Marginal Costing Analysis
Marginal costing analysis is a technique that can be used to analyze the relationship between costs, volume, and profit. Marginal costing analysis is based on the concept of marginal costs, which are the incremental costs that are incurred when one additional unit of output is produced.
P/V Ratio and its Significance
The P/V ratio, or profit-volume ratio, is a measure of the sensitivity of profit to changes in volume. The P/V ratio is calculated by dividing the contribution margin by the total sales. The contribution margin is the difference between the selling price and the variable cost per unit.
The P/V ratio is significant because it can be used to estimate the impact of changes in volume on profit. For example, if the P/V ratio is 20%, then a 10% increase in volume will lead to a 2% increase in profit.
Margin of Safety
The margin of safety is the difference between the actual sales and the breakeven sales. The breakeven sales is the level of sales at which a business will make neither a profit nor a loss.
The margin of safety is significant because it measures the risk of a business making a loss. A high margin of safety indicates that a business is less likely to make a loss, while a low margin of safety indicates that a business is more likely to make a loss.