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# Profit Planning-Application Of Marginal Costing

Posted On :  02.05.2018 11:18 pm

There are four important ways of improving the profit performance of a business: (i) increasing the volume, (ii) increasing the selling price, (iii) Decreasing variable cost, and (iv) decreasing fixed costs.

Application Of Marginal Costing

Marginal costing technique helps management in several ways.

These are discussed below:

1. Profit Planning

There are four important ways of improving the profit performance of a business: (i) increasing the volume, (ii) increasing the selling price, (iii) Decreasing variable cost, and (iv) decreasing fixed costs. Profit planning is the planning of future operations so as to attain maximum profit. The contribution ratio shows the relative profitability of various sectors of business whenever there is a change in the selling price, variable cost etc.

Illustration 4:

Two businesses, p ltd. And q ltd. Sell the same type of product in the same type of market. Their budgeted profit and loss accounts for the coming year are as under:

You are required to:

Calculate the break-even point for each business

Calculate the sales volume at which each business will earn rs.5,000 Profit.

State which business is likely to earn greater profit in conditions of:

1.       Heavy demand for the product

2.       Low demand for the product, and, briefly give your argument also.

Solution:

(I)    For Calculating The Break-Even Points, P/V Ratio Of P Ltd. And Q Ltd.,
Should Be Calculated:

In conditions of heavy demand, a concern with larger p/v ratio can earn greater profits because of greater contribution. Thus, q ltd. Is likely to earn greater profit.

In conditions of low demand, a concern with lower break-even point is likely to earn more profits because it will start earning profits at a lower level of sales. In this case, p ltd. Will start earning profits when its sales reach a level of rs.75,000, Whereas q ltd. Will start earning profits when its sales reach rs.1,05,000. Therefore, in case of low demand, break-even point should be reached as early as possible so that the concern may start earning profits.

Tags : Accounting For Managers - Management Accounting-Marginal Costing
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