# Marginal Costing | Practical Questions and Solutions Written by True Tamplin, BSc, CEPF®
Updated on October 7, 2021

## Question 1

A company produces 500 units at a variable cost of \$200 per unit. The price is \$250 per unit and there are fixed expenses of \$12,000 per month.

For this question, calculate Break-even point in terms of both units and sales. Also, show the profit at 90% capacity.

### Solution

(i) BEP (units) = Fixed Expenses / C
= (\$542,000 + \$252,000) / 6
= 792,000 / 6 = 132,000 units
BEP (Sales) = 132,000 x 20 = \$2640,000

(ii) Sales for examining profit = \$60,000
BEP (units) = (Fixed Exp. + Desired Profit) / C
= (792,000 + 60,000) / 6
= 852,000 / 6
= 142,000 units
BEP Sales = 142,000 x 20 = \$2,840,000

## Question 2

For a company, sales are \$80,000, variable costs are \$4,000, and fixed costs are \$4,000. Calculate the following: (i) PVR, (ii) BEP (Sales), (iii) Margin of Safety, and (iv) Profit.

### Solution

(i) PVR = (C / \$) x 100 = (4,000 x 100) / 8,000 = 50%
C = 8,000 – (4,000) = \$4,000

(ii) BEP (Sales) = Fixed Cost / PVR
= (4,000 x 100) / 50
= \$8,000

(iii) MOS = Actual Sales – BEP Sales
= 8,000 – 8,000
= Nil

OR

MOS = Profit / PVR = 0 / 8,000 = Nil
(iv) Profit = Sales – Variable Cost – Fixed Cost
= 8,000 – 4,000 – 4,000
= Nil

## Question 3

From the following information, find out PVR and sales at BEP.

• Variable cost per unit = \$15
• Sales per unit = \$20
• Fixed expenses = \$54,000

What should the new selling price be if BEP for units is reduced to 6,000 units?

PVR = (C x 100) / S

Thus,
= ((20 – 15) x 100) / 20
PVR = 25%
BEP (Sales) = Fixed expenses / PVR
= (54,000 x 100) / 25
= \$216,000

(iii) New selling price if BEP is brought down to 6,000 units:
New SP = (Fixed Exp. + Variable Cost ) / New BEP (units)
= (54,000 + 15) / 6,000
= \$24

## Question 4

Calculate (i) PVR, (ii) BEP, and (iii) Margin of Safety based on the following information:

• Sales = \$100,000
• Total cost = \$80,000
• Fixed cost = \$20,000
• Net profit = 80,000

### Solution

(i) PVR = (C x 100) / S
C = Sales – Variable Cost
100,000 – 60,000 = 40,000
Variable cost = Sales – Profit – Fixed Cost
(100,000 – 20,000 – 20,000) = 60,000
Thus,
PVR =  (C / S) x 100
= (40,000 / 100,000) x 100
= 40%

(ii) BEP = Fixed Exp. / PVR
= 20,000 / 40%
= (20,000 x 100) / 40
= \$50,000

(iii) Margin of Safety = Present Sales – Break-Even Sales
= 1,00,000 – 50,000
= 50,000
Profitability = (40 x 50,000) / 100
= \$20,000

## Question 5

The National Company has just been formed. They have a patented process that will make them the sole suppliers of Product A.

During the first year, the capacity of their plant will be 9,000 units, and this is the amount they will be able to sell. Their costs are:

• Direct labor = \$15 per unit
• Raw materials = \$5 per unit
• Other variable costs = \$10 per unit
• Fixed costs = \$240,000

There are two parts to this question:

(a) If the company aims to make a profit of \$210,000 for the first year, what should the selling price be? What is the contribution margin at this price?

(b) If, at the end of first year, the company aims to increase its volume, how many units will they have to sell to realize a profit of \$760,000 given the following conditions?

• An increase of \$100,000 in the annual fixed costs will increase their capacity to 50,000 units
• Selling price is at \$70 per unit and no other costs change
• \$500,000 is invested in advertising

### Solution

(a) Calculation of selling price
Direct labor (9,000 x 15) = \$135,000
Raw materials (9,000 x 5) = \$45,000
Other variable costs (9,000 x 10) = \$90,000
Total variable costs (PU 30) = 270,000
Profit = 210,000
Total sales value of 9,000 units @ \$80 per unit = 720,000

(b) Sales in units
(Fixed expenses + Desired profit) / (Sales – Variable cost)
Thus,
Fixed Expenses = 2,40,000 (given) + 1,00,000 (extra) + 50,000 (advertisement cost)
= 840,000 + Desired Profit (760,000) = \$1,600,000
= 1,600,000 / (70 – 30) = 40,000 units

## About the AuthorTrue Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

### 4 thoughts on “Marginal Costing | Practical Questions and Solutions”

1. 2019 2020
sales 500000 ?
p/v ratio 40% 25%
Mos 25% 10%
How do you calculate sales of the year 2020?

2. 2019
sales 500000
p/v ratio 40%
Mos 25%
2020
sales ?
p/v ratio 25%
mos 10%
How do you calculate sales of the year 2020?