MARGINAL COST

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MARGINAL COST

The amount at any given volume of output by which the aggregate costs are changed if the volume of output is increased or decreased by one unit.

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MARGINAL COST Variable Cost per unit Rs 10Fixed expenses Rs 1,50,000Output 30,000 unitsTotal Cost:Variable Cost 30,000 X 10 = 3,00,000Fixed Cost = 1,50,000Total Cost = 4,50,000If output is increased by One Unit Then:Variable Cost 30,001 X 10 = 3,00,010Fixed Cost =1,50,000New Total Cost =4,50,010Less Old Total Cost 4,50,000

1010 is Marginal Cost

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CONTRIBUTION

Contribution is the difference between Sales and Marginal Cost of sales. It contributes towards Fixed Expenses and Profit.

Contribution will first meet Fixed expenses and then to gain profit.

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CONTRIBUTION

SP = Rs 15 MC = Rs 10 Contribution = SP-MC C= 15-10 C= 5i.e at output of30,000 units C= 1,50,000 = (30,000 X 5)

20,000 units C=1,00,000 = (20,000 X5)

40,000 units C = 2,00,000 = (40,000 X 5)

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CONTRIBUTION

At 30,000 units Contribution = FE

At 40,000 units Contribution = FE + 50,000 (profit)

At 20,000 units Contribution = Loss of 50,000

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EQUATIONS

Sales = TVC+FE +/- P/L

SP – VC = FE +/- P/L

SP – VC = Contribution

Contribution = FE +/- P/L

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Marginal Cost (MC) = Prime Cost + Variable Expenses = Variable Cost

Contribution = Sales – TVC

= SP – MC

Profit = Contribution – FE

Variable Rate (VR) = VC/Sales

Contribution Rate (CR) = 1 - VR = 1 - VC

Sales

EQUATIONS

Contribution Rate = Contribution(CR) Sales

CR = Sales – VC Sales

= Sales – VC Sales Sales

= 1 - VC Sales

= 1- VR03/27/15 9S Kacker, IHM Mumbai

BREAK EVEN POINT (BEP)

A business is said to be at break even when its Total Sales are equal to its Total Cost. TS = TC

It is a point of No Profit No Loss

i. e Contribution = FE + O (Profit) C = FE

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BREAK EVEN POINT (BEP)

Can be determines by : 1.Formula approach expressed in terms of Units/ Volume or Value of Money.

2. Chart or graph approach

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BREAK EVEN POINT (BEP) in units

Y1 = FE + Vx Y1 = Total Cost FE = Fixed Expenses V = Variable Cost/Unit x = no of units (output)_______________ I

Y2 = SPxY2 = Total Sales/RevenueSP = Selling Price/Unitx = no of units (output) __________________II

At Break even Total Sales = Total Cost Y2 = Y1 SPx = FE +Vx

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Break even point in terms of Physical Volume (units or numbers)

X = FE____ SP _ VCWhere

FE = Total Fixed CostSP = Selling price/unitVC = Variable Cost /Unit

x = no of units at BEP03/27/15 13S Kacker, IHM Mumbai

Break even point in terms of Money or Value (Rupees)

BEP in units = FE SP – VCBEP in sales/ Revenue = FE X SP

SP – VC FE

= SP – VC SP

FE_ 1- VC SP

= FE 1-VR

= FE_____Contribution Rate

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BREAK EVEN CHART /GRAPH

Break even chart is a device in graphic form, designed to portray the principal Sales-Cost – Profit Analysis of a particular operations.

It shows the BEP and also indicates the estimated Profit /Loss at various levels of activity.

Sales Volume (output) is shown along X axis.

Cost & Revenue (rupees) related to sales Volume (output) are shown along Y axis.

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BREAK EVEN ANALYSIS

•BEP and Break even chart are two by products of break even analysis.

•Break even analysis is also known as Cost Volume profit analysis (CVP analysis).

