Marginal Costing• X Ltd. Furnished you the following related to the year 1996

First Half Second Half

Sales 45,000 50,000

Total Cost 40,000 43,000

Assume that there is no change in prices and variable cost and that the fixed expenses are incurred equally in the 2nd half year

Period. Calculate for the year 1996.

a) The Profit Volume Ratio

b) Fixed Expenses

c) Break Even Sales and d) % of margin of safety

Marginal CostingSolution:

First Half Second Half Change in Sale and Profit

Sales 45,000 50,000 5,000Less: Cost 40,000 43,000 3,000 -------------------------------------------------------Profit 5,000 7,000 2,000 -------------------------------------------------------- Change in Profita) P/V Ratio = --------------------------- X 100 Change in Sales

Marginal Costing 7,000-5,000 2,000P/v Ratio = --------------------- X100 = ------------- X 100 = 40% 50,000 – 45,000 5,000

Contribution = Sales X P/V RatioDuring the first Half = 45,000X 40% = Rs.18,000

Fixed Cost = Contribution – ProfitFor the first half = 18,000 -5,000 = 13,000

Fixed cost for the full year = 13,000x2 =26,000

Marginal Costing

Fixed CostBreak Even Sale for the year 1996 = -------------------- P/V Ratio 26,000BEP for the year 1996 = ------------ = Rs.65,000 40% Margin of Safety for the year 1996 = Sales – Break Even Sales = 95,000 – 65,000 = Rs 30,000 Margin of SafetyPercentage of Margin of Safety = ---------------------- x 100 Sales for the year

Marginal Costing

30,000Percentage of margin of Safety = ----------- X 100 = 31.58% 95,000

Note:1. Since fixed expenses are incurred equally in the 2nd half years Rs.13,000 is multiplied with 2 to get fixed cost of the full

year.2. Sales of both 1st and 2nd half years are added and are taken as

actual sales i.e., Rs.95,000 to calculate margin of safety.