This action might not be possible to undo. Are you sure you want to continue?
1 INTRODUCTION OF THE STUDY Running a successful small business requires adept navigation of the many choices created by an ever changing market place. Cost Volume Profit Analysis (CVPA) is an effective tool that can help its user answer important questions you may have about pricing your products and services, whether or not to invest in additional capital items, and which products and services to emphasize. Fixed Semi-Variable and Variable Costs: Before the CVPA can be used, fixed, semi-variable and variable costs must be determined. Determining these costs is a very useful tool in itself, but that's another white paper. Fixed costs are those costs that your business incurs regardless of sales volume. These are costs such as rent, insurance, and annual business licensing fees. Sales volume, not exceeding your current capacity, has no effect. Variable costs are those costs that are directly affected by sales volume. These include items such as cost-of-goods sold, sales commissions, and travel expenses, if you are a service provider that travels as a result of service provision. Semi-variable costs, as you have determined by now, are those costs that increase with sales volume but not directly as with variable costs. An example of a semi-variable cost for an auto body shop might be equipment maintenance expense. At some point, equipment begins to break down if not maintained at a level consistent with increased use. Therefore, in order to avoid equipment breakdown due to hyper-use, the business owner must spend additional funds on maintaining equipment. Break-Even: There are several benefits to using CVPA. First, it shows what the break-even point, in units or dollars, for a given product or service is, given a specified sales price. Break-even is the point at which sales revenue covers all fixed costs for the year plus all variable costs up to that sales point. . CVP analysis can be used for analyzing price sensitivity.
Contribution Margin Determining the contribution margin for your business is an additional benefit of CVPA. Contribution margin is simply the amount of each sales dollar left after all variable costs have been covered. It is that portion of the sales dollar that can be devoted to covering fixed costs. Knowing your overall contribution margin is beneficial because it can be compared to prior periods to determine if it is trending positively or negatively. Additionally, contribution margin analysis can be applied to individual products, product lines, services, or service lines. Knowing the contribution margin of a particular product or service can help determine if carrying that product or performing that service over another is the best decision. Moreover, understanding contribution margin is very helpful in developing the best pricing strategy for your business. One final benefit to knowing how to determine contribution margin is that it can point out your most profitable products or services, even though sales may indicate something different.
Operating Leverage Operating leverage is the degree to which a business uses fixed costs to generate profit. The greater the degree of fixed cost reliance, the greater the increase in profits during a sales up-trend and the greater the loss in a sales down-trend. As fixed assets usually carry fixed costs, financed payments for the equipment, additional insurance, etc., investing in additional equipment is something our auto body shop owner will want to seriously consider if the up-ward sales trend she is experiencing is something she believes to a be long-term phenomenon. If she believes the sales up-trend to indeed be long-term, then investing in additional fixed assets may be just the thing for her to do. CVPA is one tool our auto body shop owner can use to help her determine what to do in this situation. By using her break-even model and considering contribution margins, she
can perform sensitivity analyses to help her determine whether or not to increase her operating leverage in an effort to take advantage of a sales up-trend. Summary: CVPA is a tool that can be used to help answer questions you may have about pricing your products and services, whether or not to invest in additional capital items, and which products and services to emphasize. While there is no one magic bullet, CVPA is a nice tool to have in your business analysis bag to help you make good decisions when answering these types of questions.
1.2 NEED OF THE STUDY The study is carried out mainly to make profit planning by forecasting activity level in order to gain or maintain specified amount of profit. It also present cost data for control purposes. It also facilitates the company to take make or buy decision. It also helps to analyze the profitability of a multiple-product firm with a constant sales mix. This analysis is important to select the best alternative method yielding highest contribution. This study helps the company to determine changes in profit due to changes in sales volume. Sales required to meet proposed expenditure also determined in this study. CVP analysis is often used to develop an understanding of the
overall operations of an organization.
To analyze how the change in selling price and change in cost affect To find out the breakeven point of sales and margin of safety that helps To predict profit over a wide range of volume. 3. To estimate the volume to be produced for obtaining a desired profit the profit position of the company. Secondary objectives 1. 5 . 4.3 OBJECTIVES OF THE STUDY Primary objective To study the Cost-Volume-Profit analysis of WABCO-TVS (INDIA) LIMITED. 2.1. To determine the optimum mix of the company. in taking policy decision like reduction in price to face the competitors. 5.
these calculation cover the major areas like contribution margin.. This study assists in evaluation of performance for the purpose of control and also assists in formulating policies by showing the effect of different price structure on costs and profits. etc. The analysis done are Breakeven analysis. This would be useful for company to make new strategy to compete in the market by adopting various controlling techniques in the process of manufacturing. profit volume. 6 . margin of safety. profit. This study was conducted on cost volume profit analysis and on each and every variables.1. This study to help to forecast profit fairly and accurately as it is essential to know the relationship between profits and costs.4 SCOPE OF THE STUDY This study is performed by using the annuity report of WABCO-TVS(INDIA) LTD.
