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{"id":6076,"date":"2022-02-07T17:02:38","date_gmt":"2022-02-07T11:17:38","guid":{"rendered":"https:\/\/eponlinestudy.com\/?p=6076"},"modified":"2022-02-07T17:56:03","modified_gmt":"2022-02-07T12:11:03","slug":"contribution-margin-determination-of-selling-price-determination-of-profit-margin-of-safety-cost-volume-ratio","status":"publish","type":"post","link":"https:\/\/eponlinestudy.com\/contribution-margin-determination-of-selling-price-determination-of-profit-margin-of-safety-cost-volume-ratio\/","title":{"rendered":"Contribution Margin | Profit Volume Ratio | Selling Price | Profit | Margin of Safety"},"content":{"rendered":"

\"\"<\/p>\n

 <\/p>\n

\u00a0<\/p>\n

Cost Volume Profit Analysis<\/span><\/b><\/b><\/h2>\n

The cost volume profit analysis (CVPA) is also known as breakeven analysis.<\/span><\/p>\n

CVPA determines the\u00a0breakeven point\u00a0for different\u00a0sales\u00a0volumes and cost structures. <\/span><\/p>\n

It can be useful for managers for making short-term business decisions. <\/span><\/p>\n

\u00a0<\/span><\/p>\n

CVPA makes several assumptions; sales price,\u00a0fixed cost and variable cost\u00a0per unit are constant in CVPA. <\/span><\/p>\n

CVPA also manages contribution margin. <\/span><\/p>\n

The contribution margin is the difference between total sales and total variable costs. <\/span><\/p>\n

The main motive of the business is to earn the profits.<\/span><\/p>\n

For profit, the contribution margin must be exceed to total fixed costs. <\/span><\/p>\n

The contribution margin may also be calculated per unit. <\/span><\/p>\n

\u00a0<\/span><\/p>\n

Under the cost volume profit analysis, we will study the following:<\/strong><\/span><\/p>\n

Contribution margin<\/span><\/p>\n

Profit volume ratio, contribution margin ratio<\/span><\/p>\n

Determination of selling price, selling price per unit<\/span><\/p>\n

Profit calculation at different bases, realize profit<\/span><\/p>\n

Determination of profit from sales volume, budgeted sales volume<\/span><\/p>\n

Determination of profit on selling price<\/span><\/p>\n

Determination of profit on cost price<\/span><\/p>\n

Profit on margin of safety<\/span><\/p>\n

Cost volume ratio<\/span><\/p>\n

 <\/p>\n

 <\/p>\n

Under the break-even point analysis, we will study the following:<\/strong><\/span><\/p>\n

Break-even analysis under changed situation<\/span><\/p>\n

Margin of safety<\/span><\/p>\n

Required sales for desired profit<\/span><\/p>\n

Cash break-even point<\/span><\/p>\n

Application of marginal costing<\/span><\/p>\n

\u00a0<\/strong><\/p>\n

 <\/p>\n

Contribution Margin <\/span><\/b><\/b><\/h3>\n

Contribution means giving or donation. <\/span><\/p>\n

Here, contribution means to leave sometime for some purpose. <\/span><\/p>\n

Margin means profit. <\/span><\/p>\n

Therefore, contribution margin is the excess amount of sales revenue over variable cost; in other words:<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Contribution = Sales \u2013 Variable cost<\/span><\/b><\/p>\n

\u00a0<\/span><\/p>\n

The main objective of contribution margin is to recover first fixed cost then remaining amount transfers toward profit. <\/span><\/p>\n

If the contribution margin is not sufficient to cover fixed cost, then a loss occurs for the period. <\/span><\/p>\n

There are two methods to calculate contribution margin. <\/span><\/p>\n

First is unit basis and second is amount basis.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula of contribution margin on unit basis:<\/span><\/b><\/p>\n

Contribution margin per unit \u00a0\u00a0\u00a0 = SPPU \u2013 VCPU <\/span><\/p>\n

Contribution margin (in unit)\u00a0\u00a0\u00a0\u00a0 = Sales units x Contribution margin per unit<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/p>\n

\"\"<\/p>\n

Contribution margin<\/span><\/em><\/span><\/b><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/p>\n

\u00a0<\/span><\/b><\/p>\n

Income Statement<\/span><\/b><\/h3>\n

For 2,000 units <\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

Particulars <\/span><\/p>\n<\/td>\n

\n

Per Unit<\/span><\/p>\n<\/td>\n

\n

Amount<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Sales revenue <\/span><\/p>\n<\/td>\n

\n

250<\/span><\/p>\n<\/td>\n

\n

500,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Less: Variable cost <\/span><\/p>\n<\/td>\n

