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The Directors of Steel Manufacturing Co. Gives the Following Information. - Cost Accounting(Financial Accounting and Auditing 10)

The Directors of Steel Manufacturing Co. gives the following information.

Sales - (1,00,000 units) (Rs.) 1,00,000
Variable Costs (Rs.) 40,000
Fixed Costs (Rs.) 50,000

(i) Find out PN Ratio, Break Even Point & Margin of Safety.
(ii) In case of 20% increase In Physical Sales Volume, calculate P/V Ratio, Break Even Point & Margin of Safety.

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Solution

(i) Contribution = S - VC
∴ Contribution = Rs. 1,00,000 (-) Rs. 40,000
Contribution = Rs. 60,000

P/V Ratio = `"C"/"S"xx100`

`= ("Rs." 60,000)/("Rs." 1,00,000)xx100` = 60%

BEP =`"Fixed Cost"/"P/V Ratio"`

`=("Rs."50,000)/(60%)`

= Rs. 83,333.33

Margin of Safety (MOS) - Actual Sales (-) BEP Sales

= Rs. 1,00,000 (-) Rs. 83,333

= Rs. 16,667

(ii) 20% Increase in Physical Sales Volume :

Present Sales Volume 1,00,000 Units
Add : 20% Increase    20,000 Units
                                 1,20,000 Units

Existing Sales = 1/- per unit (Rs. 1,00,000 + 1,00,000 Units)
∴ New Revised Sales 1,20,000 Units x Rs. 1 = Rs.1,20,000
Now,  Contribution = S - VC
∴ Revised Contribution = Rs. 1,20,000 (-) Rs. 40,000
∴ Revised Contribution = Rs. 80,000

Revised P/V Ratio `="C"/"S"xx100`

`=(80,000)/(1,20,000)xx100`

= 66.67%

Revised BEP = `"FC"/"P/V Ratio"`

`=("Rs."50,000)/(66.67%)`

= Rs. 74,996.25

Revised Margin of Safety = Actual Sales (- ) BEP Sales

= Rs. 1,20,000 (-) Rs. 74,996.25

= Rs. 45,003.75

Concept: Break-even Point - Cost Volume Profit Analysis
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