Caterpillar. In the 1950’s the arrival of Telco. The US is the world’s biggest auto component market. The component industry started out small in the 1940’s supplying components to Hindustan Motors and premier automobiles. finished.1 INDUSTRY PROFILE The global auto component industry could be the next big success story after software. The automotive component industry manufactures a wide range of parts including casting. Boom time for auto components industry started with the arrival of India’s “people’s car” . Export figures also climbed. There are around 400 major players in the auto component sector.General Motors (GM). It virtually gave birth to a variety of new age auto component manufacturers who manufactured components that combined the best to technology with quality. pharmaceuticals. International Truck and Engine Corporation and Cummins. The size of the global auto component industry is approximately $1 trillion. Bajaj. In the 1980’s with Maruti. Low costs of labor and raw materials resulted in exports taking a quantum jump. 7 .the Maruthi. the growth suddenly accelerated. the path of India auto component industry took an upswing. Delphi Corporation. Currently. and subassemblies for all types of vehicle products in India. As Maruthi became India’s best selling car. and Mahindra & Mahindra led to steadily increasing production.2. assemblies. semi-finished components. In 2002 it imported auto component worth $69 bn. BPO and textiles. Evolution of Indian auto component industry The Indian auto component Industry has always been rising over the Indian Automobile industry. The new car required components that would adhere to its stringent quality standards. the automotive component industry is an important sector of the Indian economy and a major foreign exchange earner for the country. forging. The leading auto component manufacturers (OEM) in the world are Ford Motors .
Global trends and challenges The World trade and investment in automotive and parts has become liberalized with tariffs going down internationally. and the advantage shall go to global manufacturers who shall have local capabilities in India. Local suppliers are being linked into the global supply chain and they have to compete with regional players. India’s automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently employs about 250000 persons. which can eliminate the local auto parts manufacturers. There are certain strengths of the industry that attracts the global buyers and there are certain weaknesses. Auto component manufacturers supply to two kinds of buyers-original equipment manufacturers (OEM) and the replacement market is characterized by the presence of several small-scale suppliers who score over the organized players in terms of excise duty exemptions and lower overheads. This labor cost advantage translates to overall cost advantages of 208 . The auto components industry responded with huge capacity expansion and modernization programs. Rapid changes in information and communication technology are reshaping the way auto industry is doing business The globalization offers a great opportunity for the Indian auto component manufacturers. MNC assembler source parts from cheapest quality source in any part of the world. Indian auto component industry strengths The component industry in India has significant cost advantages primarily due to lower labor cost in India. and General Motors to Daewoo few years ago presented a world of opportunity for the industry. Ford.The influx of foreign auto majors ranging from Mercedes Benz. Growth in the commercial vehicle and the passenger car segments has been 20 percent year on year and 40 percent year on year from year 2000 onwards .
the component business in India was estimated at $2. Expanding global markets 6. The replacement market accounted for the remaining 40 percent. Growing entrepreneurship 4.30% over the counter parts from other developed despite lower labor productivity. technology and investment in critical process. The effect is likely to be nullified as the average life span of 9 . In 1999. Of this. Since tier I suppliers control the global component industry the cost advantages should be leveraged into attracting these global players to set up manufacturing base in India. This is a high degree of correlation between the automotive vehicle and the automotive component industry sales. Transnationalisation of world economy 7. Growing domestic market 5.81 bn. Economic liberalization Evolving industry structure The Indian automotive vehicle market has recovered from the downturn and is expected to witness a healthy growth at least for the next 3 years. original equipment(OE) had a share of 60 percent. the aftermarket is expected to growth faster than OE component market. The growth in the component market is likely to be driven by an important in the demand for automotive vehicles. Trained and killed human resources 2. quality. This low cost labor is not a factor for long-term competitiveness. This is primarily because the old vehicle population is registering a significant rise. are necessary to sustain the cost competitiveness. Wide industry base manufacturing 97% of component required 3. In the next few years. and improvement in scale. which are 1. Investment by non-resident Indians 8. In spite of several handicaps there are a number of favorable factors.
640 crores. Production While analyzing 54 automotive country markets.17174 crores compared to Rs. the ratio is likely to stabilize as in the case of developed markets. between 1995-98. growing by over 28% in nominal terms. the output of the auto component industry is expected to be around Rs.auto parts is expected to go up due to improved quality of components. it is found that 96% of global vehicle sales and 99% of global vehicles production have been made.06% by recording a production of the order of Rs. 36300 crores. 10 . Subsequently. During the year 2004-05. The production during 2000-2001 was of the order Rs. the sector has recorded a growth of 25. keeping in line with the decline in the growth rate in the automotive as a whole. Indian auto component industry is wide(over 420 firms in the organized sector producing practically all components and more than 10000 firms in small unorganized sector. auto components industry has also registered slow growth during last 2-3 years.30. in tierized format) and has been one of the fastest growing segments of automotive industry. During the year 2003-2004. Growth of automobile component industries The growth of automobile components industries is closely linked to the growth of automotive industry as substantial quantity produced is supplied by auto components industry to original equipment manufactures (OEMs).1999-2000 registering growth of 5%.