\n

150<\/span><\/p>\n<\/td>\n

\n

300,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0Contribution<\/span><\/p>\n<\/td>\n

\n

100<\/span><\/p>\n<\/td>\n

\n

200,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Less: Fixed cost <\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

100,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Earnings before interest and tax (EBIT)<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

100,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Less: Interest <\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

10,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Earning before tax (EBT)<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

90,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Less: Tax @ 25% (90,000 @ 25%)<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

22,500<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Earning after tax (EAT)<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

$67,500<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Formula of contribution margin on amount basis:<\/span><\/b><\/h3>\n\n\n\n\n\n
\n

Contribution margin (in amount)<\/span><\/p>\n<\/td>\n

\n

= Sales in amount x P\/V ratio<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= Sales revenue \u2013 Variable cost<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= Fixed cost + Profit \u2013 Loss<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1A<\/span><\/b><\/p>\n

The extracted data of XYZ Company is given below: <\/span><\/p>\n\n\n\n\n
\n

Selling price per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $50<\/span><\/p>\n<\/td>\n

\n

Fixed cost \u00a0\u00a0\u00a0 $140,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Variable cost per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $30<\/span><\/p>\n<\/td>\n

\n

Sales units \u00a0\u00a0 15,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Required: (1) Contribution margin per unit; (2) Contribution margin in rupees; (3) Profit for the period<\/span><\/p>\n

[Answer: (1) CMPU = $20; (2) CM = $300,000; (3) $160,000]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Contribution margin per unit (CMPU)<\/span><\/b><\/p>\n

= SPPU \u2013 VCPU <\/span><\/p>\n

= 50 \u2013 30<\/span><\/p>\n

= $20<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Contribution margin is rupees<\/span><\/b><\/p>\n

Sales amount \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 15,000 units x $50\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 750,000<\/span><\/i><\/p>\n

Variable cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 15,000 units x 30\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 450,000<\/span><\/i><\/p>\n

P\/V Ratio \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = CMPU \u00f7 SPPU \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = 20 \u00f7 50 \u00a0\u00a0\u00a0\u00a0 = 0.4 or 40% <\/span><\/i><\/p>\n

\u00a0<\/span><\/p>\n

Now, Contribution margin \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= Sales revenue \u2013 Variable cost <\/span><\/p>\n

= 750,000 \u2013 450,000<\/span><\/p>\n

= $300,000<\/span><\/p>\n

\u00a0<\/span><\/i><\/b><\/p>\n

Alternative,<\/span><\/i><\/i><\/p>\n

Contribution margin (in amount)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= Sales in amount x P\/V ratio<\/span><\/p>\n

= 750,000 x 0.4<\/span><\/p>\n

= $300,000<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit for the period<\/span><\/b><\/p>\n\n\n\n\n\n
\n

Contribution margin<\/span><\/p>\n<\/td>\n

\n

= Fixed cost + Profit<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

300,000<\/span><\/p>\n<\/td>\n

\n

= 140,000 + Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit<\/span><\/p>\n<\/td>\n

\n

= $160,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/b><\/p>\n

Alternative,<\/span><\/i><\/i><\/p>\n\n\n\n\n\n
\n

Sales<\/span><\/p>\n<\/td>\n

\n

= Variable cost + Fixed cost + Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

750,000<\/span><\/p>\n<\/td>\n

\n

= 450,000 + 140,000 + Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit<\/span><\/p>\n<\/td>\n

\n

= $160,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/i><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Click on the photo for FREE <\/span><\/b>e<\/span><\/b>Books<\/span><\/b><\/p>\n

\"\"<\/a><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Profit Volume Ratio | Contribution Margin Rati<\/span><\/b>o<\/span><\/b><\/b><\/h3>\n

(Profit volume ratio, contribution sales ratio, variable profit ratio)<\/span><\/b><\/p>\n

It shows the relationship between contribution margin and sales. <\/span><\/p>\n

When profit volume increases, the earning capacity of the company also increases. <\/span><\/p>\n

When profit volume ratio decreases, the earning capacity of the company also decreases. <\/span><\/p>\n

The percentage of contribution margin on the basis of sales is known as contribution margin ratio. <\/span><\/p>\n

Contribution margin ratio is also known profit volume ratio (P\/V Ratio). <\/span><\/p>\n

But profit volume ratio (P\/V Ratio) is not the ratio of net profit to sales revenue.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula of profit volume ratio (P\/V Ratio)<\/span><\/b><\/h3>\n\n\n\n\n\n\n\n\n\n\n
\n

P\/V ratio for amount and units <\/span><\/p>\n<\/td>\n

\n

Alternatively,<\/span><\/i> <\/i><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

