Page 233 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes cause to bring out changes in output and not the result of output sales. In the real world, perfect
competition is very rare and as such it is necessary to make calculations at different time periods.
The relationship between cost, revenue and volume (output) is realistic only over narrow ranges
of output and for long ranges. If too many products and too many plants are grouped together
in a productive process, the BEA cannot identify which is good or which is bad, since all are
grouped together. The BEA assumes that profits are the result of output but ignores that other

factors like technological changes, improved management and variations in the proportions of
fi xed factors are also possible for profi ts. In spite of these, BEA is an important tool in decision
making.

Example: From the following information relating to quick standards Ltd., you are

required to find out (i) PV ratio (ii) break-even point (iii) calculate the volume of sales to earn
profi t of ` 6,000/-
Total Fixed Costs ` 4,500
Total Variable Cost ` 7,500
Total Sales ` 15,000
Solution:

First step to find out the Contribution volume
Sales ` 15,000

Variable Cost ` 7,500
Contribution ` 7,500
Fixed Cost ` 4,500
Profi t ` 3,000
1. Second step to determine the PV ratio
Contribution 7,500
PV ratio = × 100 = × 100 = 50%
Sales 15,000

Third step to find out the Break-even sales
Fixed cost 4,500
2. Break-even sales = = = 9,000
PV ratio 50%
3. Margin of safety can be found out in two ways
(a) Margin of Safety = Actual sales – Break-even sales
= ` 15,000 – ` 9,000 = ` 6,000

Profit ` 3,000
(b) Margin of Safety = = = ` 6,000
PVratio 50%
4. Sales required to earn profi t = ` 6,000/-
To determine the sales volume to earn desired level of profi t

Fixed Cost + Desired Profit
=
PV ratio
`
` 4,500 + 6,000
= = ` 21,000
50%

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