But it has acquired all the shares from TVS and now it has 75% shares and remaining to the public.2 COMPANY PROFILE WABCO-TVS (INDIA) Limited was a joint venture between TVS Group and WABCO Vehicle Control System. With a commitment of total satisfaction to customers. cost and timely delivery of products. the company has achieved a share of business in the OE (Original Equipment) segment greater than 85% and a market share in the after-market greater than 75%. WABCO-TVS (INDIA) Limited has pioneered the manufacture of air-assisted and air brake systems for commercial vehicles in INDIA. It was formerly known as Sundaram Clayton Limited. WTIL have plants at Ambattur-Chennai. Brakes Division. UK. Comprehensive TQM (Total Quality Management) practices enable WABCO-TVS in being a competitive world-class manufacturer in terms of quality. The Research and Development center is full-fledged and state-of-the-art to facilitate design. WTIL’s brakes division registered a turnover of $135 million in 2007-2008. in collaboration with Clayton Dewandre Holdings plc. development. simulation and testing. It began its operations in Chennai in 1962. Jamshedpur and mahindra world city-Chennai adopting rigorous TQM processes and standards. 11 . A team of professional engineers powered with the best production facilities gear up to translate design competence into excellence in manufacturing through concepts such as cellular manufacturing and operation standards TQM WABCO-TVS have a solid foundation in its domestic market leadership and pioneering R&D efforts.2.
ABS is a result of years of extensive research and it dramatically 12 . re services. Comprehensive integration of the supply chain through implementation of ERP (Enterprise-Wide Resource Planning) programme has further enhanced WABCO-TVS (INDIA) Limited's responsiveness. brake chambers. Tata Cummins (Engines) and a host of other trailer manufacturers. Force Motors. SUTLEJ. Employees TEI (Total Employee Involvement) forms the base of WABCO-TVS quest for excellence through TQM. TAFE. Mahindra & Mahindra. WTIL is the first Indian company to manufacturer the next generation braking system: Anti – Lock brake System (ABS) and Anti-Spin Regulation (ASR) developed with total inhouse design technology.Process Management WABCO-TVS. air dryers. controlling and regulating valves. spring brake actuators and a host of auxiliaries such as hoses. Cellular manufacturing gives them the flexibility to respond in tune to customer needs. Training is imparted not only to employees but also to suppliers. Vehicle Factory (Jabalpur). couplings and switches. WTIL also offers a range of repair kits to service its products in the after market. Swaraj Mazda. Eicher Motors. WTIL manufacturers a growing range of vacuum brake equipment for light commercial vehicles. WABCO-TVS is poised to achieve breakthroughs by realizing the importance of the need to continuously honing the expertise of our human resources and learning from the best practices across the world. CATERPILLAR. TATA Motors. WABCO-TVS (INDIA) Limited supplies original equipment fitments for vehicles manufactured by Ashok Leyland. have committed to total customer satisfaction. and Bharat Earthmovers. Volvo. A complete product range WTIL manufacturers an entire range of air brake actuation components comprising several varieties of compressors.
thus enhancing safely and steer ability. With this. In 2002. 13 . It is the second company outside Japan outside Japan and the very first in India to win this prestigious award. Not with standing. Milestones on the road to excellence A commitment to enhancing customer satisfaction through continuous improvement and total employee involvement has led WTIL to one of its most significant milestones so far – The Deming Award. The examination procedures and selection process being exacting and elaborate. WTIL aims to be a competitive world class manufacturer in terms of quality. WTIL’s brakes division was awarded the prestigious Deming Prize by the union of Japanese and engineers (JUSE) for having “achieved distinctive performance improvements through the applications of company-wide quality control”. WTIL considers it a matter of pride that it is only the fourth organization in the world outside Japan to win this prize and the very first in India. WTIL has a solid foundation in its domestic market leadership and pioneering R&D efforts.improves vehicle stability under adverse road conditions. WTIL’s brakes division was awarded the Japan quality medal for “continual application of TQM for priority issue to achieve business results”. WTIL believes that winning the demand award and Japan quality medal is still only the beginning of a conscious and continuous search for new level of excellence. cost and timely delivery through comprehensive world –class practices.
This reduction in contract price is pure profit to GM.3 REVIEW OF LITERATURE A literature review is a “critical analysis of a segment of a published body of knowledge through summery. General Motors Corp. reviews of literature and theoretical articles”. airlines have been stuffing more and more seats into their aircraft. Android subtracted the wages from the bills it submitted to GM under their current contract. laid off tens of thousands of its hourly workers who would nevertheless continue to receive full pay under union contracts. Michael J. McCarthy(1994) The present study reveals that variable cost is always vary with the variables. 14 . since GM would have had to pay the laid-off workers in any case. to use laid-off GM workers. In return. GM corp (1992) In the early 1990s. Android Industries. Therefore. Literature review is the process of developing an insight into both conceptual and research based studies available in the area and the topic chosen. Inc. The only true variable costs are the costs of meals and an almost inconsequential increase in fuel consumption.The cost of the cabin flight crew is a step-variable cost--the number of flight attendants assigned to a flight will vary with the number of passengers on the flight. The objectives of such review are to understand the importance of the topic and find out the research gaps if any in the chosen area. GM entered into an agreement with one of its suppliers.. adding one passenger to a flight brings in additional revenue but has very little effect on total cost. GM agreed to pay the wages of the workers who would be supervised by Android Industries. classification and comparison of prior research studies. Consequently.
