cost like machinery likewise we can replace fixed costs and variable costs. So we can reduce the risk. In
this situation we have to select a best project from the available project available in market, for this selection criteria we
should follow some technics and methods. Here I am introducing a new technic for easy selection.
By using this equilibrium sale technic we can chose the best project from the availability.
Selection criteria:
Equilibrium point shows the two projects can produce same amount of profit at same sales level.
Sales before equilibrium point: the project which has lower p/v ratio or lower contribution per unit will produce higher
profit. In other words project which has lower F.C and higher V.C will produce more profit.
Sales after equilibrium point: the project which has higher p/v ratio or higher contribution per unit will produce higher
profit. In other words project which has higher F.C and lower V.C will produce more profit.
Equilibrium sales
Sales or units-0
Profitloss
Project - 1
Project - 2
Equilibrium profit
Equilibrium analysis
8. Equilibrium sales:
By solving the two straight line equations we can find the equilibrium sales
Cont. per Unit1 x No of Units – Profit = F.C1
Cont. per Unit2 x No of Units – Profit = F.C2
(Cont. per Unit1 - Cont. per Unit2) x No of Units= F.C1 - F.C2
So,
Equilibrium sales in units:
No of Units =
Equilibrium sales in volume:
OR
If in both projects selling price per unit is same,
OR
( F.C1 - F.C2)
(Cont. per Unit1 - Cont. per Unit2)
X price per unit
Sales =
( F.C1 - F.C2)
(Cont. per Unit1 - Cont. per Unit2)
Sales =
( F.C1 - F.C2)
(P/V ratio1 – P/V ratio2)
No of units = ( F.C1 - F.C2)
(V.C per unit2 – V.C per unit1)
X price per unitSales = ( F.C1 - F.C2)
(V.C per unit2 – V.C per unit1)
9. Example problem:
For producing same product there are two different projects available in market. In one project F.C is 20000/-. V.C is
50/- per unit. In another project F.C is 30000/- , V.C is 30/- per unit. So witch project should be selected for three
branches of the company if demand for the product is 600 units in BRANCH-1, 400 units in BRANCH-2 and 500 units in
BRANCH-3.
Solution:
Here selling price is same in each project. So,
= (30000-20000) / (50-30)
= 500 units
If the demand is more than 500 units, better to choose the project which has higher F.C and lower V.C
If the demand is not more than 500 units, better to choose the project which has lower F.C and higher V.C
Equilibrium No of units = ( F.C1 - F.C2)
(V.C per unit2 – V.C per unit1)