Page 266 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 12: Marginal Costing and Profit Planning

Verification Notes

At the level of 100 units
Sales 100 × 20 2,000/
Variable Cost 100 × 10 1,000/
Contribution 100 × 10 1,000/

Fixed Cost 1,000/
Profit/Loss 0

Break Even Point (Sales Volume )

Break even point in sales can be found out by two methods.
(1) Selling Price Method
(2) PV Ratio Method.

(1) Selling Price Method: Under this method Break even sales volume in rupees is found out
through the product of Break Even Point in units and selling price per unit
BEP ( ) = Break Even Point (units) Selling price per unit

(2) PV Ratio Method: Under this method, break even sales volume in rupees can be determined
through the following ratio
Fixed Cost
BEP ( )
PV ratio

What is PV ratio?

PV ratio is Profit-Volume ratio which establishes the relationship in between the profit and
volume of sales. It a ratio normally expressed in terms of contribution towards volume of sales.
It is expressed in terms of percentage.
Utility of PV ratio:
To find out the Break Even Point in sales volume
To identify the desired level of profit at any sales volume
To determine the sales volume to earn required level of profit

To identify the better product mix among the alternatives available etc.

Sales Variable cost Contribution
Profit-Volume Ratio (PV ratio)
Sales Sales
From the above example
PV ratio at the level of 100 units
1000
PV ratio 100 50%
2000

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