CVP is a quantitative model for developing much of the financial information relevant for evaluating resource allocation decisions. Those decisions can include such crucial areas as pricing policies. In effect. Steven.This is the direct costing method employed to calculate costs. That overview allows managers to examine the possible impacts of a wide range of strategic decisions. as well as the implications of these changes on the decisions to make. This paper is designed to explain. by means of concrete examples. analytical tools in management accounting. market expansions or contractions. The relationships between a product's revenue and cost functions expressed within the CVP model are used to evaluate the financial implications of a wide range of strategic and operational decisions. product mixes.Dorina BUDUGAN. outsourcing contracts. CVP analysis may be used to determine the trade-offs in profitability and risk from alternative product design and production possibilities. (1989) The study reveals that alternative method of full costing method. Robert (2007) Cost-volume-profit (CVP) analysis is a mathematical representation of the economics of producing a product. and yet one of the simplest. which makes these costs a useful company management tool. Kee. which is based on those costs that are closely and directly connected to the operation volume. In a general sense. Grahame (2005) Cost/volume/profit (CVP) analysis can be used to determine how many products must be sold in order to break even or reach a target profit and also to calculate the margin of safety 15 . it provides a sweeping financial overview of the planning process . it is a short-term earnings calculation method. This method is actually more than a cost calculation method. the way in which operation conditions changes influence the earnings estimated by means of the cost-volume-profit analysis. Horngren(1994) Cost Volume Profit analysis (CVP) is one of the most hallowed.
for a business proposal Panel 1 contains the formulas for these calculations. (1993) An important result of this search for better data is more accurate and relevant costing information that is useful for decision making. Metzger. 16 . CVP analysis can also offer a valuable insight into the business issues that underpin a venture. Data derived under ABC can be integrated into traditional decision-making techniques. Lawrence M. Although the information it provides is extremely useful. This article will describe the use of data developed in an ABC system as it applies to the multiproduct cost-volume-profit (CVP) analysis model.
4 RESEARCH METHODOLOGY 4. 4. 17 . Research can be a means to an end or and it end itself. organizing and evaluating data making deductions and reaching conclusions and at last testing the conclusions to determine whether they fit the formulated hypothesis. Research design is needed in the following cases. It can be defined as an organized. scientific inquiry or investigation in to a specific problem undertaken with the purpose of finding answers or solutions to it. decision making is the process of choosing and want the alternative solution to resolve their problem.1 DEFINITION According to Clifford woody research comprises defining and redefining problems. formulating hypothesis or suggested solutions correcting. systematic. It is the process of finding solution to a problem after the thorough study and analysis of situational factors. • • • • • Identify the difficult issues Gather relevant information Analyzing the data in the case that would help decision making Implementing the right course of action.2 RESEARCH DESIGN: A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Research helps to generate better alternative for effective decision making.
this data has been collected from the Annual report. 4.4. 18 . Such data are collected with the objective of understanding the past status of any variable or the data collected and reported by some source is assessed and used for the objective of the study.4 SOURCES OF DATA: Secondary data: It refers to the information or facts actually collected.3 NATURE OF RESEARCH: Analytical research: This type of research is used where the researcher has to use facts or information that is already available and analyze these to make a critical evaluation. Since this study requires use of secondary data only.
Its special value is in decision-making”.e. i. The cost is further divided according to its behaviour.. This knowledge is not sufficient for management for discharging the functions of planning and control.4. We all know that profit is balancing figure of sales over costs. The age old equation can be written as Sales – (Fixed cost + Variable cost) = profit. Marginal costing is a management technique of dealing with cost of data.5 TOOLS AND TECHNIQUES USED • • • • • contribution P/V Ratio Breakeven point Margin of safety Operating leverage Marginal cost: CIMA define marginal cost as “The cost of one unit of product or service which would be avoided if that unit were not produced or provided”. Marginal costing: CIMA define marginal costing as “The accounting system in which variable costs are charged to the cost units and fixed costs of the period are written –off in full against the aggregate contribution. 19 . It is based primarily on the behavioural study of cost.e. etc.. Sales-cost=Profit. fixed cost and variable cost. i.
but these statements do not help when it comes to predict about tomorrow’s result. 20 ..e. The statements prepared under absorption costing do elaborately explain past profit. the costing technique. there is a cut-throat competition in market and management has got to know its cost structure thoroughly. Marginal costing provides this vital information to management and it helps in the discharge of its functions like cost control. I) Contribution Contribution is the difference between the sales and the marginal cost of sales and the marginal cost of sales and it contribute towards fixed expenses and profit. profit planning performance evaluation and decision-making. i. A conventional income statement cannot tell what the profit or loss will be if the volume is increased or decreased. Contribution can be represented as : Contribution = Selling Price – Marginal Cost Contribution = Fixed Expenses + Profit Contribution – Fixed Expenses = Profit II) Profit Volume (P/V) Ratio The profit volume ratio is one of the most important ratios for studying the profitability of operations of a business and establishes the relationship between contribution and sales. past losses and the costs incurred in past.Absorption costing. which does not recognize the difference between fixed costs and variable costs does not adequately cater to the needs of management. These days.
