Marginal Costing for LDCE

Marginal Costing

·         Total cost + Profit  = Sales   

  

·         Total Cost = Variable Cost   +  Fixed Cost  

·         So, Variable Cost + Fixed Cost + Profit  = Sales

·         Sales = Variable Cost + (Fixed Cost + Profit)

·         Contribution = (Fixed Cost + Profit)

·         Sales - Variable Cost = Contribution

·         I.e., S - V = (F + P)

or

·         S - V = C

or

·         C = S - V

·         Contribution = Sales - Variable Cost

·         Contribution = (Fixed Cost + Profit)

·         (Fixed Cost + Profit) = Sales - Variable Cost

·         Profit Volume Ratio (PV Ratio) = Contribution / Sales

·         BEP - Break Even Point = Where No Profit or No loss.

·         BEP - Break Even Point = Fixed Cost / P V Ratio

Problem:

Sales - Rs. 100,  Variable Cost - Rs. 80,  Fixed cost - Rs. 10.   Find the Sales at Break Even Point

Answer:

Contribution = Sales - Variable Cost

C = Rs. 100 - Rs. 80 = Rs. 20

PV Ratio = Contribution / Sales = Rs. 20/ Rs.100  = 0.20

BEP = Fixed Cost / PV Ratio

BEP Sales = Rs.10 /0.20  = Rs. 50

To Prove:

If Sales is Rs. 100,  Variable Cost is Rs. 80

If Sales is Rs. 50, Variable Cost is ?   = 50/100 x 80  = Rs. 40

Contribution = Sales - Variable Cost   Rs. 50 - Rs. 40 = Rs. 10

In Break Even Point, Contribution equals Fixed Cost.  Here too Contribution (Rs. 10) and Fixed Cost (Rs.10) are equal. That means No Profit or No loss at Sales Rs. 50.

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