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Marginal Costing
Marginal Costing
The supreme goal of every manager is make profit . To achieve this management has to take
several decisions regarding the marginal unit, the product mix, pricing, make or buy. It has to
ascertain the cost which are controllable and establish a mechanism to control them. Marginal
costing is an effective technique applied by the management in taking several decisions and
controlling cost . The application of marginal is explained below.
(11) Eliminate Competition: When the concern wants to eliminate competition, it may
initially sell at the Marginal Cost. Thereafter once the competition is eliminated, it will
enjoy monopoly, can charge higher prices and recover its losses.
(111) Establish New Product: When the concern wants to introduce or popularise a new
product, initially, it may sell at the Magrinal Cost. Once the product is established, it
can increase its prices and recover its losses. The same strategy can be applied in
case of a special order, or for an export order etc.
(5) Decision Regarding Make or Buy
Management has to decide whether it would be more profitable to manufacture a product
or a. component in-house rather than buying it from outside. Thus-
(1) The concern should make ail article itself if its Mar g inal Cost is lower than the
market price of the article. Thus,
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Make Article A if [Marginal Cost of A + Contribution of B] < Market Price of A
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help the management in controlling the marginal costs. Break-even Charts C and PV Ratios also help
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the management in controlling cost and maximising the profits
Illustration 1 :
From the following data, calculate break-even point (BEP) in units as well as value.
Rs.
Selling price per unit 20
Variable cost per unit 15
Fixed overheads 20,000
If sales are 20% above BEP, determine the net profit.
Illustration 2:
(i) Find out contribution and BEP sales if Budgeted Output is 80,000 units. Fixed Cost is
Rs. 4,00,000, Selling Price per unit is Rs. 20. Variable Cost per unit is Rs. 10
(ii) Find out Margin of safety, if profit is Rs. 20,000 and PV Ratio is 40%.
Illustration 3:
From the following data, calculate:
(i) Break-even point expressed in amount of sales in rupees.
(ii) Number of units that must be sold to earn a profit of Rs. 1,60,000 per year.
Selling price Rs. 20 per unit
Variable manufacturing cost Rs. 11 per unit
Variable selling cost Rs. 3 per unit
Fixed factory overheads Rs. 5,40,000 per year
Fixed selling cost Rs. 2,52,000 per year
Illustration 4
Sales Rs. 1,00,000, Profit Rs. 10,000, Variable Cost 70%. Find out (a) PV ratio (b) Fixed cost and
(C) Sales to earn of profit Rs. 40,000.
Illustration 5:
Profit Volume Ratio of a company is 50%, while its margin of safety is 40%. It sales volume of the
company is Rs. 50 lakhs, find out its break-even point and net profit.
Illustration 6:
(1) Ascertain Profit, when Sales Rs. 2,00,000
Fixed Cost Rs. 40,000
BEP Rs. 1,60,000
(2) Ascertain Sales, when Fixed Cost Rs. 20,000
Profit Rs. 10,000
BEP Rs. 40,000
Illustration 3 (Discontinue Division C)- XYZ Ltd. has three divisions each of which
makes a different product. The budgeted data for the next year are as follows:
A B C
Sales 1,12,000 56,000 84,000
Costs:
Direct material 14,000 7,000 14,000
Direct labour 5,600 7,000 22,400
Variable Overhead 14,000 7,000 28,000
Fixed costs 28,000 14,000 28,000
Total Costs 61,600 35,000 92,400
Profit/(Loss) 50,400 21,000 (8,400)
The management is considering to close down Division C. There is no
possibility of reducing fixed costs. Advise ‘whether or/not Division C
should be closed down?
Each unit of the product is sold for Rs. 20 with variable selling and
administrative expenses of 60 paise per unit c product. The company
excepts that during the next year only 2,000 units can be sold.
Management plants to shut-down the plant, estimating that the fixed
manufacturing overhead can be reduced to Rs. 45,000 for the next year.
When the plant is operating the fixed overhead costs are incurred at a
uniform rate throughout the year. Additional costs of plant shut are
estimated at Rs. 15,000. Should the plant be shut-down? Show
computations. Calculate the shut down point.
Illustration 5 : ( selection of product mix )
From the following date you are required to present the best alternative
Illustration 12 :
Cookwell Ltd. manufactures pressure cookers the selling price of which is Rs. 300
per unit. Currently the capacity utilisation is 60% with sales turnover of Rs. 18 lakhs.
The company proposes to reduce the selling price by 20% but desires to maintain
the same profit position by increasing the output. Assuming that the increased
output could be made and sold, determine the level at which the company should
operate to achieve the desired objective.
The following further date are available:
(1) Variable cost per unit Rs. 60.
(2) Semi-variable cost (including a variable element of Rs. 10 per unit) Rs.
1,80,000.
(3) Fixed cost Rs. 3,00,000 will remain constant upto 80% level. Beyond this
an additional amount of Rs. 60,000 will be incurred.
Illustration 13:
Pioneer engineering company Ltd has just completed first of year of its operation as
31st March 2009and summarized result of the information is given below: Installed
capacity- 20,000 kg : production 14,000 kg.
Income and expenditure details :
Particulars Rs Rs
Income 28,00,000
Expenditure
Variable
Material 3,50,000
Labour 4,20,000
Overheads
Factory 2,80,000
Marketing 2,10,000 12,60,000
Contribution 15,40,000
Fixed cost 10,00,000
Profit 5,40,000
The Managing Director wishes to expand the operation for the year next
year and has asked you to prepare flexible budgets on capacity utilisation
levels of 80%, 90% and 100% based on the following estimate
(Rs. per kg.)
(a) Price at 80% level- 220
at 90% level- 210
at 100% level- 200
Whatever produced during the year is expected to be sold within the year.
(b) Increase in variable cost components.
Materials @ 12%
Labour @ 10%
Overheads:
Factory @ 15%
Marketing @ 20%
(a) Inflation rate applicable to fixed cost is 15%. Additionally, if the capacity
utilisation exceeds 80% fixed cost is expected to increase by 10% up to
100% capacity utilisation level.
Part 2: To avoid the incidence of increase in fixed cost for production levels beyond
80% capacity utilization the production manager has submitted the plan to sub-
contract the additional production of 4,000 kg to the party at cost of Rs 105 Kg
including marketing cost . You are requested to comment on this plan of sub
contracting with a view to maximize the profit of the company,
1,20,00
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7,50,00
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At this point, sales department wanted to know the minimum price to be
quoted for an order of 3,000 additional units to be produced and
delivered at the rate of 250 units each month for the next twelve
‘months. No additional selling and’ administration expenses will be
incurred, if the order is accepted and the management wants a minimum
profit of 5% on the selling price.
Any additional raw-material purchase can be made at a saving of 5% of
cost of such materials, labour requirements above the present one shift
can be secured only at an increase of 10% over present rate. Total
variable overheads are expected to increase by 60% due to the increase
in volume and fixed production overheads will go up by Rs. 9,000 only.
Prepare a statement showing details of price calculation for new order.