= (SSPU \u2013 VCPU) \u00f7 SPPU<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

= (Fixed cost + Net profit) \u00f7\u00a0 Sales<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= CMPU \u00f7 SPPU<\/span><\/p>\n<\/td>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= Difference in profit \u00f7 Difference in sales <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= 1 \u2013 (VC \u00f7 Sales)<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

Alternatively,<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

= Change in contribution margin \u00f7 Change in sales revenue <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= Change in net profit \u00f7 Change in sales revenue <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

Or <\/span><\/p>\n<\/td>\n

\n

= 1 \u2013 Variable cost ratio <\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0
\n<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Use of profit volume ratio (P\/V Ratio)<\/span><\/strong><\/p>\n

Profit volume ratio is used for following reason:\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

Determination of selling price<\/span><\/p>\n

Find out profit at budgeted sales volume<\/span><\/p>\n

Find out profit on sales volume<\/span><\/p>\n

Find out profit on cost<\/span><\/p>\n

Cost volume ratio<\/span><\/p>\n

Break even ratio<\/span><\/p>\n

Find out margin of safety.<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b>\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1B<\/span><\/b><\/p>\n

The following information is given:<\/span><\/p>\n

Sales \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $500,000<\/span><\/p>\n

Variable cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $200,000<\/span><\/p>\n

Fixed cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $50,000<\/span><\/p>\n

Required: (1) P\/V Ratio; (2) Net profit; (3) Contribution margin if sales is $800,000<\/span><\/p>\n

[Answer: (1) 0.6 or 60%; (2) $250,000; (3) $480,000]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= (Sales \u2013 Variable cost) \u00f7<\/span> Sales<\/span><\/p>\n

= ($500,000 \u2013 $200,000) \u00f7<\/span> $500,000<\/span><\/p>\n

= 0.6 or 60%<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Net profit <\/span><\/b><\/p>\n\n\n\n\n\n
\n

Sales<\/span><\/p>\n<\/td>\n

\n

= Variable cost +<\/span> Fixed cost +<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

500,000<\/span><\/p>\n<\/td>\n

\n

= 200,000 +<\/span> 50,000 +<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit<\/span><\/p>\n<\/td>\n

\n

= $250,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/p>\n

Contribution margin if sales is $800,000<\/span><\/b><\/p>\n

= Sales in amount \u00d7<\/span> P\/V ratio<\/span><\/p>\n

= 800,000 \u00d7<\/span> 0.6<\/span><\/p>\n

= $480,000<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1C<\/span><\/b><\/p>\n

ABC Company has following information:<\/span><\/p>\n\n\n\n\n\n
\n

Particulars<\/span><\/p>\n<\/td>\n

\n

Year 2020<\/span><\/p>\n<\/td>\n

\n

Year 2021<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Sales<\/span><\/p>\n<\/td>\n

\n

$8,00,000<\/span><\/p>\n<\/td>\n

\n

$10,00,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit<\/span><\/p>\n<\/td>\n

\n

$2,00,000<\/span><\/p>\n<\/td>\n

\n

$3,00,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Fixed cost is $3,00,000 for the year 2020<\/span><\/p>\n

Required: (a) Profit volume ratio (P\/V Ratio); (b) Variable cost for year 2020; (c) Contribution margin for year 2021<\/span><\/p>\n

[Answer: (a) 0.5 or 50%; (b) $300,000; (c) $500,000;<\/span><\/i><\/p>\n

Or <\/span><\/i>\u00a0\u00a0\u00a0(a) 0.625 or 62.5%; (b) $300,000; (c) $625,000]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= Difference in profit \u00f7 Difference in sales<\/span><\/p>\n

= ($300,000 \u2013 $200,000) \u00f7<\/span> ($1000,000 \u2013 $800,000)<\/span><\/p>\n

= $100,000 \u00f7<\/span> $200,000<\/span><\/p>\n

= 0.5 or 50%<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Alternatively,<\/span><\/i><\/b><\/i><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= (Fixed cost + Profit) \u00f7<\/span> Sales<\/span><\/p>\n

= ($300,000 + $200,000) \u00f7<\/span> $800,000<\/span><\/p>\n

= $500,000 + $800,000<\/span><\/p>\n

= 0.625 or 62.5%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Variable cost for year 2020<\/span><\/b><\/p>\n\n\n\n\n\n
\n

Sales<\/span><\/p>\n<\/td>\n

\n

= Variable cost +<\/span> Fixed cost +<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

800,000<\/span><\/p>\n<\/td>\n

\n

= Variable cost +<\/span> 300,000 +<\/span> 200,000 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Variable cost<\/span><\/p>\n<\/td>\n

