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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 determine the optimum mix of the company. 5.1. To estimate the volume to be produced for obtaining a desired profit the profit position of the company.3 OBJECTIVES OF THE STUDY Primary objective To study the Cost-Volume-Profit analysis of WABCO-TVS (INDIA) LIMITED. 2. Secondary objectives 1. 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. 4. in taking policy decision like reduction in price to face the competitors. 5 . 3.
This study to help to forecast profit fairly and accurately as it is essential to know the relationship between profits and costs. these calculation cover the major areas like contribution margin. 6 .. profit volume. 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. The analysis done are Breakeven analysis. profit.1. margin of safety. etc. 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. This study was conducted on cost volume profit analysis and on each and every variables.4 SCOPE OF THE STUDY This study is performed by using the annuity report of WABCO-TVS(INDIA) LTD.
As Maruthi became India’s best selling car. Export figures also climbed.1 INDUSTRY PROFILE The global auto component industry could be the next big success story after software. International Truck and Engine Corporation and Cummins. The new car required components that would adhere to its stringent quality standards. the growth suddenly accelerated. finished. In the 1980’s with Maruti. The leading auto component manufacturers (OEM) in the world are Ford Motors . Boom time for auto components industry started with the arrival of India’s “people’s car” . It virtually gave birth to a variety of new age auto component manufacturers who manufactured components that combined the best to technology with quality. assemblies. the automotive component industry is an important sector of the Indian economy and a major foreign exchange earner for the country. Evolution of Indian auto component industry The Indian auto component Industry has always been rising over the Indian Automobile industry. There are around 400 major players in the auto component sector. 7 .2. The size of the global auto component industry is approximately $1 trillion. pharmaceuticals. The component industry started out small in the 1940’s supplying components to Hindustan Motors and premier automobiles. forging. semi-finished components. Bajaj.General Motors (GM). The automotive component industry manufactures a wide range of parts including casting. In the 1950’s the arrival of Telco. Delphi Corporation. Currently. In 2002 it imported auto component worth $69 bn. BPO and textiles. The US is the world’s biggest auto component market. and subassemblies for all types of vehicle products in India. Caterpillar. the path of India auto component industry took an upswing. Low costs of labor and raw materials resulted in exports taking a quantum jump. and Mahindra & Mahindra led to steadily increasing production.the Maruthi.
There are certain strengths of the industry that attracts the global buyers and there are certain weaknesses. Indian auto component industry strengths The component industry in India has significant cost advantages primarily due to lower labor cost in India. 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. which can eliminate the local auto parts manufacturers. 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. 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. and General Motors to Daewoo few years ago presented a world of opportunity for the industry.The influx of foreign auto majors ranging from Mercedes Benz. This labor cost advantage translates to overall cost advantages of 208 . 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 . Global trends and challenges The World trade and investment in automotive and parts has become liberalized with tariffs going down internationally. India’s automotive component industry manufactures the entire range of parts required by the domestic automobile industry and currently employs about 250000 persons. Ford. The auto components industry responded with huge capacity expansion and modernization programs.
Transnationalisation of world economy 7. technology and investment in critical process. This low cost labor is not a factor for long-term competitiveness. 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. This is a high degree of correlation between the automotive vehicle and the automotive component industry sales. quality. Of this. In spite of several handicaps there are a number of favorable factors. In the next few years. Growing entrepreneurship 4. This is primarily because the old vehicle population is registering a significant rise. are necessary to sustain the cost competitiveness. Growing domestic market 5. Expanding global markets 6. and improvement in scale. The replacement market accounted for the remaining 40 percent. Investment by non-resident Indians 8.30% over the counter parts from other developed despite lower labor productivity. the aftermarket is expected to growth faster than OE component market. Wide industry base manufacturing 97% of component required 3. In 1999. The growth in the component market is likely to be driven by an important in the demand for automotive vehicles. original equipment(OE) had a share of 60 percent. 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.81 bn. which are 1. Trained and killed human resources 2. The effect is likely to be nullified as the average life span of 9 . the component business in India was estimated at $2.
keeping in line with the decline in the growth rate in the automotive as a whole.640 crores. 36300 crores. 10 .17174 crores compared to Rs. 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). The production during 2000-2001 was of the order Rs. the ratio is likely to stabilize as in the case of developed markets. growing by over 28% in nominal terms. During the year 2004-05. in tierized format) and has been one of the fastest growing segments of automotive industry.06% by recording a production of the order of Rs. it is found that 96% of global vehicle sales and 99% of global vehicles production have been made. Subsequently. 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. between 1995-98. Production While analyzing 54 automotive country markets. the output of the auto component industry is expected to be around Rs. the sector has recorded a growth of 25. During the year 2003-2004.30.auto parts is expected to go up due to improved quality of components.1999-2000 registering growth of 5%. auto components industry has also registered slow growth during last 2-3 years.
