1.
MARGINAL COST
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2.
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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3.
MARGINAL COST
Variable Cost per unit Rs 10
Fixed expenses Rs 1,50,000
Output 30,000 units
Total Cost:
Variable Cost 30,000 X 10 = 3,00,000
Fixed Cost = 1,50,000
Total Cost = 4,50,000
If output is increased by One Unit
Then:
Variable Cost 30,001 X 10 = 3,00,010
Fixed Cost =1,50,000
New Total Cost =4,50,010
Less Old Total Cost 4,50,000
10
10 is Marginal Cost
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3
S Kacker, IHM Mumbai

4.
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.
03/27/15 4S Kacker, IHM Mumbai

5.
CONTRIBUTION
SP = Rs 15
MC = Rs 10
Contribution = SP-MC
C= 15-10
C= 5
i.e at output of
30,000 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)
03/27/15 5S Kacker, IHM Mumbai

6.
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
03/27/15 6S Kacker, IHM Mumbai

7.
EQUATIONS
Sales = TVC+FE +/- P/L
SP – VC = FE +/- P/L
SP – VC = Contribution
Contribution = FE +/- P/L
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8.
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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

9.
EQUATIONS
Contribution Rate = Contribution
(CR) Sales
CR = Sales – VC
Sales
= Sales – VC
Sales Sales
= 1 - VC
Sales
= 1- VR
03/27/15 9S Kacker, IHM Mumbai

10.
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
03/27/15 10S Kacker, IHM Mumbai

11.
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
03/27/15 11S Kacker, IHM Mumbai

12.
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 = SPx
Y2 = Total Sales/Revenue
SP = Selling Price/Unit
x = no of units (output) __________________II
At Break even
Total Sales = Total Cost
Y2 = Y1
SPx = FE +Vx
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13.
Break even point in terms of Physical Volume
(units or numbers)
X = FE____
SP _ VC
Where
FE = Total Fixed Cost
SP = Selling price/unit
VC = Variable Cost /Unit
x = no of units at BEP
03/27/15 13S Kacker, IHM Mumbai

14.
Break even point in terms of Money or Value
(Rupees)
BEP in units = FE
SP – VC
BEP 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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14
S Kacker, IHM Mumbai

15.
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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16.
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17.
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18.
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19.
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20.
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21.
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22.
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23.
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24.
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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25.
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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26.
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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27.
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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

28.
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
03/27/15 28S Kacker, IHM Mumbai
MARGIN OF SAFETY (MOS)

29.
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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30.
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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31.
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.
03/27/15 31S Kacker, IHM Mumbai

32.
Cost- Volume Profit analysis
It measures variations in cost with
variations in volume.
Importance of CVP analysis
1. It helps in Profit Planning
2. It helps in making Budgets
3. Making decisions for Sales etc.
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33.
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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34.
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High the P/V ratio – more profit
Lower the P/V ratio – less profit
Profit – Volume Ratio

35.
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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36.
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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

37.
Problem
Selling Price = 50 Rs
Variable Cost = 5 Rs/Unit
Fixed 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
03/27/15 37S Kacker, IHM Mumbai

38.
Problem
Fixed Cost = Rs 5,000
Variable cost = Rs 10 unit
SP = 20 unit
Sales Volume = 750 units
Find BEP
03/27/15 38S Kacker, IHM Mumbai

39.
Problem
Calculate BEP
SP =Rs 100.unit
VC = Rs 80/unit
Contribution = 20 unit
FE = 10,00,000
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40.
Problem
SP/Cover
VC/Cover
Food 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
2,80,000
03/27/15 40S Kacker, IHM Mumbai

41.
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
03/27/15 41S Kacker, IHM Mumbai

42.
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