CHAPTER 7

BREAK-EVEN ANALYSIS
AND PROFIT PLANNING
 Profits
LEARNING OBJECTIVES Break-
Losses even
point
After completing this chapter you will be able to:
 Compute Break-even sales volume/revenue.
 Understand the cost behaviour of a business firm.
 Segregate Mixed costs into Fixed and Variable cost components.
 Comprehend major applications of the Break-even Analysis.
 Determine cash break-even point.
 Compute desired sales volume to attain a particular level of profits.
 Prepare Volume-Cost-Profit (VCP) graph as a tool of Profit Planning and Cash Break-even graph.

2
INTRODUCTION
 The knowledge of the Break-even point (BEP) of the business firm is very important to its executive.

 The break-even sales volume/revenue (BESR) has to be attained/achieved before the firm can
conceive of earning profits.
 However, no business enterprise can survive for a long time operating at break-even sales
level only; it must be able to earn adequate/desired profits for its owners and shareholders.
 Therefore, business executive(s) should be fully aware of the required sales volume to
earn the desired profits.

 In the case the market survey is optimistic of realising sales level higher than BESR, only then it will
be profitable to execute a new project; otherwise, it merits rejection at the initial stage itself.

3
 COST BEHAVIOUR
The relevant cost concepts are:
I. Fixed costs,
II. Variable costs, and
III. Mixed costs.

 Fixed Costs are costs of inputs, which do not vary with changes in the volume of activity (say,
production, sales, machine hours, labour hours) within a specified range (known as the relevant range)
for a given period of time. Examples: factory rent, factory insurance, salaries of permanent staff, lease
rent of plant etc.
 Fixed costs represent the capacity costs of a business firm.
 Given their nature of non-decreasing, such costs are also designated as burden costs and fixed
overhead costs.
4
COST BEHAVIOUR- FIXED COSTS
 Fixed costs are subject to change over a period of time. Examples: factory rent may increase when the contract

gets renewed, insurance rates may change, and salaries of staff may increase in the subsequent year; these
changes are independent of the changes in the firm’s production.
 Total fixed costs remain unchanged only when the firm’s production is within the relevant range. In case,

production volume increases beyond the relevant range, fixed costs will go up.
For example, the firm has a normal capacity to produce 10,000 units; to produce 15,000 units, the firm will
evidently require purchasing a new plant, employing additional personnel, and so on.
 Businesses should be careful and cautious before committing their firms to additional fixed costs.

 A cost structure with lower fixed costs may prove to be a boon in periods of recession when sales decline. For

example, the recent preference for outsourcing many services instead of employing permanent staff lowers fixed
costs.

5
COST BEHAVIOUR- VARIABLE COSTS
Variable Costs (VC) are costs of inputs, which are assumed to vary in direct proportion to the changes

in the level of activity (say production, sales) within a relevant range for a given period of time. For
example, material costs, power costs, excise duty, and salesmen’s commission.
Variable cost per unit remains unchanged.

Constituents of variable costs are also likely to change over a period of time. For instance, power

tariffs may be revised and so the excise duties over the period of time.
Unit variable cost is constant within a specified relevant range only. Therefore, cost per kg of the

material purchased should be determined with reference to the budgeted purchases planned for the
period. For example, material cost per kg is likely to be less if materials purchased are 10,000 kg than
1,000 kg (due to quantity discount).
6
PRACTICAL EXAMPLE 1

Mr. Snow is considering having a stall to sell ice creams in an exhibition that is being organised for 10
days. To have a stall, he is required to pay:

 Rs 8,000 as the entry fee;

 Rs 7,000 for installation of set up, and

 Rs 15 per unit to buy ice-cream.

His selling price is Rs 25 per unit of ice-cream.