Comparison of P/V ratios for different products can be made to find out which product is more profitable. A concern which attains breakeven point at less number of units will definitely be better from another concern where breakeven point is achieved at more units of production. contribution is equal to fixed cost. Higher the P/V ratio more will be the profit. At this point.Variable Cost P/V Ratio = -------------------------------Sales Or P/V Ratio = Change in Profits or Contributions ---------------------------------------------Changes in Sales III) Break Even Point A business is said to break even when its total sales are equal to its total costs. It is a point of no profit no loss. This breakeven point can be calculated by the following formula: 21 . This ratio is calculated as under: Contribution ----------------------------Sales Fixed Expenses + Profit -------------------------------Sales P/V Ratio = Or P/V Ratio = Or Sales .
at breakeven point only fixed expenses are recovered. 22 .Total Fixed Expenses Break Even Point (in units) = ---------------------------------------Selling price per unit – Marginal Costs per unit Break Even Point (in units) = Total Fixed Expenses ---------------------------------------Contribution per unit IV) Margin of safety: Margin of safety is the difference between the actual sales and the sales at breakeven point. Sales or output beyond breakeven point is known as margin of safety because it gives some profit. it is an indicator of the strength of a business because with a substantial reduction in sales or production. Margin of safety = Present or Actual Sales – Break Even Sales Margin of Safety = Profit ----------------------------P/V Ratio Profit Margin of Safety (in units) = -------------------------------Contribution per unit If the margin of safety is large. profit shall be made.
if the number of lines or curves depicted on the graph is large. 4. Fixed costs do not always remain constant. Only a limited amount of information can be presented in a single breakeven chart. a number of charts will have to be drawn up. variable costs and selling prices. If we have to study the changes of fixed costs. Breakeven analysis of doubtful validity when the business is selling many products with profit margin. 5.4. Variable costs do not always vary proportionately 3. The chart becomes very complicated and difficult to understand for a layman. 23 . 2.6 LIMITATION OF THE STUDY 1.
75 Amount (for 4 lakhs unit) 782300000 37.7 26.7 .97532916 571272000 211028000 93148000 117880000 26.57 232.18 527.87 294.39 1428.82 1218.1.97 127.5 DATA ANALYSIS AND INTERPRETATION 5.41% 448014285.97532916 176560.46 345308113 Amount(per unit) Rs 1955.1 COST VOLUME PROFIT ANALYSIS TABLE 5.1 CONTRIBUTION INCOME STATEMENT Particulars Sales (less) Variable Production Overhead cost Material cost Labour Cost Contribution (less) Fixed Cost Profit P/V Ratio Break even sales (in units) Break Even Sales value( in Rs) Break even capacity Margin of Safety BREAKEVEN ANALYSIS 24 81.
TABLE 5.1. Since the company has only less break even capacity there is a possibility for greater profit.2 COST AND SALES OF COMPRESSOR AT VARIOUS CAPACITY LEVELS Fixed Expenses 0 20 40 60 85 100 93148000 93148000 93148000 93148000 93148000 93148000 Capacity (%) Variable costs 0 134426750 268853501 403280252 571313690 672133753 Total costs 93148000 227574750 362001501 496428252 664461690 765281753 Sales 0 184070588 368141176 552211765 782300000 920352941 GRAPH 18.104.22.168% production capacity.1 BREAK EVEN CHART SHOWING BREAKEVEN CAPACITY INTERPRETATION From the graph 5.2 it is clear that the breakeven point lies at 37.1. The breakeven point should be less in order to earn more profit.TABLE 5.3 25 .
2 it is clear that Break Even Point is reached at 16 thousand units and breakeven point is reached at 34 crore (approx).COST AND SALES AT VARIOUS LEVELS OF OUTPUT Output(units) 0 100000 200000 300000 400000 Fixed Expenses 93148000 93148000 93148000 93148000 93148000 Variable costs 0 142818000 285636000 428454000 571272000 Total costs 93148000 235966000 378784000 521602000 664420000 Sales 0 195575000 391150000 586725000 782300000 GRAPH 5. FIXATION OF SELLING PRICE TO EARN A PROFIT OF RS 15 CRORE 26 .2 BREAK EVEN CHART SHOWING BREAKEVEN UNIT SALE INTERPRETATION: From the graph 5.1.1. The sale line lead to 78 crore and since the cost line lies at 66 crore the profit is between 78 crore and 66 crore.