WTIL have plants at Ambattur-Chennai. It was formerly known as Sundaram Clayton Limited. development. With a commitment of total satisfaction to customers. WABCO-TVS (INDIA) Limited has pioneered the manufacture of air-assisted and air brake systems for commercial vehicles in INDIA. cost and timely delivery of products.2. But it has acquired all the shares from TVS and now it has 75% shares and remaining to the public. 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%. It began its operations in Chennai in 1962. 11 .2 COMPANY PROFILE WABCO-TVS (INDIA) Limited was a joint venture between TVS Group and WABCO Vehicle Control System. 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. simulation and testing. Comprehensive TQM (Total Quality Management) practices enable WABCO-TVS in being a competitive world-class manufacturer in terms of quality. Jamshedpur and mahindra world city-Chennai adopting rigorous TQM processes and standards. Brakes Division. UK. in collaboration with Clayton Dewandre Holdings plc. 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.
WTIL also offers a range of repair kits to service its products in the after market. Cellular manufacturing gives them the flexibility to respond in tune to customer needs. Comprehensive integration of the supply chain through implementation of ERP (Enterprise-Wide Resource Planning) programme has further enhanced WABCO-TVS (INDIA) Limited's responsiveness. spring brake actuators and a host of auxiliaries such as hoses. 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. SUTLEJ. TATA Motors. Volvo. Eicher Motors. controlling and regulating valves. 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. CATERPILLAR. Vehicle Factory (Jabalpur). Mahindra & Mahindra. have committed to total customer satisfaction. brake chambers. Force Motors. A complete product range WTIL manufacturers an entire range of air brake actuation components comprising several varieties of compressors. Swaraj Mazda. re services. TAFE. couplings and switches. Training is imparted not only to employees but also to suppliers. Employees TEI (Total Employee Involvement) forms the base of WABCO-TVS quest for excellence through TQM. ABS is a result of years of extensive research and it dramatically 12 .Process Management WABCO-TVS. Tata Cummins (Engines) and a host of other trailer manufacturers. WTIL manufacturers a growing range of vacuum brake equipment for light commercial vehicles. air dryers. WABCO-TVS (INDIA) Limited supplies original equipment fitments for vehicles manufactured by Ashok Leyland. and Bharat Earthmovers.
The examination procedures and selection process being exacting and elaborate. 13 . 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’s brakes division was awarded the Japan quality medal for “continual application of TQM for priority issue to achieve business results”. Not with standing. thus enhancing safely and steer ability.improves vehicle stability under adverse road conditions. 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. WTIL aims to be a competitive world class manufacturer in terms of quality. cost and timely delivery through comprehensive world –class practices. 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. With this. It is the second company outside Japan outside Japan and the very first in India to win this prestigious award. In 2002. WTIL has a solid foundation in its domestic market leadership and pioneering R&D efforts.
In return. Android Industries. reviews of literature and theoretical articles”. to use laid-off GM workers. Therefore. McCarthy(1994) The present study reveals that variable cost is always vary with the variables. laid off tens of thousands of its hourly workers who would nevertheless continue to receive full pay under union contracts. The only true variable costs are the costs of meals and an almost inconsequential increase in fuel consumption. GM corp (1992) In the early 1990s. Inc.3 REVIEW OF LITERATURE A literature review is a “critical analysis of a segment of a published body of knowledge through summery.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. 14 . Android subtracted the wages from the bills it submitted to GM under their current contract.. Literature review is the process of developing an insight into both conceptual and research based studies available in the area and the topic chosen. adding one passenger to a flight brings in additional revenue but has very little effect on total cost. Michael J. Consequently. classification and comparison of prior research studies. GM entered into an agreement with one of its suppliers. GM agreed to pay the wages of the workers who would be supervised by Android Industries. General Motors Corp. airlines have been stuffing more and more seats into their aircraft. This reduction in contract price is pure profit to GM. 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. since GM would have had to pay the laid-off workers in any case.