1. How many units of ice cream he should sell so that he does not suffer any loss?

7
PRACTICAL EXAMPLE 1
 Contribution margin per unit (CMPU) = Selling price per unit – Variable cost per unit
 Fixed cost = Entry fee + Installation fee

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 𝑇𝐹𝐶

𝐵𝐸𝑃 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 =
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝑅𝑠 15000
= 1500 𝑢𝑛𝑖𝑡𝑠
𝑅𝑠 10

2. Will Mr. Snow decide to go for the stall if his sales are likely to be 1,500 units in his perception?

8
PRACTICAL EXAMPLE 1
Confirmation Table: Income Statement

Particulars Amount

Sales revenues (1,500 units × Rs 25) Rs 37,500

Less: cost of ice-creams/variable costs (1,500 units × Rs 15) 22,500

Total contribution (1,500 units × Rs 10) 15,000

Less: total fixed costs (entry fees + stall expenses) 15,000

Profit Nil
PRACTICAL EXAMPLE 1

3. How many ice-creams should he be able to sell in order to earn a profit of Rs 25,000?

𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑣𝑜𝑙𝑢𝑚𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝑅𝑠 15,000 + 𝑅𝑠 25,000
=
𝑅𝑠10

= 4,000 units

10
PRACTICAL EXAMPLE 1

Confirmation Table: Income Statement at 4,000 units.

Particulars Amount
Sales revenues (4,000 units × Rs 25) Rs 1,00,000

Less: variable costs (4,000 units × Rs 15) 60,000

Total contribution (4,000 units × Rs 10) 40,000

Less: fixed costs 15,000

Profits (before taxes) 25,000

11
BREAK-EVEN ANALYSIS
In the case of multi-product firms, BEP cannot be determined on the basis of units.

𝑇𝑜𝑡𝑎𝑙 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

𝐵𝐸𝑆𝑅 𝑖𝑛 𝑟𝑢𝑝𝑒𝑒𝑠 =
𝐶/𝑉𝑟𝑎𝑡𝑖𝑜
Where,
𝐶 𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑚𝑎𝑟𝑔𝑖𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑡𝑜 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜 = ∗ 100
𝑉 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 + 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑖𝑛 𝑟𝑢𝑝𝑒𝑒𝑠 =
𝐶/𝑉𝑟𝑎𝑡𝑖𝑜

12
PRACTICAL EXAMPLE 1
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Variable cost to volume ratio (V/V ratio)= ∗ 100
𝑆𝑎𝑙𝑒𝑠 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 𝑜𝑟 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 − 𝐵𝐸𝑆𝑅

𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦
𝑀𝑎𝑟𝑔𝑖𝑛 𝑜𝑓 𝑠𝑎𝑓𝑒𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 = ∗ 100
𝐴𝑐𝑡𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 (𝑜𝑟 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠)

 The sum of C/V ratio and V/V ratio is 1 or 100%.

 Assumptions of break-even analysis:
1. Selling price per unit should remain constant
2. Variable cost per unit should remain constant
3. Fixed costs should remain constant
13
 PRACTICAL EXAMPLE 1

4. What will be the C/V ratio, BESR, desired sales revenue (for profit of 25000), V/V ratio, and margin of
safety (assuming budgeted sales of 2500 units) of, Mr. Snow, the ice-cream vendor?

5. Between C/V ratio and V/V ratio, which one should be higher for more profitability?

6. Should a firm have higher or lower BEP/BESR? Why?

7. What will be effect on BESR if assumptions are violated?

14
PRACTICAL EXAMPLE 1

𝑅𝑠 10
C/V Ratio = ∗ 100 = 40%
𝑅𝑠 25
𝑅𝑠 15000
BESR (in rupees) = = Rs 37,500
40 %
𝑅𝑠 15000+𝑅𝑠 25000
Desired sales revenue = = Rs 1,00,000
40 %
𝑅𝑠 15
V/V Ratio = ∗ 100 = 60%
𝑅𝑠 25
Margin of safety (in units) = 2500 units – 1500 units = 1000 units
Margin of safety (in rupees) = Rs 62500 – Rs 37500 = Rs 25000
𝑅𝑠 25000
Margin of safety (ratio) = ∗ 100 = 40%
𝑅𝑠 62500