\n

= $300,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Contribution margin (CM) for year 2021<\/span><\/b><\/p>\n

\u00a0<\/span><\/b>= Sales in amount \u00d7<\/span> P\/V ratio<\/span><\/p>\n

= 10,00,000 \u00d7<\/span> 0.5<\/span><\/p>\n

= $500,000<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Alternatively,<\/span><\/i><\/b><\/i><\/p>\n

Contribution margin (CM) for year 2021<\/span><\/b><\/p>\n

= Sales in amount \u00d7<\/span> P\/V ratio<\/span><\/p>\n

= $10,00,000 \u00d7<\/span> 62.5%<\/span><\/p>\n

= $625,000<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

######<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

Click on the link for <\/span>YouTube<\/span><\/b> videos<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Accounting Equation<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/c89jkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Journal Entries in Nepali<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/uaakkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Journal Entries<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/8aakkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Journal Entry and Ledger<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/caakkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Ledger<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/haakkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Subsidiary Book<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/399jkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Cashbook<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/889jkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Trial Balance and Adjusted Trial Balance<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/c59jkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Bank Reconciliation Statement (BRS)<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/q59jkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Depreciation<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/ugakkz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Click on the link for <\/span>YouTube<\/span><\/b> videos chapter wise\u00a0 <\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Financial Accounting and Analysis (All videos)<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/jlersz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Accounting Process<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/mlersz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Accounting for Long Lived Assets<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/plersz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n

\n

Analysis of Financial Statement<\/span><\/p>\n<\/td>\n

\n

http:\/\/tiny.cc\/slersz<\/span><\/a><\/span><\/strong><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

######<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Determination of Selling Price and Selling Price Per Unit<\/span><\/b><\/h3>\n

Selling price is the most sensitive effect in demand, profit and breakeven point. <\/span><\/p>\n

A small point change in price may cause great change in the operating result. <\/span><\/p>\n

All the operating expenses and profit depend on selling price. <\/span><\/p>\n

Selling price is depended on various factors like requisition, competition and return on investment etc. <\/span><\/p>\n

The following factors are helpful to determine sales price:<\/span><\/p>\n

Production volume<\/span><\/p>\n

Variable cost and fixed cost <\/span><\/p>\n

Desire profit etc.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula to find out selling price<\/span><\/b><\/h3>\n\n\n\n\n\n
\n

Selling price<\/span><\/p>\n<\/td>\n

\n

= Cost of product + Mark-up profit<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Selling price per unit (SPPU)<\/span><\/p>\n<\/td>\n

\n

= Contribution \u00f7 (P\/V ratio \u00d7 Sales units) <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Or<\/span><\/p>\n<\/td>\n

\n

= Variable cost per unit \u00f7 (1 \u2013 P\/V ratio)<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/i><\/p>\n

Where: <\/span><\/i><\/p>\n

Mark-up price is depended on profit percent on sales or cost<\/span><\/i><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1D<\/span><\/b><\/p>\n

Following is the extracted data of Shiva Manufacturing Company:<\/span><\/p>\n\n\n\n\n
\n

Sales<\/span><\/p>\n<\/td>\n

\n

$800,000<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

VCPU<\/span><\/p>\n<\/td>\n

\n

$6<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

P\/V Ratio<\/span><\/p>\n<\/td>\n

\n

0.6 or 60%<\/span><\/p>\n<\/td>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n

\n

Profit (desire)<\/span><\/p>\n<\/td>\n

\n

$60,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Required: Selling price per unit<\/span><\/p>\n

\u00a0[Answer: SPPU = $15]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Selling price per unit (SPPU)<\/span><\/b><\/p>\n

= VCPU \u00f7<\/span> (1 \u2013 P\/V ratio)<\/span><\/p>\n

= $6 \u00f7<\/span> (1 \u2013 0.6)<\/span><\/p>\n

= $6 \u00f7<\/span> 0.4<\/span><\/p>\n

= $15<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit Calculation at Different Base<\/span><\/b>s<\/span><\/b><\/h3>\n

Sometimes manufacturing company wants to know the profit in advance. <\/span><\/p>\n

In other words if the manufacturing company sales goods of certain amount or units, what will be the profit? <\/span><\/p>\n

There are four methods to find out profit; they are:<\/span><\/p>\n

Determination of profit from sales volume (budgeted sales volume)<\/span><\/p>\n

Determination of profit on selling price<\/span><\/p>\n

Determination of profit on cost price<\/span><\/p>\n

Determination of profit on margin of safety<\/span><\/p>\n

\u00a0<\/span><\/p>\n

 <\/p>\n

Formula to find out profit, profit volume ratio and fixed cost<\/span><\/b><\/h3>\n\n\n\n\n\n\n\n\n
\n