832215 TABLE 5.4 CONTRIBUTION INCOME STATEMENT SHOWING SALES REQUIRED TO EARN A PROFIT OF RS 15 CRORES Sales Variable cost Contribution Fixed Cost Profit/Loss 815932885.1.98% Contribution -------------------------------p/v ratio 243148000/ 26.Contribution = = = P/V Ratio Sales = = = = Selling price Per unit = Fixed cost + desired profit 93148000 + 150000000 243148000 26.9 2039.9 214805384 243148000 93148000 150000000 EFFECT OF CHANGES IN SELLING PRICE 27 .98% 815932885.
57 232.2. Since the competitor’s price is more than our price it is desirable to increase the selling price.07 232.8 % increase of current profit.2 INTERPRETATION: From the table(5.87 294.3 INCREASE IN PROFIT DUE TO INCREASE IN SELLING PRICE 3 50 3 40 3 30 3 20 3 10 3 00 2 90 2 80 2 70 2 60 Befo re A fter NEW PRICE 2150 1569. 28 .5 CONTRIBUTION INCOME STATEMENT SHOWING CHANGE IN PROFIT DUE TO CHANGE IN SELLING PRICE PERTICULARS Selling price(Per unit) (less) Variable cost Contribution Fixed Cost Profit CURRENT PRICE 1955. TABLE 5.75 1428.18 527. This is because there is no change in fixed cost and major portion of variable cost will be compensated by the excess selling price.22.214.171.124) it is clear that increasing the selling price to 2150 will increase the profit to 347.7 GRAPH 5.93 580. This is 17.Changing the selling price will have both positive and negative impact.87 347.
And also from the graph it is clear that contribution exceeds the fixed cost so that the company can earn a profit.1. Operating leverage = Contribution -----------------------------------Operating profit 211028000 -----------------------------------117880000 1.OPERATING LEVERAGE: The leverage associated with investment activities is referred to as operating leverage. Operating leverage is determined by the relationship between the firm’s sales revenue and its earnings before interest and tax. 29 .4 OPERATING LEVERAGE 800000000 700000000 600000000 500000000 400000000 300000000 200000000 100000000 0 Sales Contribution Fixed cost Profit INTERPRETATION : The operating leverage is greater than 1 which is 1.79 this is a favourable operating leverage.790 = = GRAPH : 5. Since the operating leverage is high a small change in sales will have a large effect on operating income.
015.42028) 11834.1 SALES AND PROFIT OF THE YEAR 2009 AND 2010 Period 2009 2010 16.802010X .22 Difference (Cost structure and selling price remains the same in 2008 & 2009) P/V RATIO P/V Ratio = Change in profit ------------------------Change in sales X 100 6.76 ------------16531.22 .067.35 lakhs 30 .531.594.947.2.31 .07 = = P/V Ratio = 6947.76 sales (in lakhs) 42.125.321 lakhs (or) (42594.31 13.582009X .COST VOLUME PROFIT ANALYSIS BY CONSIDERING OVERALL PRODUCTION TABLE 5.6067.42028) 11834.Profit (59125.42028 X 100 42.028% X 100 FIXED COST: Fixed cost = = = = = (Sales X P/V Ratio) .07 .80 Profit (in lakhs) 6.13015.58 59.
1 BREAK EVEN SALES 28158. Since it is more than 50% of the actual sales it leads to lower profit.028% = 28158.18317 16323.86 11834.18317 Lakhs TABLE 5. 31 .2.2 STATEMENT SHOWING BREAKEVEN SALES Break even Sales Variable cost Contribution Fixed Cost Profit/Loss GRAPH 5.32 11834.2.32 Nil INTERPRETATION: From the graph it clears that the breakeven point lies at 28 thousand lakhs(approx).35 = ---------------------------42.CALCULATION OF BREAKEVEN SALES Break Even Point Fixed Cost = --------------------------P/V Ratio 11834.
028% = (Or) 30967.18317 30967.31 = ---------------------------42.6168 Lakhs = = = sales – sales at Break even 59125.28158.80.07 = -----------------------------42.028% = (Or) = = = sales – sales at Break even 42594.6168 Lakhs 32 .58 .352 Lakhs Margin of safety for the year 2010: Profit = ------------------------P/V Ratio 13015.28158.18317 14436.CALCULATION OF MARGIN OF SAFETY Margin of safety for the year 2009: Profit = ------------------------P/V Ratio 6067.3968 Lakhs 14436.
GRAPH 5.2.3 MARGIN OF SAFETY OF THE YEAR 2010 33 .2.2 MARGIN OF SAFETY OF THE YEAR 2009 GRAPH 5.
4 COMPARISON OF MARGIN OF SAFETY OF THE YEAR 2009 AND 2010 30000 50000 30000 00000 20000 50000 20000 00000 10000 50000 10000 00000 50000 0000 0 20 09 21 00 INTERPRETATION: The graph(5.GRAPH 5.4) reveals that the margin of safety of the year 2010 is higher than of the year 2009. 34 . This because the company has increased its sales in the year 2010 and there is no change in fixed cost.2.2.