15
Table: Effect of Changes in Costs and Selling Price on BEP/BESR, Margin of Safety and Profit.

Impact on
Particulars
BESR MS Profit
(i) Change in fixed costs:
Increase Increase Decrease Decrease
Decrease Decrease Increase Increase
(ii) Change in variable costs:
Increase Increase Decrease Decrease
Decrease Decrease Increase Increase
(iii) Change in selling price:
Increase Decrease Increase Increase
Decrease Increase Decrease Decrease 16
COST BEHAVIOUR- MIXED COSTS
 Mixed Costs (MC) are costs of inputs, which change with the change in volume of activity but not in the same
proportion (like VC). For example, telephone, electricity (metre rent represents fixed charge and electricity usage as
a variable charge), consumable stores, repairs and maintenance costs.
 Also called semi-variable costs.
 Such costs need to be segregated into fixed and variable components. The best method to apportion such costs is
the Method of Least Squares. The application of Method of Least Squares requires:

i. Compilation of total mixed costs corresponding to the level of activity (which may be machine hours used,
labour hours employed and output) over a period of time.

ii. Out of the various measures of activity suggested above, a measure, which exhibits maximum correlation
coefficient with mixed costs should be picked up.

iii. The measure of activity serves as an independent variable and mixed cost as dependent variable.

17
 COST BEHAVIOUR- MIXED COSTS
iv. The basic straight line regression equation is
Y = a + bX (5.1)
Where Y = Total mixed cost, a = Fixed cost element of mixed cost, b = Variable cost element of mixed cost, X =
Measure of activity (say production, machine hours)
v. From Eq. 5.1, follows the two simultaneous linear equations:
ΣY = na + bΣX (5.2)
ΣXY = aΣX + bΣX2 (5.3)
The solution of Equations 5.2 and 5.3 provides the most objective and unbiased estimates of parameter a (fixed
cost element) and parameter b (variable cost element) and, hence, the credence of results.

18
PRACTICAL EXAMPLE 2
The following is the behaviour of the mixed cost of a manufacturing firm for the first 6 months
corresponding to output produced:

Month Output produced (X) Mixed costs (Y)

January 200 units Rs 30,000
February 220 32,000
March 170 27,000
April 240 34,000
May 180 28,000
June 190 29,000
1,200 1,80,000
Segregate these costs into fixed and variable elements.
19
PRACTICAL EXAMPLE 2
Table: Segregation of Mixed Cost into Fixed and Variable

Units produced (X) Mixed cost (Y) XY X2

200 30,000 60,00,000 40,000

220 32,000 70,40,000 48,400
170 27,000 45,90,000 28,900
240 34,000 81,60,000 57,600
180 28,000 50,40,000 32,400
190 29,000 55,10,000 36,100
1,200 1,80,000 3,63,40,000 2,43,400
20
 Two linear equations are:

ΣY = na + b ΣX
ΣXY = a ΣX + b ΣX2
 Substituting the values, we get

1,80,000 = 6a + 1,200b (1)

3,63,40,000 = 1,200a + 2,43,400b (2)
 Multiplying Equation 1 by 200,

3,60,00,000 = 1,200a + 2,40,000b (3)

 Subtracting Eq. 3 from Eq. 2,

3,40,000 = 3,400b or b = 3,40,000/3,400 = 100

 Substituting the value of b = 100 in Equation 1,

1,80,000 = 6a + (1,200 × 100)

1,80,000 - 1,20,000 = 6a or a = 60,000/6 = 10,000

 Fixed cost is Rs 10,000 per month (as per value of a) and variable cost is Rs 100 per unit produced (as per value of b).