P\/V Ratio = (Fixed cost + Profit) \u00f7 Sales\u00a0 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Above formula can be modified as:<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit in rupees<\/span><\/p>\n<\/td>\n

\n

= (Sales x P\/V ratio) \u2013 Fixed cost<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Fixed cost<\/span><\/p>\n<\/td>\n

\n

= (Sales x P\/V Ratio) \u2013 Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Sales<\/span><\/p>\n<\/td>\n

\n

= (Fixed cost + Desire profit) \u00f7 P\/V ratio<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Keep in Mind (KIM) <\/span><\/b><\/p>\n\n\n\n\n\n\n\n\n\n
\n

This formula can be used to find out sales, profit, profit volume ratio and fixed cost.<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n

\n

P\/V Ratio = (Fixed cost + Profit) \u00f7 Sales \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Above formula can be modified as:<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

(a) Profit in rupees<\/span><\/p>\n<\/td>\n

\n

= (Sales x P\/V ratio) \u2013<\/span> Fixed cost<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

(b) Fixed cost<\/span><\/p>\n<\/td>\n

\n

= (Sales x P\/V Ratio) \u2013<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

(c) Sales<\/span><\/p>\n<\/td>\n

\n

= (Fixed cost + Desired profit) \u00f7<\/span> P\/V ratio \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Determination of Profit from Sales Volume and Budgeted Sales Volume<\/span><\/b><\/h3>\n

Profit in rupees can be found out with help of profit volume ratio. <\/span><\/p>\n

For this purpose, these amounts should be given in the question (pre-determined):<\/b><\/span><\/p>\n

Sales amount (units x SPPU)<\/span><\/p>\n

Variable cost <\/span><\/p>\n

Fixed cost <\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula to find out profit from sales and budgeted sales <\/span><\/b><\/h3>\n\n\n\n\n
\n

Profit<\/span><\/p>\n<\/td>\n

\n

= (Sales x P\/V ratio) \u2013 Fixed cost<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Or<\/span><\/p>\n<\/td>\n

\n

= Sales \u2013 Variable cost \u2013 Fixed cost<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1E<\/span><\/b><\/p>\n

Following data is given from Ultra Manufacturing Company for one month:<\/span><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Sales units \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000<\/span><\/p>\n

Selling price per unit $20<\/span><\/p>\n

Variable cost per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $8<\/span><\/p>\n

Fixed cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $50,000<\/span><\/p>\n

Required: (a) P\/V Ratio; (b) Profit for the month <\/span><\/p>\n

[Answer: P\/V ratio = 60%; Profit = $190,000] <\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= (SPPU \u2013 VCPU) \u00f7 SPPU<\/span><\/p>\n

= ($20 \u2013 $8) \u00f7 $20<\/span><\/p>\n

= $8 \u00f7 20 <\/span><\/p>\n

= 0.6 or 60%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit for the month<\/span><\/b><\/p>\n

Sales = 20,000 units \u00d7 $20 = $400,000<\/span><\/i><\/p>\n

VC = 20,000 units \u00d7 $8 = $160,000<\/span><\/i><\/p>\n

\u00a0<\/span><\/b><\/p>\n\n\n\n\n\n\n\n\n
\n

P\/V Ratio<\/span><\/p>\n<\/td>\n

\n

= (Fixed cost + Profit) \u00f7 Sales <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

0.6<\/span><\/p>\n<\/td>\n

\n

= ($50,000 + Profit) \u00f7 $400,000 <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

$400,000 x 0.6<\/span><\/p>\n<\/td>\n

\n

= $50,000 + Profit<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

$240,000<\/span><\/p>\n<\/td>\n

\n

= $50,000 + Profit<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

$240,000 \u2013 $50,000<\/span><\/p>\n<\/td>\n

\n

= Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit<\/span><\/p>\n<\/td>\n

\n

= $190,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/i><\/p>\n

Alternatives,<\/span><\/i><\/i><\/p>\n\n\n\n\n\n\n\n\n\n\n\n
\n

Sales<\/span><\/i><\/p>\n<\/td>\n

\n

= Fixed cost + Variable cost + Profit <\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 400,000<\/span><\/i><\/p>\n<\/td>\n

\n

= 50,000 \u00a0\u00a0\u00a0\u00a0\u00a0 + 160,000 + Profit <\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Profit<\/span><\/i><\/p>\n<\/td>\n

\n

= $190,000<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

Or <\/span><\/i><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

Profit (in rupees)\u00a0\u00a0 <\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

= (Sales x P\/V ratio) \u2013 Fixed cost<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

