Reasons for Decline in Profit:

(i) Increase in FC and

(ii) Decline in PV ratio.

PV ratio declines for either or both of the following two reasons

(i) Increase in Unit VC
(ii) Decrease in SP.

TRY YOURSELF Q. No.10 The following information is given by Z Ltd:

Margin of safety Rs.1,87,500
Total cost Rs.1,93,750
Margin of safety 7500 units
Breakeven sales 2500 units
Calculate profit, PV ratio, Breakeven sales in rupees, and fixed cost. (CA FINAL Nov. 2010)
Answer :
SP = Rs.1,87,500 / 7,500 units = Rs.25
Breakeven sales in Rupees: 25x2,500 = Rs. 62,500
Total sales = 10,000units @ Rs.25 i.e., Rs.2,50,000
Total profit = total sales – total cost = 2,50,000 – 193750 = Rs.56,250
P V Ratio = Profit/Margin of Safety = 56250/187500 = 30%
B E Sales = Fixed Cost/PV Ratio
62500 = Fixed cost /0.30
FC = Rs.18,750

Q.NO.11

A Ltd makes and sells a single product. The trading results for year 2007 ate given below:
(Rs. Thousands)
Sales 3,000
Material 900
Labour 600
Overheads 900
Total cost 2400

For the year 2008, the following are expected:

 Reduction in sale price by 10%
 Increase in quantity sold : 50%
 Inflation of material cost : 8%
 Price inflation in variable overhead by 6%
 Reduction in fixed overheads expenses by 25%
 It is also known that :
 In 2006 overhead expenditure totaled Rs.8,00,000
 Total overhead cost inflation for 2007 has been 5% more than 2006
 Production and sales volumes have been 25% higher in 2007 than in 2006

High and low method is used by the company to estimate overhead expenditure.
You are required to:
(i) Prepare a statement showing the estimated trading results for 2008.
(ii) Calculate the Breakeven points for 2007 and 2008.
(iii) Comment on the BEPs and profits for the years 2007 and 2008.
(CA FINAL May 2008)
Answer
Working note :
Let VO in 2006 = X Let FO i