Page 238 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 11: Marginal Costing and Profi t Planning

Notes
Y
10
Profit (Rs. in lakhs) Profi t (` in lakhs) 5 P 2

BEP
0 X
5 10 Sales (Rs. in lakhs) 15 20
12.5
Loss (Rs. in lakhs) Loss (` in lakhs) 5 P 1
Sales (` in lakhs)

10

11.5.2 Algebraic Method

Break-even analysis can also be performed algebraically, as follows. Total revenue is equal to the
selling price (P) per unit times the quantity of output or sales (Q). That is
TR = (P) . (Q)
Total costs equal total fixed costs plus Total Variable Costs (TVC). Since TVC is equal to the

Average (per unit) Variable Cost (AVC) times the quantity of output or sales, we have
TC = TFC + TVC
or, TC = TFC + (AVC). (Q)

Setting total revenue equal to total costs and substituting QB (the break-even output) for Q, we
have
TR = TC
(P). (Q ) = TFC + (AVC). (Q )
B B
Or, TFC = P. (Q ) – (AVC) (Q )
B B
TFC = Q . (P – AVC)
B
TFC TFC
OB (the break-even output) = =
(P – AVC) ACM

The denominator in the above equation (i.e., P – AVC) is called the contribution margin per unit
(ACM) because it represents the portion of the selling price that can be applied to cover the fi xed

costs of the firm and to provide for profi ts.

Task Break even sales ` 1,60,000
Sales for the year 2007 `2,00,000

Profit for the year 2007 ` 12,000
Calculate:
1. Profit or loss on a sale value of ` 3,00,000.

2. During 2008, it is expected that selling price will be reduced by 10%. What should be
the sale if the company desires to earn the same amount of profit as in 2007?

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