Page 109 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING
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Cost and Management Accounting
Notes Total contribution = Contribution margin per unit Number of units
×
Total contribution
Number of units =
Contribution margin per unit
Total Contribution (Fixed + Desired Level of profit)
=
Contribution margin per unit
` 6,00,000
= = 20,000 units
` 30
Sales volume at the desired level of profi t ` 2,40,000
According to the method of coverage, in finding out the total volume of contribution at the
desired level of profi t
= fixed cost + Desired level of profi t
The next step is to find out the volume of sales in rupees at the desired level of profi t.
= Number of units × selling price per unit
Contribution (Fixed + Desired level of profit)
=
Number of units Contribution margin per unit
Fixed cost + Desired level of profit
= × selling price per unit
Contribution Margin per unit
The next step is to find out the PV ratio
Contribution Margin
= × 100
Sales
` 30
= × 100 = 37.5%
` 80
The last step is to find out the volume of sales in rupees.
` 6,00,000
= = ` 16,00,000
37.5%
Self Assessment
Fill in the blanks:
16. Margin of safety is the difference between the actual sales and sales at .................. .
17. Sales beyond break-even volume bring in ................... .
18. A low margin of safety usually indicates high .................. .
6.9 Application of Marginal Costing
Marginal cost helps management to make decision involving consideration of cost and revenue.
Basically, marginal costing furnishes information regarding additional costs to be incurred if an
additional activity is to be taken up or the saving in costs which may be expected if an activity is
given up. This can be compared with the benefit expected from the proposed course of action and
thus the management will be able to take the appropriate decision.
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