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What will be the operating profit/loss at a sales volume? 3. What profit will be earned, if there is Q % increase in sales volume 4. What will be the effect on operating profit if the Co¶s F.C¶s increase? 5. What is the additional sales volume required to make good a R% reduction in selling price so as to maintain the current profit level? 6. What will be the effect on profit of the firms if the firm achieves a reduction in VC?
BREAK EVEN ANALYSIS The Break ±even point is defined as the volume of activity at which total sales revenue exactly equal total costs of the output produced or sold. Since at this level, there is neither a profit nor a loss, it is also called no profit no loss level. In a broader sense, BE analysis refers to the study of relationship between cost, volume & profit at different levels of sales. Hence it is known as cost-volume-profit analysis. CV P analysis is a model to study the interrelated relationship between cost, price and profit structure of a co. It is a formal profit planning approach based on established relationships between different factors affecting profit. The BE Equation: we know Sales = VC + FC OR Sales ± VC = FC OR Contribution = FC
In order to work out the required no. of units to break ± even (where the amount of contribution will be sufficient to cover total fixed cost), the total fixed cost must be divided by unit contribution. Be Point = (Units) BEP = Fc Sp-vc Beep in rupees = Beep in unit x sp Again using up Ratio BEP= Fc (Refer) Pv Ratio Example : Fc = Rs. 1200 Fc Contribution per unit
Sales = 8,000 Sales(Unit) = 1000 BEP = Fc = Cont/unit (Rs) = 1200 = 400 unit 8-5 = 1200 = Rs. 3200 3 8 Break ± even Analysis Project Data Fixed Cost : Rs. 300,000
Variable cost : Rs 15/ unit
Selling Price : Rs 25/unit Capacity BE Sales (Volume) : 60,000 units = Fc Cont. per unit = 300,000 10 BE (Rs) = 30,000 units
= 30,000 x Rs. 25 = Rs. 750000 OR
= Fc P/v RATIO = 300, 000 = Rs. 750,000
10 25 P/V Ratio = CONTBN Or Contend/per unit SALES SP
Given a Level of Profit expected or planned which is the required Level of Sales ? If P = Rs. 200,000 Sales ? Sales = Fc + Vc + P = 300,000 + 3 S + 200,000 5
2S 5S =
= 500,000 5000 x 5 = Rs. 12,50,000 2 Is find out Profit / Loss at a given Level of Sale . If Sales = Rs. 600,000 What is P ? BE Sales = FC + VC = 300,000 + 3 x 600,000 5 = 660,000 If Sales = N.600,000
There is a Loss = 6,60,00 ± 600,000 = Rs. 60,000 BE. Analysis If Break even Level is al the Level of total capacity installed, I.e., 100 %, how to determine sp. ? B.E. = 60,000 units SP ?
60000 P = 300 000 + 60 000 x 15 = Rs. 12,00,000 P = 1200 000/60 000 units = Rs. 20 . Per unit B.E. ANALYSIS
MARGIN of SAFETY The excess of actual Sales revenue (ASR) over the BE Sales revenue is known as the margin of Safety. Margin of Safety = (ASR ± BESR) Ms. Ratis = ASR-BESR ASR Ms. Ratio in dictates the percentage by which the actual sales may be reduced before they fall bellow the BE. Sales volume Suppose the sale is 40 000 unit (40 000 x 25 = Rs. 10,00,000) the margin of safety is 10,000,00 ± 750,000 =Rs. 250,000 And the MS. Ratis is 250,000 = 25 % 10,00,000 PROFIT =( MS in amount ) x P.V.ratio
Or PROFIT = (MS is units) x CM per unit Or PROFIT = 250,000 x .40 = Rs. 100 000 Or PROFIT = 10000 unit x Rs. 10 = Rs. 100 000 Example : Compete margin of Safe ling of x 4 from the information given below : Selling Price = Rs. 8/ unit Vc FC Sales = Rs. 5/ unit = Rs. 45000 = 25,000 unit /pa
i. M/s = Actual sales ± BE sales = Rs. 200 000 ±120 000 = Rs. 80,000 (BE sales = 45000/8-5 = 15000 unit x Rs = 120 000)
ii. M/s is units
= 25000 units ± 15000 = 10,000 units = 30000 x 10 = Rs. 8000 37.5
iii. M/s is rupees = Profit P/v Rates
PVR= 3/8 = 37.5 % Profit = 200000 ± (45000 +125000) Rs. 30,000 iv. M/s is unit = Profit Cont/unit = 30,000 = 10,000 units 3
Angle of incidence .in the BE chart where Sales line inter sales the total cost line that angle is known as angle of incidence .A larger angle would mean high rate of profit. A narrow angle reveals high vc that resale's in low profit merging of safest and angle of incidence should be studied examining the soundness of a co.
BREAK EVEN ANALYSIS Assume pillions : ABE. Chart is made on the assume. Motion that 1. All cost can be classified into FC & Vc. 2. Costs and sale price have a linear venation 3. The selling price will not change all different levels of operations. 4. There will be no change in the manufacturing process , & operating affiance will remain the same. 5. There will be no opening or closing stock. The no of units produced & sold will be the same. 6. There will be no change in product mix. 7. FC will remain constant & Vc. Will change in proportion to
8. Management prophecies do not change in the expansions in production activities. BE.Analysis. Limitations BE Analysis & chart are good technique & aid managerial decision making but there are no smash that for sound panicle integument this is because of the following limitations. 1. Segregation of costs into Fc & Vc cannot be done accurately. 2. Revenue & cost lines may actual thick leads so that we have BE Area & not just a point. 3. The assembling of constant SP at different of sales which may be unrealistic. 4. Assumplin of homogeneous products invalid.
5. Only one product or sales mix is studied & the effects of various product mixes on profits cannot be studied. 6. If the conditions of losing as change during a period , the BE. Charts became unrealities. Make or Buy Make ± your supply linen are assured. Buy ± your costs dive. Make ± your business becomes unmanageably large. Buy ± you need to control your vender lease. Make ± you may not have the best technology. Buy ± ymr vendors will use the state off art technology. MAKE OR BUY
A firm that requires 10,000 units of a component can purchase then from a supplier for Rs. 90,000 If the same component is mineralized internally, it would cost (per unit) Rs Direct material Direct jailor : : 3.00 3.50 1.50 2.00
Variable overhead : Fixed overhead :
Total Rs. 10.00 per unit Assuming the firm has spare capacity should it make the component or buy it ?
The relevant cost for making in hones are Rs. & per unit. Hence MAKE A TV manufacturing co. is considering whether to buy a particular component- CM2 or to manufacture it. The component is available in the market at the rate of Rs. 10 each. The cost elements of manufacturing The component ± CM2 per unit are VC : Rs. 5
Machine hour required per unit : 3 hours The machine on which the component CME . Is processed is also used for another products with its cost structure as : SP per unit Vc per unit Rs. 100 60
Contribution per unit
No. of hours read on that machine Per unit Contribution per hour 20 hours 40/20= Rs.2
Should the co. Buy or manufacture ? In this satiation machinery is the limiting factor. (it cannot therefore be assumed that spare capacity is available for manufacturing) In such cases the relevant costs are marginal cost plus lost contribution. Since the machinery is fully initialized for manufacturing PP, the component- CM2 would effect PP production and so the cost of CM2 would be VC Rs.5
Machinery cost (3 hours) Total Decision Real :
Rs. 6 Rs.11
When VC + contribution lost price BUY In the present case RS. 5+6 > Rs. 10 BUY. The decision essentially depends on this opportunity cost.