= 400,000 x 0.6 \u2013 50,000<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

= 240,000 \u2013 50,000<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n

\n

= $190,000<\/span><\/i><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/i><\/p>\n

\u00a0<\/span><\/i><\/p>\n

\u00a0<\/span><\/p>\n

Determination of Profit on Selling Price<\/span><\/b><\/h3>\n

Sometime manufacturing company determines profit on selling price. <\/span><\/p>\n

Profit volume ratio is used for it. <\/span><\/p>\n

This profit can be calculated from unit basis and cash basis.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula to find out profit on selling price <\/span><\/b><\/h3>\n\n\n\n\n
\n

Profit (in rupees from units)<\/span><\/p>\n<\/td>\n

\n

= (Actual sales units \u2013 BEP units) \u00d7 Contribution units<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit (in rupees from rupees)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n<\/td>\n

\n

= (Actual sales \u2013 BEP sales) \u00d7 P\/V ratio<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1F<\/span><\/b><\/p>\n

The extracted data are taken from AL Rice Mill for one month:<\/span><\/p>\n

Sales \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000 kg<\/span><\/p>\n

Selling price per kg \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $30<\/span><\/p>\n

Variable cost per kg \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $20<\/span><\/p>\n

Break even sales\u00a0\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10,000 kg<\/span><\/p>\n

Required: (1) Actual sales; (2) BEP sales; (3) P\/V Ratio; (4) Profit for the month from units and amount; (5) Fixed cost per month<\/span><\/p>\n

[Answer: (1) $600,000; (2) $300,000; <\/span><\/i><\/p>\n

(3) 1\/3 or 0.3333; (4) $100,000; (5) $60,000]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Given and working note: <\/span><\/i><\/p>\n

Contribution per unit\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/i><\/p>\n

= SPPU \u2013 VCPU \u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/i><\/p>\n

= 30 \u2013 20\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/i><\/p>\n

= $10<\/span><\/span><\/i><\/p>\n

\u00a0<\/span><\/i><\/p>\n

Actual sales<\/span><\/b><\/p>\n

= Sales units \u00d7<\/span> SPPU<\/span><\/p>\n

= 20,000 \u00d7<\/span> $30<\/span><\/p>\n

= $600,000 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

BEP sales<\/span><\/b><\/p>\n

= BEP sales units \u00d7<\/span> SPPU<\/span><\/p>\n

= 10,000 \u00d7<\/span> $30<\/span><\/p>\n

= $300,000 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= (S \u2013 V) \u00f7<\/span> S<\/span><\/p>\n

= ($30 \u2013 $20) \u00f7<\/span> $30<\/span><\/p>\n

= $10 \u00f7<\/span> 30<\/span><\/p>\n

= 1\/3 <\/span>or 0.3333 or 33.33%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit for the month<\/span><\/b><\/p>\n

Profit (from units)\u00a0 <\/span><\/p>\n

= (Actual sales units \u2013 BEP sales units) \u00d7<\/span> Contribution units<\/span><\/p>\n

= (20,000 \u2013 10,000) \u00d7<\/span> $10<\/span><\/span><\/p>\n

= 10,000 \u00d7<\/span> 10<\/span><\/p>\n

= $100,000 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit (from amount)<\/span><\/b><\/p>\n

= (Actual sales \u2013 BEP sales) x P\/V ratio<\/span><\/p>\n

= ($600,000 \u2013 $300,000) x 1\/3<\/span><\/span><\/p>\n

= 300,000 x 1\/3<\/span><\/p>\n

= $100,000<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Fixed cost <\/span><\/b><\/p>\n\n\n\n\n\n\n
\n

Sales<\/span><\/p>\n<\/td>\n

\n

= Variable cost +<\/span> Fixed cost +<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

600,000<\/span><\/p>\n<\/td>\n

\n

= (22,000 kg x $20) +<\/span> Fixed cost +<\/span> 100,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

600,000<\/span><\/p>\n<\/td>\n

\n

= 440,000 +<\/span> fixed cost +<\/span> 100,000<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Fixed cost<\/span><\/p>\n<\/td>\n

\n

= $60,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Determination of Profit on Cost Pric<\/span><\/b>e<\/span><\/b><\/h3>\n

Most of the companies charge profit on cost. <\/span><\/p>\n

For this purpose variable cost, variable cost ratio and profit volume ratio are needed. <\/span><\/p>\n

Fixed cost is ignored under this method while calculating profit.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula to find out profit on cost price <\/span><\/b><\/h3>\n

