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Test Questions-Marginal Costing

TEST QUESTIONS

  1. What is marginal cost?
  2. What is meant by marginal costing?
  3. Describe the main features of marginal costing.
  4. Explain the advantages and limitations of marginal costing.
  5. What is meant by Absorption costing?
  6. What is contribution?
  7. What is P/v ratio?
  8. Give marginal cost equation.
  9. Define angle of incidence.
  10. What is meant by cost volume profit analysis?
  11. What is meant by Break-even point?
  12. How is margin of safety calculated?
  13. “The effect of Price reduction is always to reduce the P/v ratio, to raise break-even point and        To the margin of safety”. Explain and illustrate by numerical examples.
  14. What do you understand by the term cost volume profit relationship? Why is this relationship important in business management?
  15. “The technique of marginal costing can be valuable aid to Management”. Discuss.
  16. What is meant by break-even analysis? Discuss the assumptions and the limitations of this technique.
  17. What do you understand by contribution? How does it helps the management to solving Various problems ?

PROBLEMS AND SOLUTIONS

Problem 1. From the following particulars you are required to calculate BEP.

(a) Fixed  cost  $. 2, 00, 000, selling price per unit $. 40, variable cost per unit $. 1.5.

(b) Fixed cost $. 40,000, sales $. 1,00,000, variable cost $. 30,000.

(a) Computation of BEP =      fixed cost /Selling price per unit – Variable cost per unit

Fixed Cost                   = $ 2,00,000

Selling price per unit   = $ 40  per unit

Variable cost per unit   = $ 15 per unit

= 2,00,000 /40-15

BEP in units = 8,000

BEP in value =BEP units x Selling price per unit

=8,000×40

=$ .3,20,000

 

(b)                     BEP       =  Fixed Cost x Sales

Sales – Variable Cost

=40,000 x1,00,000 /  1,00,000 x 30,000

=4,00,000   /7 = $ 57,142

 

Problem 2. From the following data calculate break even point expressed in terms of units and also the new BEP if selling price is reduced by 10%.

Fixed Expenses                                        $

Depreciation                                        2,00,000

Salaries                                                2,00,000

Variable Expenses

Materials                                             $  6 per unit

Labour                                                 $ 4 per unit

Selling Price                                        $ 20 per unit 

Solution :

BEP =fixed Cost  /Selling price per unit – Variable cost per unit

=  4,00,000 /20-10

BEP in units = 40,000 unit

New break even point if selling price is reduced by 10%

Fixed Cost = $ 4,00,000

Material = $ 6.00

Labour   = $ 4.00

$ 10.00

New Selling price :

Selling Price = $ 20.00

Less : 10% Reduction = $ 2.00

$.18.00

BEP  =   Fixed Cost /Selling price per unit –variable cost per unit

= 4,00,000 /8

BEP in units         = 50,000 units

 

Problem 3. From the following particulars find out the BEP, what will be the selling price per unit if BEP is to be brought down to 9,000 units.

Variable cost per unit                      $ 75

Fixed expenses                           $ 2,70,000

Selling price per unit                   $ 100

Solution : 

BEP =fixed cost / selling price per unit –variable cost per unit

Fixed Cost       = $ 2,70,000

Selling price      = $ 100

Variable cost      = $ 75

= 2,70,000 /100 -75

BEP in units          = 10,800 units

BEP in value        = 10,800 units x Selling price

= i.e., 10,800 x 100

= $ 10,80,000

If BEP is brought down to 9,000 units

BEP = fixed cost (2,70,000) /contribution per price (X)

Contribution per unit is treated as X

X  =2,70,000 /9,000 =30

Therefore, New Selling price is $ 105 i.e., (4 75 + 4 30 = 4 105)

 

Problem 4. The following  information relating to a company is given to you :

Calculate BEP.