21
PRACTICAL EXAMPLE 2

Table: Analysis of Mixed Costs into Fixed and Variable Elements

Month Output Fixed costs Variable costs* Total

January 200 units 10,000 20,000 30,000
February 220 10,000 22,000 32,000
March 170 10,000 17,000 27,000
April 240 10,000 24,000 34,000
May 180 10,000 18,000 28,000
June 190 10,000 19,000 29,000
* the unit variable cost of Rs 100 per unit.
22
PRACTICAL EXAMPLE 3
The following data are obtained from the records of a factory for the preceding year. Except as noted, the cost-
revenue relationship for the present year is expected to follow the same pattern as in the preceding year.
Sales (10,000 units × Rs 120) Rs 12,00,000
Less variable costs (10,000 units × Rs 60):
Direct material Rs 2,00,000
Direct labour (on output basis) 2,50,000
Other variable costs (say power, selling commission) 1,50,000 6,00,000
Contribution (10,000 units × Rs 60) 6,00,000
Less annual fixed costs:
Rent Rs 60,000
Depreciation 50,000
Advertising 40,000
Salaries of office staff and other administrative costs 1,20,000
Other fixed expenses 30,000 3,00,000
Earnings before taxes (EBT) 3,00,000
Less taxes (0.35) 1,05,000
23
Earnings after taxes (EAT) 1,95,000
 PRACTICAL EXAMPLE 3

Additional information

BEP (in units) = TFC Rs 3,00,000/Rs 60 CMPU 5,000

C/V ratio = CMPU Rs 60/Rs 120 selling price per unit 50%

V/V ratio = 100% - C/V ratio 50%

BESR = Rs 3,00,000/50% C/V ratio Rs 6,00,000

Margin of safety (Rs 12,00,000 Actual sales – Rs 6,00,000 BESR) 6,00,000

MS Ratio (Rs 6,00,000/Rs 12,00,000) 50%

24
PRACTICAL EXAMPLE 3
1. Desired Sales Revenue to achieve desired earnings after taxes (EAT) of Rs 3,25,000

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝐸𝐴𝑇
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 +
1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑡𝑜 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 3,25,000
𝑅𝑠 3,00,000 +
1 − 0.35
=
50%

= Rs 16,00,000

25
PRACTICAL EXAMPLE 3

Confirmation Table: EAT at Sales Revenue of Rs 16,00,000

Particulars Amount
Sales revenues Rs 16,00,000
Less variable costs (0.50 × Rs 16,00,000) 8,00,000
Contribution 8,00,000
Less fixed costs 3,00,000
EBT 5,00,000
Less taxes (0.35) 1,75,000
EAT 3,25,000
26
PRACTICAL EXAMPLE 3
2. Impact of 10% projected increase in sales revenue on profits:

Projected EBT = (Budgeted sales revenue – Breakeven sales revenue) × C/V Ratio
= (Rs 13,20,000 – Rs 6,00,000) * 0.50
= Rs 3,60,000

Projected EAT = [(Budget sales revenue – BESR) × C/V ratio] (1 – t)

= [(Rs 13,20,000 – Rs 6,00,000)* 0.50] (1-0.35)
= Rs 2,34,000

27
PRACTICAL EXAMPLE 3
Verification Table: EBT and EAT at Budgeted Sales of Rs 13,20,000

Particulars Amount
Sales revenues Rs 13,20,000
Less variable costs (Rs 13,20,000 × 0.5) 6,60,000
Contribution 6,60,000
Less fixed costs 3,00,000
EBT 3,60,000
Less taxes (0.35) 1,26,000
EAT 2,34,000
Question: What will be the impact on profits if budgeted sales revenue reduces by 10%?
28
PRACTICAL EXAMPLE 3
3. Impact of increase in Fixed Costs from Rs 2,00,000 to Rs 5,00,000 (expansion) on Profits

𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝐹𝐶 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐹𝐶
𝐵𝐸𝑆𝑅 𝑟𝑒𝑣𝑖𝑠𝑒𝑑 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑉𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 3,00,000 + 𝑅𝑠 2,00,000
=
50%
= Rs 10,00,000

𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝐹𝐶 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐹𝐶 + 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝐸𝐵𝑇

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑡𝑜 𝑒𝑎𝑟𝑛 𝑒𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑉𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 3,00,000 + 𝑅𝑠 2,00,000 + 𝑅𝑠 3,00,000

=
50%
= Rs 16,00,000
29
PRACTICAL EXAMPLE 3

Verification Table: Desired Sales revenue to Earn Existing Profit after Expansion

Particulars Amount
Sales revenues Rs 16,00,000
Less variable costs (Rs 16,00,000 × 0.50) 8,00,000
Total Contribution 8,00,000
Less: fixed costs (Rs 3,00,000 + Rs 2,00,000) 5,00,000
EBT 3,00,000
Less taxes (0.35) 1,05,000
EAT 1,95,000
30
PRACTICAL EXAMPLE 3
3b. If expansion should lead to a budgeted increase in EAT by 50%

𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝐸𝐴𝑇 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐸𝐴𝑇

𝐸𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝐹𝐶 + 𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐹𝐶 +
1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑉𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 1,95,000 + 𝑅𝑠 97,500
𝑅𝑠 3,00,000 + 𝑅𝑠 2,00,000 +
1 − 0.35
=
50%

= Rs 19,00,000

31
PRACTICAL EXAMPLE 3
Confirmation Table: Determination of Profit at Sales of Rs 19 Lakh.

Particulars Amount
Sales revenues Rs 19,00,000
Less variable costs (Rs 19,00,000 × 0.50) 9,50,000
Total Contribution 9,50,000
Less: Total fixed costs 5,00,000
EBT 4,50,000
Less taxes (0.35) 1,57,500
EAT 2,92,500
Question: If fixed costs increase by Rs 1,00,000 instead of Rs 2,00,000 assuming everything else
to be the same, what will be the resulting figures of sales revenue?
32
PRACTICAL EXAMPLE 3
4. Impact of increase in Variable Cost per unit by 20% on Profit

Table: Impact of Change in Variable Costs on All Major Parameters

Particulars Amount
Sales revenues (10,000 units × Rs 120) Rs 12,00,000
Less variable costs (Rs 10,000 units × Rs 72) 7,20,000
Total Contribution (10,000 units × Rs 48) 4,80,000
Less: Total fixed costs 3,00,000
EBT 1,80,000
Less taxes (0.35) 63,000
EAT 1,17,000 33
PRACTICAL EXAMPLE 3
4. Impact of increase in Variable Cost per unit by 20% on Profit

Additional information:
BEP (units) = Rs 3,00,000/Rs 48 6,250 units
C/V ratio = Rs 48/Rs 120 40 per cent
V/V ratio = 100% - 40% 60 per cent
BESR = (Rs 3,00,000/40%) Rs 7,50,000
Margin of safety (Rs 12,00,000 – Rs 7,50,000) 4,50,000
MS ratio (Rs 4,50,000 / Rs 12,00,000) 37.5 per cent

34
PRACTICAL EXAMPLE 3
5. Impact of reduction in Selling Price from Rs 120 to Rs 100 on Profits:

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠 + 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝐸𝐵𝑇

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑣𝑜𝑙𝑢𝑚𝑒 𝑡𝑜 𝑚𝑎𝑖𝑛𝑡𝑎𝑖𝑛 𝑒𝑥𝑖𝑠𝑡𝑖𝑛𝑔 𝐸𝐵𝑇 =
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 3,00,000 + 𝑅𝑠 3,00,000
=
40%

= Rs 15,00,000

35
 PRACTICAL EXAMPLE 3
6. Impact of Multiple Changes on Profit:

Assume the following set of revised data in Example 3 related to factory owner:

Particulars Existing data Revised data

Selling price per unit Rs120 Rs 100
Total fixed cost 3,00,000 5,00,000
VC per unit 60 50
CM per unit 60 50
C/V ratio 50% 50%

36
PRACTICAL EXAMPLE 3
𝐹𝐶 𝑒𝑥𝑖𝑠𝑡𝑖𝑛𝑔 + 𝐹𝐶 (𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙)
𝐵𝐸𝑆𝑅 𝑟𝑒𝑣𝑖𝑠𝑒𝑑 =
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜
Where, Revised C/V Ratio = Revised CMPU/Revised SP

𝑅𝑠 5,00,000
𝐵𝐸𝑆𝑅 𝑟𝑒𝑣𝑖𝑠𝑒𝑑 = = 𝑅𝑠 10,00,000
50%

𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝐸𝐴𝑇
𝐹𝐶 𝑒𝑥𝑖𝑠𝑡𝑖𝑛𝑔 + 𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 +
1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒
𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑠𝑎𝑙𝑒𝑠 𝑣𝑜𝑙𝑢𝑚𝑒 𝑡𝑜 𝑒𝑎𝑟𝑛 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝐸𝐴𝑇 =
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 1,95,000
𝑅𝑠 5,00,000 +
1 − 0.35
=
50%
= Rs 16,00,000
37
PRACTICAL EXAMPLE 3
7. Cash Break-even Point (CBEP/CBESR)
𝑇𝑜𝑡𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 (𝐶𝐹𝐶)
𝐶𝐵𝐸𝑃 =
𝐶𝑀𝑃𝑈

𝑅𝑠 3,00,000 − 𝑅𝑠 50,000
=
𝑅𝑠 60
=4,167 units

𝑇𝑜𝑡𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 𝐶𝐹𝐶

𝐶𝐵𝐸𝑆𝑅 =
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 3,00,000 − 𝑅𝑠 50,000
=
50%
= Rs 5,00,000

38
PRACTICAL EXAMPLE 4
Break-even Applications for Multi-Product Firm
Hypothetical firm manufactures and sells three types of products (A, B and C). The details are as follows:

Particulars A B C Total

Sales revenue (Rs lakh) 200 500 300 1,000

Less variable costs 100 300 180 580

Total contribution 100 200 120 420

The fixed costs are Rs 210 lakh of the company.

39
PRACTICAL EXAMPLE 4
𝐶𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑓𝑟𝑜𝑚 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 − 𝑡𝑜 − 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜 = ∗ 100
𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 𝑓𝑟𝑜𝑚 𝑎𝑙𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑠

𝑅𝑠 420 𝑙𝑎𝑘ℎ𝑠
=
𝑅𝑠 1000 𝑙𝑎𝑘ℎ𝑠
=42%

𝑇𝑜𝑡𝑎𝑙 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠

𝐵𝐸𝑆𝑅 =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑡𝑜 − 𝑣𝑜𝑙𝑢𝑚𝑒 𝑟𝑎𝑡𝑖𝑜

𝑅𝑠 210 𝑙𝑎𝑘ℎ𝑠
=
42 %
= Rs 500 lakh
* Additional assumption: The sales mix should remain unchanged.
40
 BREAK-EVEN ANALYSIS:
GRAPHICAL PRESENTATION
Volume-cost-profit (VCP) graph portrays the relationship of sales volume with costs and profits.

 It exhibits BEP/BESR as well as the levels of costs and profits at varying levels of sales.

 While the horizontal axis represents sales revenues, costs and profits are measured on the vertical axis.

 When the scales are uniform, the 450 line serves as the useful proxy of the sales line as sales revenues

are always equal to the sum of total costs (FC + VC) and profits (loss).

The VCP graph is appropriately referred to as a tool of profit planning, as all the constituents of profit

planning are present in this graph.

