Contribution Margin Approach

The logic underlying the determination of the BEP under this approach can be stated by answering the following question:

How many ice-creams having a unit cost of Rs 2 and a selling price of Rs 3, must a vendor sell in a fair to recover the Rs 800 fees paid by him for all and additional of Rs 400 to install the stall? The answer can be  determined by dividing the fixed cost by the difference between the selling price (Rs .3) and cost price (Rs 2). Thus,

1

From the P/V ratio, the variable cost to volume ratio ( V/V ratio) can be easily derived:

V/V ratio = 1 – P/V ratio

In the vendor’s case, it is = 1-113 = 213 = 66.67 per cent

The V/V ratio, as the name suggests, establishes the relationship between variable costs (VC) and sales volume in amount. The direct method of its computation is:

1

Thus, P/V ratio + V/V ratio = 1 or 100 per cent

(1/3 + 213) = 1 (33.33 per cent + 66.67 per cent) = 100 per cent

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