$

Sales                            7,00,000

Fixed cost                   1,80,000

Variable cost               4,00,000

Solution :

BEP                      = Fixed cost / contribution x sale

Contribution           = Sales – Variable cost

= 4,00,000 – 2,50,000

= 1,50,000

BEP = 1,80,000 /1,50,000  x 4,00,000

BEP Sales = 4,80,000

Present Sales = 4,00,000

80,000

Based upon the above calculation, sales are to be increased only by $  80,000 to break even.

 

    Problem 5. From the following data you are required to calculate the break-even point and net sales value at this point.

Selling price per unit                                         $ 25

Direct material cost per unit                               $  8

Direct labour cost per unit                                 $ 24,000

Fixed overhead$ 24,000

Variable overheads @ 60% on Direct Labour.

Trade discount 4%

If sales are 15% and 20% above the break even volume determine the net profits.

Solution :

(i) BEP = fixed/ selling price per unit – variable cost unit

=24,000 /24-16

= 24,000 /8

BEP in units = 3000 units

BEP in value = BEP Units x Selling price

= 3000 units x $. 24

= $ 72,000

Workings :

(a) Selling Price :

Selling price per unit          = 4 25.00

Less : Trade discount 4%              = 1.00 [ 25.00 x 4/100]

Selling Price                       =   24.00

 

(b) Variable Cost :

Direct Material cost per unit          = 4 8.00

Direct labour cost per unit         = $ 5.00

Variable overhead 60%

Direct Labour }                   = $ 3.00 [5 x 60/100]

Variable Cost  }                    = $ 16.00

 

(ii) If sales are 15% above the break even volume, find out the profit.

 

Formula :

Given Sales x PN ratio      = xx

Less : Fixed Cost   = xx

Profit    = xx

BEP Sales is  = 72,000

15% above the break even sales  = 10,800

Increased sale volume = 82,800

Therefore,  82,800 x 33.33/100  =   27,597   i.e . ,   27,600

Less : Fixed cost             = 24,000                24,000

.                              profit             = 3,597                   3,600

 

NOTE : Find the p/v radio

P/V ratio = contribution /sales

Contribution =sales –Variable cost

=24-16 = $ 8

=8/24 x100

= 33.33%

(iii) If sales are 20% above the break even, determine the profit.

Break even sales   = $ 72,000

20% increase  =  $  14,400

Increased sales volume  =  $  86,400

 

Problem 6 : (i) From the following details you are required to determine the break even point.

Direct Labour            $  100 per unit

Direct Material ·       $  40per unit

Variable overhead    $  100 % of direct labour

Fixed overheads      $ 60,000

Selling price            $ 400 per unit

 

(ii) In order to increase the efficiency in production, the concern installs improved machinery, which results in fixed overhead of $ 420,000, but the variable overhead is reduced by 40%.

Solution :

(i) Computation of  Break  even point

BEP          =  fixed cost /selling price per unit –variable cost per unit

Fixed  cost       =  $ 60,000

Variable Cost

Direct material                           =  40

. Direct laour                              =  100

Variable overhead 100% }        =   $ 100

On direct labour

$ 240

BEP                 =   60,000 /400-240

=   60,000 /160

BEP in unit                           =   375 unit

BEP in unit                           =   BEP unit x selling price

=   375 unit  x $ 400

=  1,50,000

 

(ii) In order to increase the production : The New BEP

Fixed overhead                  =  $  60,000

( +) Additional                  = . $20,000

Total fixed cost                  =   $  80,000

Variable overhead is reduced by 40%

Variable Cost

Direct Material    = $ 40

Direct Labour      = $ 100

Variable  overhead 100 x 60/100   = $ 60

Total Variable .cost              $ 200

Revised BEP   =    fixed cost

Selling price per unit – Variable cost per unit

=80,000 /400-200

BEP in units               = 400 units

BEP in value             = 400 x 400

= $ 1,60,000

 