58 Rs 2010 59125.4088 Lakhs TABLE 5.42028) X 59125.6168 35 .3 PROFITABILITY STATEMENT Rs Particulars Sales 2009 42594.58 24692.CALCULATION OF VARIABLE COST Variable cost at 2009: = = = Variable cost at 2010: = = = (1 .42028) X 42594..35 11834.3968 30967..651 24849.35 Profit 14436.9299 34276.80 (1 .80 34276.9299 Lakhs (-) Variable Cost 24692.P/V Ratio) X Sales (1 .4088 Contribution 17964.3912 (-) Fixed Cost 11834.2.P/V Ratio) X Sales (1 .
5) reveals that company has increased its sales around 16 crores from the year 2009 to 2010. 36 .2.GRAPH 5.2. Because of this increase in sales the contribution is increased and so profit also increased to 6 crores. COST AND PROFIT OF THE YEAR 2009AND 2010 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 sales (-) Variable Cost Contribution (-) Fixed Cost Profit INTERPRETATION: The graph(5.5 COMPARISON OF SALES.
67 lakhs = = TABLE 5.32 11834.2.4 STATEMENT SHOWING SALES REQUIRED TO EARN A PROFIT OF 15000 CRORES Rs in crores Sales Variable cost Contribution Fixed cost 63848.000 ----------------------------------42.35 26834.32 + 15. 67 37014.028% 63848.32 37 .SALES RQUIRED FOR THE DESIRED PROFIT Sales = Fixed cost + Desired profit ---------------------------------P/V Ratio 11834.
305.22 1.3.1 STATEMENT OF PROFIT OF THREE COMPRESSORS Particulars Product X Product Y Product Z Total 10-Mar Sales(in units) 7.279.906.477.Profit 15000.753.554.231.6 7.40 Labour Cost 1.097.430.60 163.788.095.40 2.802.0 0 10-Mar 10-Mar 10-Mar 5.080.006.574.886.940.78 31.400.060.570.02 64.674.082.00 Marginal Cost 9.00 Selling Price 4.400.40 18.00 Sales (Value): Units X selling Price 28.00 6.00 3.317.00 OPTIMUM PRODUCT MIX OF THREE COMPRESSORS TABLE 5.164.965.16 6.906.660.641.4 17.331.62 38 .0 0 48.340.510.00 40 13.634.00 Direct Material 8.76 16.011.2 80.880.246.20 14.78 12.00 20.0 0 243.164.305.965.153.210.
20 7.006.65086 65.198.36 TABLE 5.086% (12.86 2 0 Compressor Maximum capacity (in units) 7060 Minimum Capacity (in units) 6937 X : SC 160 SINGLE CYLINDER COMP Y : COMPRESSOR SC 160 5906 50 4624 6 Z : COMPRESSOR SIDE MOUNTED P/V Ratio Product X = = = = (Contribution / sales) * 100 (126.96.36.1995.789.2 MAXIMUM AND MINIMUM CAPACITY LEVELS OF DIFFERENT COMPRESSORS 3.120.46 44.62599 39 Product Y = = .906.841.430.22 / 20080400) X 100 .20 Profit 24.435.60 / 28317660) * 100 0.Contribution(SalesMarginal cost) 0 Fixed Cost 188.8.131.520.
4 STATEMENT OF INCOME SHOWING MAXIMUM PROFIT Particulars Capacity (units) Sales(Rs/unit) Total value(Rs) Maximum of Z Minimum of Y Average of X Total sales value Less variable cost Contribution Less fixed cost Profit INTERPRETATION: 50 4624 6990 6097 3400 4011 304850 15721600 28036890 44063340 17477305.3 Rank I Sales 40 .574.= Product Z = = = 62.8 26586034.072% TABLE 5.40/ 243880) X 100 .67072 67.599 % (163.2 7006198.3 RANKING OF THE COMPRESSORS BASED ON THEIR P/V RATIO Product Z X II Y III TABLE 184.108.40.206 19579835.
0 0 40 6 13.31 11.80 191. In order to earn more profit te company should boost up te sale of product Z.55 15.3. Since the maximum production capacity of Z is only 50 units the company should produce all the 50 units.From the above table(5.15 75.02 28.4 4 0.00 1.4) it is clear that product Z has highest contribution.00 Sales Value Units X Price (in lakhs) selling 283.00 6.02 27.06 Marginal Cost (in lakhs) 98.37 486.75 141.94 0.8 0 0.638.400.12 174.42 470.097. By doing so the company can earn a profit of Rs 19579835.006.77 168.87 62.70 120.011.3.060.00 Selling Price 4.69 0.96 Contribution(SalesMarginal cost) (in lakhs) 184.906.75 0. And te product X can be produced at the normal level.18 278.0 0 5.10 146.10 71.581.5 PERFORMANCE EVALUATION OF THREE COMPRESSORS Particulars Product X 10-Mar 10-May Product Y 10-Mar 10-May Product Z 10Mar 10May Total 10-Mar 10-May Sales(in units) 7.24 200.28 12.79 59.32 81.25 311.0 0 6.69 2.65 301. And since the contribution of product Y is comparatively less than other products it should produced at its minimum level.1 6 0.0 0 5.34 41 . And then X followed by Y.937.6 4 0.00 Direct Material (in lakhs) 83.90 Labour Cost (in lakhs) 15.6 4 0.31 181.0 0 12.30 3.3. TABLE 5.87 97.10 125.