it is a short-term earnings calculation method. In a general sense.This is the direct costing method employed to calculate costs. Those decisions can include such crucial areas as pricing policies. by means of concrete examples. This method is actually more than a cost calculation method. Steven. Robert (2007) Cost-volume-profit (CVP) analysis is a mathematical representation of the economics of producing a product. outsourcing contracts. Kee. 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 . which is based on those costs that are closely and directly connected to the operation volume. 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. CVP is a quantitative model for developing much of the financial information relevant for evaluating resource allocation decisions. Horngren(1994) Cost Volume Profit analysis (CVP) is one of the most hallowed. which makes these costs a useful company management tool. analytical tools in management accounting. it provides a sweeping financial overview of the planning process . This paper is designed to explain. as well as the implications of these changes on the decisions to make. (1989) The study reveals that alternative method of full costing method. CVP analysis may be used to determine the trade-offs in profitability and risk from alternative product design and production possibilities. and yet one of the simplest.Dorina BUDUGAN. In effect. the way in which operation conditions changes influence the earnings estimated by means of the cost-volume-profit analysis. That overview allows managers to examine the possible impacts of a wide range of strategic decisions. product mixes.
CVP analysis can also offer a valuable insight into the business issues that underpin a venture. Lawrence M. 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.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 . Although the information it provides is extremely useful. Data derived under ABC can be integrated into traditional decision-making techniques.
17 . It can be defined as an organized. systematic.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.4 RESEARCH METHODOLOGY 4. formulating hypothesis or suggested solutions correcting. It is the process of finding solution to a problem after the thorough study and analysis of situational factors. 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. Research can be a means to an end or and it end itself. decision making is the process of choosing and want the alternative solution to resolve their problem. scientific inquiry or investigation in to a specific problem undertaken with the purpose of finding answers or solutions to it. 4.1 DEFINITION According to Clifford woody research comprises defining and redefining problems. • • • • • Identify the difficult issues Gather relevant information Analyzing the data in the case that would help decision making Implementing the right course of action. Research helps to generate better alternative for effective decision making.
Since this study requires use of secondary data only. 18 . 4. 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.4.3 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. this data has been collected from the Annual report.
fixed cost and variable cost.. It is based primarily on the behavioural study of cost.e. This knowledge is not sufficient for management for discharging the functions of planning and control. etc.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 is a management technique of dealing with cost of data. i. We all know that profit is balancing figure of sales over costs. Sales-cost=Profit. 19 .e. i. Its special value is in decision-making”. The age old equation can be written as Sales – (Fixed cost + Variable cost) = profit. The cost is further divided according to its behaviour..4. 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.
Marginal costing provides this vital information to management and it helps in the discharge of its functions like cost control. profit planning performance evaluation and decision-making. the costing technique. i. 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. but these statements do not help when it comes to predict about tomorrow’s result. 20 . 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. there is a cut-throat competition in market and management has got to know its cost structure thoroughly. A conventional income statement cannot tell what the profit or loss will be if the volume is increased or decreased. past losses and the costs incurred in past.e. which does not recognize the difference between fixed costs and variable costs does not adequately cater to the needs of management.Absorption costing. These days.. The statements prepared under absorption costing do elaborately explain past profit.
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.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. This ratio is calculated as under: Contribution ----------------------------Sales Fixed Expenses + Profit -------------------------------Sales P/V Ratio = Or P/V Ratio = Or Sales . Higher the P/V ratio more will be the profit. It is a point of no profit no loss. At this point. This breakeven point can be calculated by the following formula: 21 .
profit shall be made. at breakeven point only fixed expenses are recovered.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. 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. it is an indicator of the strength of a business because with a substantial reduction in sales or production. 22 .
4. Breakeven analysis of doubtful validity when the business is selling many products with profit margin. Variable costs do not always vary proportionately 3. The chart becomes very complicated and difficult to understand for a layman. a number of charts will have to be drawn up. If we have to study the changes of fixed costs.6 LIMITATION OF THE STUDY 1. 4. Fixed costs do not always remain constant. Only a limited amount of information can be presented in a single breakeven chart. 2. 5. 23 . if the number of lines or curves depicted on the graph is large. variable costs and selling prices.
57 232.18 527.5 DATA ANALYSIS AND INTERPRETATION 5.7 .75 Amount (for 4 lakhs unit) 782300000 37.1.1 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 81.87 294.97 127.39 1428.7 26.97532916 571272000 211028000 93148000 117880000 26.82 1218.46 345308113 Amount(per unit) Rs 1955.41% 448014285.97532916 176560.
