Page 274 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 12: Marginal Costing and Profit Planning

Solution: Notes

P – AVC = 500 – 100 = 400
30,00,000
Q (Passengers) = 7,500 passengers
B
400
The break even sales value
30,00,000 30,00,000
Q B 00 = 37,50,000
1 0.8
500
12.6.3 Break-even Models and Planning for Profit

The break even point represents the volume of sales at which revenue equals expenses; that is,
at which profit is zero. The break even volume is arrived at by dividing fixed costs (costs that do
not vary with output) by the contribution margin per unit, i.e., selling price minus variable costs
(costs that vary directly with output). In certain situations, and especially in the consideration of
multi-products, break even volume is measured in terms of rupee sales value rather than units.
This is done by dividing the fixed costs or overheads by the contribution margin ratio
(contribution margin divided by selling price). Generally, in these types of computations, the
desired profit is added to the fixed costs in the numerator in order to ascertain the sales volume
necessary for producing the target profit.
If management plans for a certain profit, then revenue needed to cover all costs plus the desired
profit is

P. Q. = TR = TFC + AVC × Q + Profit
TFC + Profit
and Q B
P – AVC
TFC + TFC +
or Q B = where, p = Profit.
P – AVC ACM
TFC +
and S = P. Q =
B B AVC
1 –
P
TFC +
and % B =
(P – AVC) (Q(cap))
Thus, in the example used above,
Q = 20,000
cap
P = 100
AVC = 20
TFC = 200,000

Q = 2500 units
B
S = 250,000
B
% B = 12.5

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