Profit Planning: A business concern exists with the objective of making profits, and profits are the yardstick of its success profit planning is therefore a part of operations planning. It is the basis of planning cash, capital expenditure, and pricing. If growth and survival of a business are to be ensured, profit planning becomes an absolute necessary. Marginal costing assists profit planning through computation of contribution ratio. It enables planning of future operation in such a way as to either maximize profits pre maintain specified levels of profit. Normally, profits are affected by several factors, such as the volume of sales, marginal cost per unit, total fixed costs, selling price and sales mix etc., Hence management can achieve their profit goals by varying one or more of the above variables. Basic marginal costing equations which are useful in profit planning are as follows.

Advertisement

 

Profit volume ratio (p/w ratio). This is the ratio of contribution to sales. Symbolically it is expressed as:

 

Contribution

C/S ratio or P/V ratio = ——————————— x 100                (1)

(as a percentage)                 Sales (S)

 

 

Contribution = Sales x P/V ratio                                                               (2)

 

Contribution

Sales = ————————–                                                             (3)

P/V ratio

 

Brake Even point (BEP). This may be defined as that point of sales volume at which total revenue is equal to total costs. it is a no-profit no-less point. It may be derived from the equation (3). We may get

 

Contribution at BEP

BEP (in Rs.)              —————————–

P/V ratio

 

At BEP, the contribution will be equal to fixed cost and therefore, the formula may be restructured as follow:

 

Fixed Cost

BEP (in Rs.)  =          —————————

P/V ratio

 

Fixed Cost (F)

BEP (in units) =        —————————–

Contribution per unit

 

Margin of Safety (MS) : This represents the difference between salew or production at the selected activity, and the break-even sales or production.

 

MS  = Sales at the selected activity   — BEP

 

C

Sales at the selected activity  =   ———————-

P-V ratio

 

F

BEP  =                        ———————-

P/V ratio

 

C                                             F                                  profit (p)

MS  =  ————————- ————   ——————- = —————————

P/V ratio                                          P/V ratio                     P/V ratio

 

Where C-F = P

Margin of safety is also presented in percentages as follows:

 

MS (Sales) x 100

—————————————–

Sales at selected activity

Advertisement
The following two tabs change content below.
We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to [email protected]
0 Comments

Leave a reply

Your email address will not be published. Required fields are marked *

*

*

BMS.co.in is aimed at revolutionising Bachelors in Management Studies education, also known as BMS for students appearing for BMS exams across all states of India. We provide free study material, 100s of tutorials with worked examples, past papers, tips, tricks for BMS exams, we are creating a digital learning library.

Disclaimer: We are not affiliated with any university or government body in anyway.

©2019 BMS - Bachelor of Management Studies Community 

A Management Paradise Venture

Ask Us On WhatsApp
or

Log in with your credentials

or    

Forgot your details?

or

Create Account