Transcript Document

CVP /BEP Analysis
DR. RANA SINGH
Associate Professor in Management
MBA (Gold Medalist), Ph.D.
Break Even Analysis
• Break Even Analysis refers to the ascertainment
of level of operations where total revenue equals
to total costs.
• Analytical tool to determine probable level of
operations.
• Method of studying the relationship among sales
revenue, variable cost, fixed cost to determine
the level of operation at which all the costs are
equal to the sales revenue and there is no profit
or no loss situation.
• Important technique in profit planning and
managerial decision making
Methods of BEP
• Graphical Method
• Algebraic Method
Graphical Method
• Break Even Analysis is done through Graphical
Charts.
• Chart indicates approximate profit or loss at
different volume of sales volume within a limited
range.
• Break even charts show fixed cost, variable cost
and sales revenue so that profit or loss at a
certain level of production or sales can be
ascertained.
• BEP Chart can be constructed in two ways.
Calcu
Curvi-linear BEP
Assumption in Marginal Costing
• SP and VC will remain constant at any
given level of activity.
• Production and sales can be pushed so
long as the contribution margin is positive.
• Basic assumption is linearity of Cost
Volume and profit
Practical Business Scene
• Increased sales may be obtained if price
concessions are being offered to the
customers.
• Initially total cost will increase at a
declining rate per unit.
• Then at a constant rate per unit
• Finally at an increased rate per unit.
Problem
Problem
Treat soft drinks is a Greater Noida based juice
manufacturing unit and is a single product firm. It sells its
products at Rs. 60 per unit. In 2007, the company
operated at a margin of safety of 40%.
The fixed costs amounted to Rs. 3,60,000. and the variable
cost ratio to sales was 80%.
In 2002, it is estimated that the variable cost will go up by
10% and the fixed costs will increase by 5%.
Find the selling price required to be fixed in 2008 to earn
the same P/V ratio as in 2007.
Assuming the same selling price of Rs. 60 per unit in 2007,
find the number of units to be produced and sold to earn
the same profit as in 2007.
Approach
• Working notes
P/V ratio (in 2007)
P/V ration = SPPU –VCPU
SPPU
= 60 – 48
60
100 = 20%
Approach
• No. of Units sold in (in 2007)
BEP =
FC
Contribution per Unit
=Rs.3,60,000 / Rs. 12
= 30,000 Units
Since MOS is 40%, hence BEP is 60% of Units sold.
Or No. of units sold = BEP/ 60% =
30000 u/.6 =50000
Approach
• Profit earned in 2007
Profit =Total contribution on the sale of
50000 units –Fixed Costs
=(50000 units Rs. 12 –Rs. 3,60,000
=Rs. 6,00,000-Rs. 3,60,000 =Rs. 2,40,000
Approach
• Selling Price to be fixed in 2008
Variable cost in 2008=Rs. 52.80 (Rs.48+Rs. 4.80)
Fixed Cost in 2008 = Rs. 3,78,000(Rs. 3,60,000+ Rs.
18,000)
P/V ratio in 2007 =20%
Since P/V ratio is 20% , VC is 80%.
Hence required Selling Price = Rs. 52.80 / 80% = Rs. 66
Approach
• Profit in 2007 =Rs.2,40,000
• Fixed Cost in 2008 =Rs. 3,78,000
• Desired Contribution in 2008
• (2,40,000+3,78,000) =Rs. 6,18,000
Contribution per unit in 2008= SP PU –VCPU
=Rs. 60- Rs. 52.80 = Rs. 7.20
Approach
• No. of Units to be produced and sold in
2008
• = FC in 2008/ Cont. PU in 2008
• = Rs. 6,18,000/Rs. 7.20 = 85833 Units
Problem
• If MOS is Rs. 2,40,000 (40% of sales) and
PV ratio is 30% of Shriram Pistons ltd.,
Calculate its Break-even sales.
• MOS =
Profit
P/V ratio
Or, Profit = MOS
P/V ratio
Approach
• =Rs. 2,40,000
30 % =Rs. 72,000
• Total Sales = MOS / 40 % =
• = Rs. 2,40,000
40%
= Rs. 6,00,000
Contribution = Sales
P/V ratio
= Rs. 6,00,000
30/100 =Rs. 1,80,000
Approach
• Fixed Cost = Contribution –Profit
= Rs. 1,80,000 –Rs. 72,000
= Rs. 1,08,000
Break-even sales =
FC
P/V ratio
= 1,08,000
30%
=Rs. 3,60,000
Approach
• Amount of Profit on sale of Rs. 9,00,000
= Sales
P/V ratio – Fixed Cost
= (Rs. 9,00,000
30% ) –Rs. 1,08,000
= Rs. 2,70,000 –Rs. 1,08,000
=Rs.1,62,000
Problem
• A SME in the name of Raj Ratan Flour mills incurred
fixed expenses of Rs. 4,50,000 with sales of Rs.
15,00,000 and earned a profit of Rs. 3,00,000 during the
first half year.
In the second half year, it suffered a loss of Rs. 1,50,000.
Calculate (i) The P/V ratio, BEP and Margin of safety
ii) Expected sales-volume for the second half year
assuming that selling price and fixed expenses
remained unchanged during the second half year.
iii) The break even point and Margin of safety for the whole
year.
Approach
• Calculation of P/V ratio BEP and MOS
P/V ratio = Contribution
Sales
= Fixed Cost + profit
Sales
= 4,50,000 + 3,00,000
15,00,000
100
100
100
=50%
Approach
• BEP (Rs.) = Fixed Cost
P/V Ratio
= Rs. 4,50,000 / 50% = Rs. 9,00,000
MOS = Actual Sales –Break Even Sales
=
15,00,000-9,00,000 =Rs. 6,00,000