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The following data are available from the records of a company
Sales Rs.60,000
Variable cost Rs.30,000
Fixed Cost RS.15,000
You are required to
i) Calculate the P/V Ratio, Break-Even Point and Margin of Safety at this level.
ii) Calculate the above with the effect of 10% increase in selling price.
iii) Calculate the above with the effect of 10% decrease in selling price.
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Answer Posted / tirlangi gireesh
To compute the P/V Ratio, Break-Even Point, and Margin of Safety, let's start with the given data:
i) At the current level:
- Sales: Rs. 60,000
- Variable Cost: Rs. 30,000
- Fixed Cost: Rs. 15,000
**1. P/V Ratio:**
P/V Ratio = (Contribution / Sales) * 100
Contribution = Sales - Variable Cost
Contribution = Rs. 60,000 - Rs. 30,000 = Rs. 30,000
P/V Ratio = (30,000 / 60,000) * 100 = 50%
**2. Break-Even Point:**
Break-Even Point (in units) = Fixed Costs / Contribution per unit
Contribution per unit = (Sales per unit - Variable cost per unit)
Contribution per unit = (60,000 / Number of units) - (30,000 / Number of units)
Let's assume the number of units sold is 'x':
Contribution per unit = (60,000 / x) - (30,000 / x) = (60,000 - 30,000) / x = Rs. 30,000 / x
Break-Even Point (in units) = 15,000 / (30,000 / x) = 0.5x units
**3. Margin of Safety:**
Margin of Safety = Actual Sales - Break-Even Sales
Margin of Safety = Rs. 60,000 - (0.5x * Rs. 60,000) = Rs. 60,000 - Rs. 30,000 = Rs. 30,000
ii) With a 10% increase in selling price:
New Sales = Rs. 60,000 + 10% of Rs. 60,000 = Rs. 66,000
Recompute P/V Ratio, Break-Even Point, and Margin of Safety using the new sales figure.
iii) With a 10% decrease in selling price:
New Sales = Rs. 60,000 - 10% of Rs. 60,000 = Rs. 54,000
Recompute P/V Ratio, Break-Even Point, and Margin of Safety using the new sales figure.
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