Variable cost ratio = 1 \u2013 P\/V ratio<\/span><\/i><\/p>\n

Again,<\/span><\/i><\/p>\n

Profit = (Variable cost x P\/V ratio) \u00f7 Variable cost ratio <\/span><\/p>\n

\u00a0
\n<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1G<\/span><\/b><\/p>\n

BS Industries (P) Ltd has following information:<\/span><\/p>\n

Sales \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 20,000 units <\/span><\/p>\n

Selling price per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $40<\/span><\/p>\n

Variable cost per unit \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $18<\/span><\/p>\n

Required: (a) P\/V Ratio; (b) Variable cost ratio; (c) Profit per unit <\/span><\/p>\n

[Answer: (a) 0.55; (b) 0.45; (c) $22]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= (S \u2013 V) \u00f7<\/span> S<\/span><\/p>\n

= ($40 \u2013 $18) \u00f7<\/span> $40<\/span><\/p>\n

= $22 \u00f7<\/span> $40<\/span><\/p>\n

= 0.55 or 55%<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Variable cost ratio (V\/C ratio)<\/span><\/b><\/p>\n

= 1 \u2013<\/span> P\/V Ratio \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= 1 \u2013<\/span> 0.55\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= 0.45 or 45%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit per unit <\/span><\/b><\/p>\n

= (Variable cost x P\/V ratio) \u00f7<\/span> Variable cost ratio <\/span><\/p>\n

= ($18 x 0.55) \u00f7<\/span> 0.45<\/span><\/p>\n

= $22 <\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Profit on Margin of Safety<\/span><\/b><\/h3>\n

Sometime, manufacturing company charges profit on margin of safety basis.<\/span><\/p>\n

In such a condition, profit volume ratio is multiplied to margin of safety. <\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula to fund out profit on marginal safety <\/span><\/b><\/h3>\n

Profit (on margin of safety) \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = Margin of safety \u00d7 P\/V ratio<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1H<\/span><\/b><\/p>\n

The extracted data are taken from BD Corporation for one month: <\/span><\/p>\n

Sales \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $12,00,000<\/span><\/p>\n

Variable cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $800,000<\/span><\/p>\n

Margin of safety\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $900,000 <\/span><\/p>\n

Required: (1) P\/V Ratio; (2) Profit from margin of safety<\/span><\/p>\n

[Answer: (1) 1\/3; $300,000]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Profit volume ratio (P\/V Ratio)<\/span><\/b><\/p>\n

= (S \u2013 V) \u00f7<\/span> S<\/span><\/p>\n

= ($12,00,000 \u2013 $8,00,000) \u00f7<\/span> $12,00,000<\/span><\/p>\n

= $4,00,000 \u00f7<\/span> $12,00,000<\/span><\/p>\n

= 1\/3 or 0.333<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Profit from margin of safety<\/span><\/b><\/p>\n

= Margin of safety \u00d7<\/span> P\/V Ratio\u00a0\u00a0 <\/span><\/p>\n

= 900,000 \u00d7<\/span> 1\/3\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= $300,000<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Cost Volume Rati<\/span><\/b>o<\/span><\/b><\/h3>\n

All manufacturing company or organizations have to do expenses. <\/span><\/p>\n

These expenses are related to factory, office, administrative, selling and distribution. <\/span><\/p>\n

The main purpose of organization is to earn profit. <\/span><\/p>\n

To earn profit, company does expenses.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

There are mainly three types of cost\/expenses. <\/span><\/p>\n

They are variable cost, semi-variable cost and fixed cost. <\/span><\/p>\n

These costs are incurred for sales revenue or service revenue.<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Formula related to cost volume ratio \u00a0<\/span><\/b><\/h3>\n\n\n\n\n\n\n
\n

Cost volume ratio \u00a0\u00a0\u00a0\u00a0 = 1 \u2212<\/span> profit volume ratio<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Variable cost ratio\u00a0\u00a0\u00a0\u00a0 = Variable cost \u00f7<\/span> Sales <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Fixed cost ratio\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = Fixed cost \u00f7<\/span> Sales <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Total cost ratio \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 = Total cost \u00f7<\/span> Sales <\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Here, Amount = Rs = $ = \u00a3 = \u20ac = <\/span>\u20b9<\/span> = Af = <\/span>\u09f3 <\/span>= Nu = Rf = <\/span>\u0dbb\u0dd4<\/span> = Br = P = Birr = Currency of your country<\/span>\u00a0 <\/span><\/p>\n

PROBLEM: 1I<\/span><\/b><\/p>\n

BD Cottage Industries has following extracted on 31st<\/sup> December 2021:<\/span><\/p>\n

Variable cost \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $400,000<\/span><\/p>\n

Fixed cost \u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $300,000<\/span><\/p>\n