1.1 BREAK EVEN CHART SHOWING BREAKEVEN CAPACITY INTERPRETATION From the graph 5. Since the company has only less break even capacity there is a possibility for greater profit.TABLE 184.108.40.206 25 .1.2 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 5.41% production capacity. TABLE 5.2 it is clear that the breakeven point lies at 37. The breakeven point should be less in order to earn more profit.
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. FIXATION OF SELLING PRICE TO EARN A PROFIT OF RS 15 CRORE 26 .1.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 5.2 it is clear that Break Even Point is reached at 16 thousand units and breakeven point is reached at 34 crore (approx).1.2 BREAK EVEN CHART SHOWING BREAKEVEN UNIT SALE INTERPRETATION: From the graph 5.
9 214805384 243148000 93148000 150000000 EFFECT OF CHANGES IN SELLING PRICE 27 .832215 TABLE 5.98% 815932885.4 CONTRIBUTION INCOME STATEMENT SHOWING SALES REQUIRED TO EARN A PROFIT OF RS 15 CRORES Sales Variable cost Contribution Fixed Cost Profit/Loss 815932885.98% Contribution -------------------------------p/v ratio 243148000/ 26.1.9 2039.Contribution = = = P/V Ratio Sales = = = = Selling price Per unit = Fixed cost + desired profit 93148000 + 150000000 243148000 26.
2 INTERPRETATION: From the table(5. This is 17.Changing the selling price will have both positive and negative impact.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 15220.127.116.11 580. Since the competitor’s price is more than our price it is desirable to increase the selling price. This is because there is no change in fixed cost and major portion of variable cost will be compensated by the excess selling price.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 1955.8 % increase of current profit.07 232. TABLE 5.5) it is clear that increasing the selling price to 2150 will increase the profit to 347. 28 .2.7 GRAPH 5.87 294.1.57 232.75 1428.87 347.18 527.
OPERATING LEVERAGE: The leverage associated with investment activities is referred to as operating leverage. Since the operating leverage is high a small change in sales will have a large effect on operating income.790 = = GRAPH : 5.4 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 1.1. Operating leverage = Contribution -----------------------------------Operating profit 211028000 -----------------------------------117880000 1. 29 .79 this is a favourable operating leverage. Operating leverage is determined by the relationship between the firm’s sales revenue and its earnings before interest and tax. And also from the graph it is clear that contribution exceeds the fixed cost so that the company can earn a profit.
13015.22 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 6.125.Profit (59125.76 ------------16531.594.42028) 11834.80 Profit (in lakhs) 6.58 59.35 lakhs 30 .22 .802010X .1 SALES AND PROFIT OF THE YEAR 2009 AND 2010 Period 2009 2010 16.31 .6067.2.015.42028 X 100 42.947.321 lakhs (or) (42594.07 = = P/V Ratio = 6947.028% X 100 FIXED COST: Fixed cost = = = = = (Sales X P/V Ratio) .582009X .531.31 13.42028) 11834.067.76 sales (in lakhs) 42.07 .COST VOLUME PROFIT ANALYSIS BY CONSIDERING OVERALL PRODUCTION TABLE 5.
35 = ---------------------------42.86 11834.028% = 28158.18317 Lakhs TABLE 5.18317 16323.1 BREAK EVEN SALES 2818.104.22.168 Nil INTERPRETATION: From the graph it clears that the breakeven point lies at 28 thousand lakhs(approx). Since it is more than 50% of the actual sales it leads to lower profit.2 STATEMENT SHOWING BREAKEVEN SALES Break even Sales Variable cost Contribution Fixed Cost Profit/Loss GRAPH 5.CALCULATION OF BREAKEVEN SALES Break Even Point Fixed Cost = --------------------------P/V Ratio 11834.32 11834. 31 .
80.07 = -----------------------------42.3968 Lakhs 14436.352 Lakhs Margin of safety for the year 2010: Profit = ------------------------P/V Ratio 13015.18317 14436.028% = (Or) = = = sales – sales at Break even 42594.31 = ---------------------------42.6168 Lakhs 32 .CALCULATION OF MARGIN OF SAFETY Margin of safety for the year 2009: Profit = ------------------------P/V Ratio 6067.028% = (Or) 30967.6168 Lakhs = = = sales – sales at Break even 59125.28158.28158.18317 30967.58 .
