Page 71 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes Problem 3:
Calculate P/V ratio from the following information:
Sales ` 50,000
Marginal cost ` 20,000

Solution:
Contribution = Sales – Marginal cost
= 50,000 – 20,000
= ` 30,000

Contribution
P/V Ratio =  100
Sales
30,000
=  100 = 60%
50,000
4.4 Break-Even Analysis

Break-even analysis is a technique of studying cost-volume-profit relationship. This analysis
may be interpreted in broad as well as in narrow sense. In its narrow sense, the break-even
analysis determines the break-even point. It is a point to indicate no profit and no loss situation
of the project taken up for implementation. If the same is used in broad sense, the analysis is to
indicate the probable profit or loss at any given level of activity. Break-even analysis is also
known as cost-volume-profit analysis.
According to Joseph Baggot, ‘Break-even analysis refers to a system of analysing cost into its
fixed and variable components to determine the probable profits at given level of activity.”
In the words of Car Heyel, “Break-even analysis is a method of studying the relationship among
sales revenue, fixed costs and variable expenses to determine the minimum volume at which
production can be profitable.” Break-even analysis is aimed at measuring variations of cost with
volume. It is a useful technique in business decision-making.
4.4.1 Assumption of Break-Even Analysis

Break-even analysis is based on the following assumptions:
(i) All costs be classified into fixed cost and variable cost,
(ii) Total fixed costs remain unchanged,
(iii) Variable costs per unit remains unchanged and total variable costs change with the change
in the volume of output in direct proportion,
(iv) With the changes in the volume of sales, selling price does not change,
(v) General price level will not change,
(vi) Stocks are valued at marginal cost,
(vii) In case of multi product sales programme, sales mix will remain constant,

(viii) Costs and revenues are influenced only by volume,
(ix) Productivity per worker remains unaffected, and
(x) There is synchronisation between production and sales.

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