Problem 7. The PI V ratio of a firm dealing in Electrical equipment is 50% and the margin of safety is 40%. Find out BEP and the net profit, if sales volume is $ 50,00,000

Solution :

(i) Contribution

Given sales x P/V ratio                      = contribution

50,00,000  x50 /100             = $ 25,00,000

 

(ii) Break even sales                           = (Actual Sales – BEP Sales = M.O.S. (or)

Actual Sales – M.O.S.           = BEP Sales

Sales          =$  50,00,000

Less :Margin of safety 40% on sales =$  20,00,000

Break even sales = $ 30,00,000

(iii) Fixed cost

BEP(30,000)              =  fixed cost (X) / P/V Ratio (50%)

X                   = 30,00,000 x 50/500

Fixed assets           =  $ 15,00,000

 

(iv) Find out profit :

Contribution                           = Fixed cost + Profit or Fixed cost – Loss

Contribution                           = $ 25,00,000

Less : Fixed Cost                           = $ 15,00,000

Profit                                      = $ 10,00,000

 

      Problem 8. Assuming that the cost structure and selling prices remain the same in both the periods. Compute the following :

(a) Profit volume Ratio

(b) BEP for sales

(c) Profit when sales are $ 1,00,000

(d) Sales required earning a profit of $ 20,000

(e) Safety margin in both the periods.

          Period          Sales $             Profit
                I         1,20,000            9,000
                II        1,40,000           13,000

Solution :

(a)         Profit Volume Ratio          =  Difference of profit / difference of sales x 100

= 13,000 – 9,000 / 1, 40,000 – 1,20,000  x 100

=4,000 /20,000 x 100

P/V Ratio  = 20%

 

(b)                       BEP for sales  =  fixed cost / P/V  Ratio

=15,000/20/100

BEP Sales =$ 75 ,000

NOTE :                  Fixed cost =contribution  – profit

= 1,20,000 x 20/100 -9,000

=24,000 -9,000 =15,000

[ therefore ,contribution = given sales x P/V Ratio]

(c)  Profit when sales are $ 1,00,000

Profit = Contribution – Fixed cost

= 1,00,000x 20/100 -15,000

=  20,000 -15,000   =5,000

(d) Sales required to earn a profit of $ 20,000

Fixed  Cost + Desired Profit  /  P/V Ratio

15,000 + 20,000 /20/100 = $ 1,75 000

(e) Safety margin in both the periods

Actual Sales – BEP Sales   = Margin of safety

(1) 1,20,000            -75,000             – 45,000

(11) 1,40,000          – 75,000            – 65,000

 

Problem 9.  Find out profit from the following data

Sales                         $ 8,00,000

Marginal cost             $  6,00,000

Break-even sales         $  6,00,000 

Solution :

(i) P/V = Contribution  / sales x 100

= 20,00,000 /8,00,000 x 100 =25%

(ii) Fixed Expenses

BED (60,00,000)    = x 25/100 -1,50,000

Fixed Expenses (X)  =$ 1,50.000

(iii) Find out profit _

Contribution = $ 2,00,000

Less : Fixed Expenses = $ 1,50,000

Profit = $ 50,000

          

Problem 10. P I V ratio is 30% and margin of safety is 40%. Find out the fixed cost and net profit if the actual sales-is $  5,00,000 .   

  Solution :

Sales                            = $ 5,00,000

Less : Margin of safety 40%   = $ 2,00,000

BEP                                       = $ 3,00,000

 

NOTE :  (Actual Sales – Margin of safety) 3,00,000

Find the Fixed cost.

BEP (3,00,000)                         = fixed cost (X)

P/V Ratio (30%)

X= 3,00,000 x 30/100 =$ 90,000

Profit or Loss          = contribution –fixed cost

=1,50,000 -90,000 =$ 60,000 

 

NOTE : Contribution      = Given Sales x P/V ratio

= 5,00,000 X 30/000 =1,50,000