3 MARGIN OF SAFETY OF THE YEAR 2010 33 .2.GRAPH 5.2.2 MARGIN OF SAFETY OF THE YEAR 2009 GRAPH 5.
4) reveals that the margin of safety of the year 2010 is higher than of the year 2009.4 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(5.2. This because the company has increased its sales in the year 2010 and there is no change in fixed cost. 34 .GRAPH 5.2.
651 24849.4088 Contribution 17964.80 34276.3912 (-) Fixed Cost 11834.42028) X 42594.58 Rs 2010 59125..80 (1 .35 Profit 14436.4088 Lakhs TABLE 5.35 11834.3968 30967.6168 35 .CALCULATION OF VARIABLE COST Variable cost at 2009: = = = Variable cost at 2010: = = = (1 .42028) X 59125.P/V Ratio) X Sales (1 .2.9299 34276..58 24692.3 PROFITABILITY STATEMENT Rs Particulars Sales 2009 42594.9299 Lakhs (-) Variable Cost 24692.P/V Ratio) X Sales (1 .
5 COMPARISON OF SALES.2. 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. Because of this increase in sales the contribution is increased and so profit also increased to 6 crores.5) reveals that company has increased its sales around 16 crores from the year 2009 to 2010. 36 .GRAPH 5.2.
67 lakhs = = TABLE 5.35 26834.32 37 .2.32 + 15.SALES RQUIRED FOR THE DESIRED PROFIT Sales = Fixed cost + Desired profit ---------------------------------P/V Ratio 11834.4 STATEMENT SHOWING SALES REQUIRED TO EARN A PROFIT OF 15000 CRORES Rs in crores Sales Variable cost Contribution Fixed cost 63848.028% 63848.000 ----------------------------------42. 67 37014.32 11834.
6 7.0 0 48.906.1 STATEMENT OF PROFIT OF THREE COMPRESSORS Particulars Product X Product Y Product Z Total 10-Mar Sales(in units) 7.060.340.153.40 2.02 64.3.906.788.574.080.76 16.00 Marginal Cost 9.510.674.095.16 6.20 14.00 Sales (Value): Units X selling Price 28.660.Profit 15000.430.802.965.62 38 .4 17.400.400.210.886.00 6.317.60 163.880.305.00 3.554.279.40 18.0 0 10-Mar 10-Mar 10-Mar 5.753.231.78 12.00 40 13.164.097.011.00 Direct Material 8.00 20.2 80.78 31.22 1.40 Labour Cost 1.0 0 243.641.965.570.00 OPTIMUM PRODUCT MIX OF THREE COMPRESSORS TABLE 5.305.477.246.006.164.331.00 Selling Price 4.082.940.634.
006.570.435.153.430.20 7.20 Profit 24.158.841.086% (12.46 44.65086 65.86 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 (18.62599 39 Product Y = = .Contribution(SalesMarginal cost) 0 Fixed Cost 3.2 MAXIMUM AND MINIMUM CAPACITY LEVELS OF DIFFERENT COMPRESSORS 3.906.22 / 20080400) X 100 .36 TABLE 5.3.722.214.171.1245.198.60 / 28317660) * 100 0.
3.3 Rank I Sales 40 .40/ 243880) X 100 .072% TABLE 5.3.2 7006198.67072 67.4 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 17477305.574.599 % (163.3 RANKING OF THE COMPRESSORS BASED ON THEIR P/V RATIO Product Z X II Y III TABLE 5.8 26586034.86 19579835.= Product Z = = = 62.
0 0 6.10 125.75 0.34 41 .70 120.0 0 5.06 Marginal Cost (in lakhs) 98.75 141.10 71.18 278.6 4 0.65 301.5 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. Since the maximum production capacity of Z is only 50 units the company should produce all the 50 units.00 Direct Material (in lakhs) 83.906. And then X followed by Y.94 0.69 0.10 146.4 4 0.060.37 486.097.400.31 11.3.25 311.0 0 5.937.0 0 12.00 1.02 27.31 181.80 191.30 3.42 470.77 168.69 2.90 Labour Cost (in lakhs) 15.87 62.00 6.28 12.32 81.3.0 0 40 6 13.02 28.011. By doing so the company can earn a profit of Rs 19579835.8 0 0.00 Sales Value Units X Price (in lakhs) selling 283. TABLE 5.1 6 0.006.55 15.581.12 174.96 Contribution(SalesMarginal cost) (in lakhs) 184.79 59.15 75. And te product X can be produced at the normal level.24 200.87 97. And since the contribution of product Y is comparatively less than other products it should produced at its minimum level.638.00 Selling Price 4. In order to earn more profit te company should boost up te sale of product Z.3.6 4 0.From the above table(5.4) it is clear that product Z has highest contribution.
