Page 104 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 6: Marginal Costing and Absorption Costing

Contribution profit analysis provides a useful format for examining a variety of price and output Notes
decisions.

As it is clear from Figure 6.7 Total Contribution Profit (TCP) = Total Revenue (TR) – Total Variable
Cost (TVC)
= Total Net Profit (TNP) + Total Fixed Cost (TFC)

Therefore, if TNP = 0 then, TCP = TFC. This occurs at break even point. From the above equation
it is also clear that
TR = TCP + TVC
= (TNP + TFC) + TVC
Total Contribution Profi t (TCP)

= TR – TVC

= Net Profit + Fixed Cost
Example: From the following figures, ascertain the break-even sales and also show the

computation by means of a graph.
`
Sales 20,00,000
Fixed Costs 5,00,000
Variable costs 12,00,000
Solution:
Total Contribution: `
Sales 20,00,000
Variable Cost 12,00,000
Contribution 8,00,000
As percentage of sales or P/V ratio = ` 8,00,000/`20,00,000 × 100 = 40%

Alternatively: (Fixed Cost + Profit)/Sales × 100

(` 5,00,000 + ` 3,00,000/` 20,00,000) × 100 = 40%
Break-even sales:
Fixed Costs/P/V Ratio i.e., ` 5,00,000 × 100/40 = ` 12,50,000

Proof: Variable Costs:
60% of ` 12,50,000 7,50,000
Fixed Costs 5,00,000
Total Cost 12,50,000

Total costs equal sales; hence there is neither profit nor loss.
Points plotted:
Break-even Chart

Sales Variable Costs Fixed Costs Total Cost
` ` (60% of sales) ` `
0 0 5,00,000 5,00,000 (C1)
15,00,000 9,00,000 5,00,000 14,00,000 (C2)

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