Sales \u00a0 \u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $10,00,000<\/span><\/p>\n

Required: (a) Profit volume ratio; (b) Cost volume ratio; (c) Variable cost ratio; (d) Fixed cost ratio; (e) Total cost ratio; <\/span><\/p>\n

(f) Profit for the period<\/span><\/p>\n

[Answer: (a) 60%; (b) 40%; (c) 40%; (d) 30%; (e) 70%; (f) $300,000]<\/span><\/i><\/p>\n

SOLUTION: <\/span><\/b><\/p>\n

Profit volume ratio (P\/V ratio)<\/span><\/b><\/p>\n

= (Sales \u2013 Variable cost) \u00f7<\/span> Sales <\/span><\/p>\n

= ($10,00,000 \u2013 $4,00,000) \u00f7<\/span> $10,00,000 \u00a0<\/span><\/p>\n

= $6,00,000 \u00f7<\/span> $10,00,000<\/span><\/p>\n

= 0.6 or 60%<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Cost volume ratio (C\/V ratio)<\/span><\/b><\/p>\n

= 1 \u2013<\/span> P\/V ratio\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= 1 \u2013<\/span> 0.6\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= 0.4 or 40%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Variable cost ratio (V\/C ratio)<\/span><\/b><\/p>\n

= Variable cost \u00f7<\/span> Sales\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= $4,00,000) \u00f7<\/span> $10,00,000 \u00a0<\/span><\/p>\n

= 0.4 or 40%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Fixed cost ratio (F\/C ratio)<\/span><\/b><\/p>\n

= Fixed cost \u00f7<\/span> Sales\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/p>\n

= $3,00,000 \u00f7<\/span> $10,00,000<\/span><\/p>\n

= 0.3 or 30%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

Total cost ratio (T\/C ratio)<\/span><\/b><\/p>\n

= Total cost \u00f7<\/span> Sales<\/span><\/p>\n

= $7,00,000 \u00f7<\/span> $10,00,000<\/span><\/p>\n

= 0.7 or 70%<\/span><\/p>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Profit for the year <\/span><\/b><\/p>\n\n\n\n\n\n
\n

Sales<\/span><\/p>\n<\/td>\n

\n

= Variable cost +<\/span> Fixed cost +<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

10,00,000<\/span><\/p>\n<\/td>\n

\n

= 400,000 +<\/span> 300,000 +<\/span> Profit <\/span><\/p>\n<\/td>\n<\/tr>\n

\n

Profit<\/span><\/p>\n<\/td>\n

\n

= $300,000<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

\u00a0<\/span><\/p>\n

\u00a0<\/span><\/p>\n

EP <\/span>Online <\/span>Study <\/span><\/p>\n

Thank you for investing your time.<\/span><\/i><\/p>\n

Please comment on the article.<\/span><\/i><\/p>\n

You can help us by sharing this post on your social media platform.<\/span><\/i><\/p>\n

\u00a0<\/span><\/p>\n

Jay G<\/span>o<\/span>o<\/span>g<\/span>l<\/span>e<\/span>, Jay YouTube<\/span>, Jay Social Media<\/span><\/span><\/p>\n

\u091c\u092f<\/span> \u0917\u0942<\/span>\u0917<\/span>\u0932<\/span>.<\/span> \u091c\u092f<\/span> \u092f\u0941\u091f\u094d\u092f\u0941\u092c<\/span>,<\/span> \u091c\u092f<\/span> \u0938\u094b\u0936\u0932<\/span> \u092e\u0940\u0921\u093f\u092f\u093e <\/span><\/p>\n

\u00a0<\/span><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

  \u00a0 Cost Volume Profit Analysis The cost volume profit analysis (CVPA) is also known as breakeven analysis. CVPA determines the\u00a0breakeven point\u00a0for different\u00a0sales\u00a0volumes and cost structures. It can be useful for managers for making short-term business decisions. \u00a0 CVPA makes several assumptions; sales price,\u00a0fixed cost and variable cost\u00a0per unit are constant in CVPA. CVPA also […]<\/p>\n","protected":false},"author":19997,"featured_media":6078,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2306,3124,11],"tags":[3139,3126,3132,3136,3134,3135,3138,3137,3133,3140],"writers":[144],"yoast_head":"\nContribution Margin | Profit Volume Ratio | Selling Price | Profit | Margin of Safety<\/title>\n<meta name=\"description\" content=\"Contribution Margin Ratio | Profit Volume Ratio | Determination of Selling Price | Determination of Profit | Margin of Safety | Cost volume ratio\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/eponlinestudy.com\/contribution-margin-determination-of-selling-price-determination-of-profit-margin-of-safety-cost-volume-ratio\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" 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