Marginal Cost is the additional cost which is incurred for an additional unit manufactured & sold by an organisation beyond the regular level of activity.
Eg. Cost of producing 100 units is Rs.200,
101 units manufactured cost Rs. 202,
therefore the marginal cost is Rs.2(202-200).
Concepts
Contribution
Excess of selling price over variable cost.
It is a pool of amount from which total fixed cost will be deducted to arrive at profit or loss.Plays a very important role in decision making.
Identify the extent to which major business segments contribute to company overhead and profit.
Provide a method for your management to compare performance of business segments.
Provide a method for your management to estimate the profit potential of new business opportunities.
Profit Volume Ratio (P/v)
Expresses the relationship between contribution and sales.
Indicator of the rate at which the organisation is earning profit.
A high ratio indicates profitability , sound financial health of company’s product and vice – versa.
The P/v ratio can be improved by:
Increasing selling price ,
Reducing marginal costs by effectively using men , machines and materials.
Selling more profitable products thereby increasing the overall p/v ratio.
Break-Even Point (BEP)
BEP Sales is that Level of sales where the businessman neither makes any profit nor incurs any Loss.
The company starts earning profit when the output and sales activity crosses this point.
Facilitates determination of selling price which will give the desired profits.
It suggests to make a change in sales mix.
It enables the management to plan for the optimum utilisation of capacity.
It helps management to do inter-firm comparisons
Margin of Safety (MOS)[/B]
It is the excess of present sales value over break-even sales.
If MOS is large the business prospects are strong and vice-versa.
It could be improved by increasing selling price , which improves sales revenue or by reducing the costs
Eg. Cost of producing 100 units is Rs.200,
101 units manufactured cost Rs. 202,
therefore the marginal cost is Rs.2(202-200).
Concepts
Contribution
Excess of selling price over variable cost.
It is a pool of amount from which total fixed cost will be deducted to arrive at profit or loss.Plays a very important role in decision making.
Identify the extent to which major business segments contribute to company overhead and profit.
Provide a method for your management to compare performance of business segments.
Provide a method for your management to estimate the profit potential of new business opportunities.
Profit Volume Ratio (P/v)
Expresses the relationship between contribution and sales.
Indicator of the rate at which the organisation is earning profit.
A high ratio indicates profitability , sound financial health of company’s product and vice – versa.
The P/v ratio can be improved by:
Increasing selling price ,
Reducing marginal costs by effectively using men , machines and materials.
Selling more profitable products thereby increasing the overall p/v ratio.
Break-Even Point (BEP)
BEP Sales is that Level of sales where the businessman neither makes any profit nor incurs any Loss.
The company starts earning profit when the output and sales activity crosses this point.
Facilitates determination of selling price which will give the desired profits.
It suggests to make a change in sales mix.
It enables the management to plan for the optimum utilisation of capacity.
It helps management to do inter-firm comparisons
Margin of Safety (MOS)[/B]
It is the excess of present sales value over break-even sales.
If MOS is large the business prospects are strong and vice-versa.
It could be improved by increasing selling price , which improves sales revenue or by reducing the costs