Page 76 - DCOM206_COST_ACCOUNTING_II

Unit 4: Cost Volume Profit Analysis

Solution: Notes
Contribution
(i) P/V Ratio =  100
Sales
45,000
=  100 = 45%
1,00,000
Fixedcost
(ii) Break-even Point (in `) =
P/Vratio
20,000
=  100
45
= ` 44,444
Profit
(iii) Margin of Safety =
P/Vratio
25,000
=  100
45
= ` 55,556 (Approx.)
OR Margin of Safety = Actual sales – Break-even point sales
= 1,00,000 – 44,444

= ` 55,556

Task What is the effect of the following on the break-even point, profit-volume ratio
and margin of safety? Explain giving reasons.
(a) Increase in units of sales,

(b) Decrease in VC per unit,
(c) Increase in unit selling price,
(d) Decrease in total fixed cost,

(e) Increase in material prices, and
(f) Discount on selling price.

4.6 Break-Even Chart

A break-even chart is a graphical representation of marginal costing or cost-volume-profit
analysis. It is an important aid to profit planning. It has been defined as “A chart which shows
the profitability or otherwise of an undertaking at various levels of activity and as a result
indicates the point at which neither profit nor loss is made.”

According to Dr. Vance, “It is a graph showing the amounts of fixed variable costs and the sales
revenue at different volumes of operation. It shows at what volume the firm first covers all costs
with revenue of break-even.”

A break-even chart presents the following information:
(i) The profit or loss at various levels of activity,

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