Cost-Volume-Profit RelationshipCost-Volume-Profit Relationship

Nature of relationship Nature of relationship     LinearLinear

Assumptions under this concept are as Assumptions under this concept are as follows-follows- Costs are classified under fixed and variable Costs are classified under fixed and variable

costs. costs. Selling price remains constant. Selling price remains constant. Only one product is manufactured.Only one product is manufactured.

What is Marginal Cost?What is Marginal Cost? ““The amount at any given volume of output by The amount at any given volume of output by

which aggregate costs are changed if the which aggregate costs are changed if the volume of output is increased or decreased by volume of output is increased or decreased by one unit” ICMA, London one unit” ICMA, London

““The ascertainment of marginal costs and of the The ascertainment of marginal costs and of the effect on profit or changes in volume or type of effect on profit or changes in volume or type of output by differentiating between fixed costs and output by differentiating between fixed costs and variable costs” ICMA, London variable costs” ICMA, London

Characteristics of Marginal costing Characteristics of Marginal costing

Difference between product and period Difference between product and period cost. cost.

Considered only those manufacturing Considered only those manufacturing costs that are dependant on the costs that are dependant on the production volume. production volume.

Prices are determined by adding the Prices are determined by adding the contribution with the marginal cost. contribution with the marginal cost.

It is helpful in decision-making. It is helpful in decision-making.

llustrationllustration Arrive at the marginal cost from the following Arrive at the marginal cost from the following

informationinformation..

No. of units produced   =  200

Variable Cost     = Rs. 200/- unit.

Fixed Cost    = Rs. 2,50,000

  = 2,50,000 +(200 × 200)

Total Cost =  2,90,000

If we If we increase the number of units to 201increase the number of units to 201, , the variable costs will be = 201 × 200 = the variable costs will be = 201 × 200 = 40,20040,200

Therefore, the total cost =  40200+ 250000

  =  290200

Marginal Cost = 

290200-290000

      =  Rs. 200/-

Break Even AnalysisBreak Even Analysis

Traditional Break Even ChartTraditional Break Even Chart

Contribution Break Even chartContribution Break Even chart

Mathematical representation of Mathematical representation of BEPBEP

Mathematically B.E.P. can be calculated by using the following Mathematically B.E.P. can be calculated by using the following formulae:-formulae:-BEP(Units) = BEP(Units) = (Fixed cost) / (Selling price per unit – Variable cost per unit)(Fixed cost) / (Selling price per unit – Variable cost per unit)oror (Fixed cost) / (Contribution per unit)(Fixed cost) / (Contribution per unit)oror (Break-even sales (Rs) / (Selling price per unit)(Break-even sales (Rs) / (Selling price per unit)

BEP (Rs) = BEP (Rs) = (Fixed costs × Sales) / (Sales – Variable cost)(Fixed costs × Sales) / (Sales – Variable cost)oror

(Fixed cost × selling price per unit) / (Selling price per unit-(Fixed cost × selling price per unit) / (Selling price per unit- variable cost per variable cost per unit)unit)oror (Fixed cost × selling price per unit) / (contribution per unit)(Fixed cost × selling price per unit) / (contribution per unit) oror Fixed cost/ PV ratio Fixed cost/ PV ratio

IllustrationIllustration

Output: 6000 unitsOutput: 6000 units Selling price per unit Rs.40Selling price per unit Rs.40 Variable cost per unit Rs.30Variable cost per unit Rs.30 Total Fixed cost Rs.25000Total Fixed cost Rs.25000

From the above information, calculate the From the above information, calculate the break-even point in units and sales value break-even point in units and sales value