•The analysis is a tool of financial analysis where by the impact on the profit with the changes in volume, selling price, cost and mix can be estimated.

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SIGNIFICANCE OF BREAK EVEN CHART

-It will show Variable Cost, Fixed Expenses, Total Cost.

- Sales unit or Value of Sales can be known.

- Profit or Loss can be known.

- Margin of safety can be known.

- Angle of incidence can be understood.

- Break even point both in numbers or rupees can be

ascertained.

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PURPOSE OF BREAK EVEN CHART

→At what sales volume will any operation make

money.

→What will be the Profit/Loss at any given point

of sale.

→How much will be expenses at any given point of

sale.

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→How will changes in Selling Price or Volume sold

will affect profit.

→Is it feasible to incur additional expenses like

advertising, etc.

→Should the operation expand or even start.

PURPOSE OF BREAK EVEN CHART

MOS is excess of normal or actual sales over break even sales.

MOS = Actual Sales – Break even sales(Normal Sales)

Like Profit Volume Ratio MOS can be expressed in : - Percentage

- No of Units- Volume of sales

Larger the MOS safer in the firm

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MARGIN OF SAFETY (MOS)

Margin of safety can be increased by:

1. Decreasing the fixed expenses

2. Decreasing the variable costs

3. Increasing the selling price

4. Increasing the volume of sale

5. OR Effect of all the above

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MOS = Actual Sales – Breakeven Sales

= Budgeted Sales – Breakeven Sales

= Profit___ P/V Ratio

= Profit C/S

MOS Ratio = Actual Sales – Break even Sales Actual Sales

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Cost, Volume, Profit Relation (CVP Relation)

Profit depends on various factors

1. Cost of manufacture

2. Volume of sales

3. Selling Price of products

All these are interconnected.

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Cost- Volume Profit analysis

It measures variations in cost with variations in volume.

Importance of CVP analysis

1. It helps in Profit Planning2. It helps in making Budgets3. Making decisions for Sales etc.

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Profit – Volume Ratio

It studies the profitability of operations

It establishes the relationship between contribution and

sales

Comparison of P/V Ratio of different dishes can be made

to find out which item is profitable.

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High the P/V ratio – more profit

Lower the P/V ratio – less profit

Profit – Volume Ratio

P/V Ratio can be increased by increasing the SP/Cover or

Decreasing Fixed and Variable Cost

Variable Ratio = VC_(Variable Cost Ratio) SP

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Profit Volume Ratio = 1 - VC(Contribution Ratio) SP(Marginal income Ratio) = C/S percentage

= Contribution x 100 Sales

= Sales – VC x 100 Sales

ProblemSelling Price = 50 RsVariable Cost = 5 Rs/UnitFixed Cost = 9,00,000

Calculate :1) BEP

2) Turn over to earn profit of Rs 2,25,000

3) MOS available on earning a profit of 2,25,000

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Problem

Fixed Cost = Rs 5,000

Variable cost = Rs 10 unit

SP = 20 unit

Sales Volume = 750 units

Find BEP

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Problem

Calculate BEP

SP =Rs 100.unit

VC = Rs 80/unit

Contribution = 20 unit

FE = 10,00,000

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Problem

SP/CoverVC/CoverFood Cost Rs 10 Labor Cost Rs 7 Overhead cost Rs 7 Fixed Cost Rs 1,50,000

Calculate – 1. Contribution 2. BE Sales 3. Sales required to earn profit of

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Problem

Cost figures of a restaurant are given below

Fixed Cost = Rs 18,000 No of Covers = 200 to 2000 Average check = Rs 20 Variable Cost = 25 % of sales Calculate = BEP

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Problem

The Everest Restaurant has fixed cost of Rs 1,50,000 per month and serves to 1,000 covers.

Its average check is Rs 40 of which

40% is needed to pay for the restaurant’s variable cost.

Calculate BE sales.03/27/15 42S Kacker, IHM Mumbai