74 31.58 233.79 0. Product Z having highest contribution sold less in the second period.21 29. And also the main reason for decrease in profit is unfavorable sales mix.02. This because the sale volume has been decreased.00% 67.00% 60.74 P/V Ratio: X : Y : Z : 64.07% GRAPH 5.Fixed Cost (in lakhs) Profit (in lakhs) 38.00% 66.07 70.06 67.3. In order to bring up the profit the product Y having less contribution should be produced less.33% 62.4 4 0.00% 64. 42 .41 37.00% 62.1 COMPARISON OF CONTRIBUTION OF THREE COMPRESSORS 68.00% 61.00% X Y Z INTERPRETATION: The profit has been decreased by 784378.60 241.00% 65.00% 63.59% 67.
The breakeven sale volume of capacitor lies at 16 thousand units. Increasing the selling price to 2150 will increase the profit to 347. 43 . It was found that breakeven capacity of the production of capacitor lies at 37. 5.6.2. This is 17. 6.8 % increase of current profit. SUGGESTIONS AND CONCLUSION 6. 4. It was found that breakeven sale of overall production is Rs 28 thousand lakhs. 3.41% of overall production capacity. 2.1 FINDINGS 1. The item Z (COMPRESSOR SIDE MOUNTED) has higher contribution than other items X ( SC 160 SINGLE CYLINDER COMPRESSOR) and Y (COMPRESSOR SC 160) 9. Margin of safety of the year 2010 is higher than the year 2009 7. Because of unfavourable sales mix the profit has been reduced to 1.96 crore. FINDINGS.790. It shows positive sign of the company. This is because there is no change in fixed cost and major portion of variable cost will be compensated by the excess selling price. The operating leverage of the company regarding production of capacitor is 1. The company has earned a profit of additional 6 crores in the year 2010 than in the year 2009 8.
production based on demand) it is highly risk for the company to increase the profit by increasing the sales.e.. So in order to increase the profit the company can increase the selling price maximum to the competitor’s price. 44 . Since it is less than 50% the company can continue the production of capacitors and it has to take measures to control the variable cost by concentrating on single product..6.41%.96 crores. So in order to overcome the loss the product COMPRESSOR SIDE MOUNTED should be given importance. followed by the item SC 160 SINGLE CYLINDER COMPRESSOR and then the item COMPRESSOR SC 160. Since the company is following JIT( Just In Time) principle for manufacturing(i. Because of unfavourable sales mix of the compressors the profit of the company has been reduced to 1.2 SUGGESTIONS From the findings it was found that the breakeven capacity of capacitors is 37.
6. Cost volume profit analysis helps the management in profit planning. In the competitive world it is very much important for the company to know about its profit position. It is a powerful tool to analyze how the change in selling price and change in cost affect the profit position of the company. since the company can produce products on demand basis it’s concluded that by increasing the selling price company can earn more profit.3 CONCLUSION The cost volume profit analysis is very much important for the company to know about the relationship between the cost volume and profit. selling price or reducing the cost . profit of the firm wabco-tvs can be increased by increase the output . not only that it also helps to determine the optimum mix of the company. 45 .
wikipedia. 1994.wabco-auto. 3. 2. B1 and B6. Y. 1990.com 46 .com www.. Yuan.L. Brealey.wabco-tvs. "The Information Executives Truly Need. 4th ed.pp.” The Wall Street Journal. 5. April 18. and Y. Heaney. New York: McGraw-Hill. Brigham. Peter F. Eugene F. "A Contingent-Claim Integration of CostVolume-Profit Analysis with Capital Budgeting. Drucker. Richard A." Harvard Business Review 73 (January-February): 54-62. 3. and J. FL: Dryden Press. 5. WEBSITES REFERRED: 1. Chan. J. Cheung. 1991..com www. 4. Fundamentals of Financial Management. Michael J. 2. Principles of Corporate Finance. Orlando. 4. 1990." Contemporary Accounting Research 6 (Spring): 738-760.moneycontrol. 7th ed.com www. "Dealing With Fuzziness in Cost-Volume-Profit Analysis. Less Legroom.financialexpress.. Myers. www. 1995.K. and Stewart C. 6." Accounting and Business Research 20 (78): 83-95. 1995. McCarthy. “Airline Squeeze Play: More Seats.com www.TEXTBOOKS REFERRED: 1.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.