00% X Y Z INTERPRETATION: The profit has been decreased by 784378.74 P/V Ratio: X : Y : Z : 64.00% 64.00% 67.60 241.07 70.07% GRAPH 5.00% 62.3. Product Z having highest contribution sold less in the second period.41 37.00% 63.33% 62. And also the main reason for decrease in profit is unfavorable sales mix.00% 61.06 67.1 COMPARISON OF CONTRIBUTION OF THREE COMPRESSORS 68.59% 67.58 233.00% 60.79 0. This because the sale volume has been decreased.02.74 31. In order to bring up the profit the product Y having less contribution should be produced less. 42 .Fixed Cost (in lakhs) Profit (in lakhs) 38.00% 65.00% 66.21 29.4 4 0.
The operating leverage of the company regarding production of capacitor is 1.790. Increasing the selling price to 2150 will increase the profit to 347.8 % increase of current profit. It was found that breakeven capacity of the production of capacitor lies at 37. This is 17.2.41% of overall production capacity. 3. The item Z (COMPRESSOR SIDE MOUNTED) has higher contribution than other items X ( SC 160 SINGLE CYLINDER COMPRESSOR) and Y (COMPRESSOR SC 160) 9. The company has earned a profit of additional 6 crores in the year 2010 than in the year 2009 8.6. SUGGESTIONS AND CONCLUSION 6. 4. This is because there is no change in fixed cost and major portion of variable cost will be compensated by the excess selling price. Margin of safety of the year 2010 is higher than the year 2009 7. The breakeven sale volume of capacitor lies at 16 thousand units. 6. 5.1 FINDINGS 1. It was found that breakeven sale of overall production is Rs 28 thousand lakhs. FINDINGS. 2. 43 . Because of unfavourable sales mix the profit has been reduced to 1. It shows positive sign of the company.96 crore.
2 SUGGESTIONS From the findings it was found that the breakeven capacity of capacitors is 37. followed by the item SC 160 SINGLE CYLINDER COMPRESSOR and then the item COMPRESSOR SC 160.6. Because of unfavourable sales mix of the compressors the profit of the company has been reduced to 1. 44 .96 crores.. Since the company is following JIT( Just In Time) principle for manufacturing(i. So in order to overcome the loss the product COMPRESSOR SIDE MOUNTED should be given importance. 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.41%.. 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.
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. Cost volume profit analysis helps the management in profit planning. It is a powerful tool to analyze how the change in selling price and change in cost affect the profit position of the company. not only that it also helps to determine the optimum mix of the company. selling price or reducing the cost . 45 . In the competitive world it is very much important for the company to know about its profit position. profit of the firm wabco-tvs can be increased by increase the output . since the company can produce products on demand basis it’s concluded that by increasing the selling price company can earn more profit.6.
2. Richard A. Fundamentals of Financial Management. Orlando. 1990.K. and J. 4.wikipedia. Yuan. Myers. Michael J.TEXTBOOKS REFERRED: 1. McCarthy. and Y. 2. Heaney. 5. 1995.. "A Contingent-Claim Integration of CostVolume-Profit Analysis with Capital Budgeting. "The Information Executives Truly Need. 4. 4th ed. Cheung. J. 7th ed. “Airline Squeeze Play: More Seats. Y. New York: McGraw-Hill.L. 1990. 3.pp. 3. www. and Stewart C. Chan. 1994. 1991. "Dealing With Fuzziness in Cost-Volume-Profit Analysis.moneycontrol.com www. FL: Dryden Press.” The Wall Street Journal.financialexpress. April 18. Brigham.. Peter F.wabco-auto.com www. 1995." Accounting and Business Research 20 (78): 83-95.. WEBSITES REFERRED: 1. Less Legroom.com www. Drucker. B1 and B6.com www." Harvard Business Review 73 (January-February): 54-62. 5. Principles of Corporate Finance." Contemporary Accounting Research 6 (Spring): 738-760.com 46 . Brealey.wabco-tvs. Eugene F. 6.
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