41
VOLUME-COST-PROFIT GRAPH
 The BEP is located where total sales revenue = total costs

 FC line is parallel to the horizontal axis (x-axis).

 VC line superimposes on FC line and moves upward uniformly @ V/V ratio

 The area right to the BEP is profit area; the area left to the BEP represents loss area.

 The vertical distance between the sales line and total cost line measures the budgeted net income

before taxes.

 At BEP, an angle is formed, called the angle of incidence. The effort should be to have this angle as

large as possible as it is indicative of a higher rate of profit.

42
When sales = Rs 3,00,000 (Point A in Fig 5.1)
TFC = Rs 3,00,000
TVC = Rs 1,50,000 (50% of sales)
TC = Rs 4,50,000
Therefore, loss = Rs 1,50,000
When sales = Rs 12,00,000 (Point B in Fig 5.1)
TFC = Rs 3,00,000
TVC = Rs 6,00,000 (50% of sales)
TC = Rs 9,00,000
Therefore, profit = Rs 3,00,000
When sales = Rs 18,00,000 (Point C in Fig 5.1)
TFC = Rs 3,00,000
TVC = Rs 9,00,000 (50% of sales)
TC = Rs 12,00,000
43
In Fig 5.2, VC is split into direct material costs, direct
labour cost and other variable costs.
The steps involved in Fig 5.2 are the same as those of Fig
5.1 except that variable cost area (vertical distance between
total cost and fixed cost) needs to be further split-up into 3
parts.
The VC area is divided in the cost ratio of 20:25:15 (i.e.,
4:5:1) to represent VC elements.
By drawing a line perpendicular from any sales volume on
the horizontal axis, the corresponding FC, VC and its
components, and profits can be ascertained on the vertical
axis.
The profit area can be bifurcated in the ratio of 65 and 35
to represent EAT and taxes.

Question: What will be the sales volume that will yield an EBT
of Rs 6,00,000?

44
VOLUME-PROFIT GRAPH
The V/P graph contains several points where each point
measures the amount of profit (or loss) in relation to the sales
volume.
The horizontal axis in the middle represents sales line.
Losses are to be represented on vertical axis below the sales
line. Profits are represented on vertical axis above the sales
line.
From Fig 5.1, at the sales levels of Rs 3 lakh and Rs 12 lakh,
there is a loss of Rs 1,50,000 and profit of Rs 3,00,000,
respectively.
Profit line has been drawn from the loss base of Rs 3,00,000
(equivalent to the TFC at zero sales volume) and from the
other two profit/loss points of Rs 1,50,000 and Rs 3,00,000.
The point of intersection of the profit line and the sales line is
BESR/BEP (Rs 6 lakh).

Question: What is the profit when sales is (a) Rs 15,00,000 and (b)
Rs 18,00,000? 45
CASH BREAK-EVEN (CB) GRAPH
Each point on the graph shows the amount of cash loss/cash profit in
relation to the sales volume.
Also called cash-volume graph (C/V) graph.
Cash break-even graph has the cash fixed cost line instead of the
total fixed cost line.
Cash fixed cost = Total fixed cost – Depreciation
= Rs 3,00,000 – Rs 50,000 = Rs 2,50,000
At sales = Rs 3,00,000, total cash costs are Rs 4,00,000 (Rs 2,50,000
+ Rs 1,50,000). At sales = Rs 12,00,000, total cash costs are Rs
8,50,000 (Rs 2,50,000 + Rs 6,00,000)
Thus, total cash cost line emanates from Rs 2.5 lakh base (on Y axis)
and passes through two points of Rs 4,00,000 (point A) and Rs
8,50,000 (point B).
The point of intersection of the total cash cost line and the sales line
is the cash break-even point (CBEP).
The area to the right of CBEP indicates cash surplus situations and
the area to the left of it represents cash deficiency situations.

46
47