Bep Numericals

7/30/2019 Bep Numericals

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BREAK EVEN POINT ANALYSIS NUMERICALS

You are given the following information about two competing companies during the year 2008.

A friend of yours seeks your advice as to which companys shares he should purchase. Assuming

that the capital invested is equal for the two companies, state the advice that you will give.

Ans. The prospects of shareholders in these two companies; must be compared in terms of P.V. ratio.

Fixed costs, BEP sales and Margin of Safety as at present. The company which commands more merits

that the other must be chosen for investment.

Q. 36. XYZ Company Ltd., is manufacturing a uniform product. At present, the company incurs

the expenses as follows:

Variable cost per unit Rs. 6.


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Fixed expenses for one year Rs. 35,000

Consider the price range of substitutes and of similar goods, produced by other concerns, the

company has fixed the selling price at Rs. 10 per unit. Management considers that Rs 30,000 as

profit will be a fair return on investment for the year. Assuming that the fixed costs, remain

constant for the next trading period, find out the volume of sales required to earn the desired profit.

Solution:

Q. 37. XYZ Company Ltd., produces a uniform product, X. Out of competition, it is forced to

reduce the price of its product. The Company plans to announce a price reduction of 10% to

capture more market. The accountnant gives the relative data as follows:


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Though, price is reduced the company wants to maintain the present volume of profit through increased

sales. Therefore, it wants to know the required volume of sales. Assume that fixed expenses will remainconstant at the new level of activity.

Since the price is going to be reduced, we have to find out the P.V. Ratio for the same volume of sales

(20,000 units) but at the reduced price rate; then only the require volume of sales can be calculated.


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Q. 38. ABC Ltd. Data is given below:

You are required to calculate the Break Even point and Margin of safety and also to provide

information to the management regarding the possible effects of the following contingencies (each

to be considered separately.)

1. Fixed costs increase by 10%

2. Variable costs decrease by 20%

3. Selling price is increased by 20%.

Suitable charts may be presented showing the effect of these change in profit factors

Workings:


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Note : Since fixed costs have increased by Rs. 6,000 profit will be reduced to some extent: (because other

factors are remaining constant). This can be verified as follows:

Sales = Rs.2,00,000

Note : Since fixed costs have increased the Break-even sales will also be increased, in the chart shownbelow, the total costs line and the sales line intersect at a point indicating break-even sales of Rs.

1,32,000. Thus break-even sales is increased by Rs.12,000 (i.e., to absorb the additional fixed costs of Rs.

6,000. The company has to effect the sales for Rs. 12,000 more and react the B.E.P.) This can be checked

as follows:

i.e., an increase of Rs. 12,000.

At the present level of sales, the break-even sales have increased. Therefore, the remaining

margin(Margin of Safety) will be decreased i.e.,

Q. 40. From the following data, calculate B.E.P. and P.V.R.


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. From the following, calculate the Cash Break-even Point.


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Q. 42. Sales are Rs 150,000 producing a profit of Rs. 4,000 in period 1. Sales are Rs. 1,90,000

producing a profit of Rs. 12,000 in period II. Determine the BEP.

Difference in profit = Rs. 8,000

Difference in sales = Rs. 40,000

Since the change in the sale must have led to the change in the profit, P/V ratio:

Rs. 8,000 x 100 = 20%

Rs. 40,000

At BEP, Profit = Nil

If Rs. 20 is to be reduced from profit, sales must be reduced by Rs. 100. To reduce profit by Rs. 4,000

reduction in sale:

(100 x Rs. 4,000/20 = 20,000

B.E.P. = Rs. 1,30,000 (i.e. sales producing profit of Rs. 4,000 less reduction in sales of Rs, 20,000 to wipe

out the profit)

Alternatively

Total contribution on Rs. 1,50,000 @ 20% Rs. 30,000

Profit Rs. 4,000

Fixed expenses Rs. 26,000

Q. 43. From the following figures ascertain the break-even

sales.


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Total cost equals sales, hence, there is neither profit nor loss.

Q44. The sales of company are @ Rs. 200 per unit Rs. 20,00,000

Variable cost Rs. 12,00,000

Fixed cost Rs. 6,00,000

The capacity of the Factory 15,000 units

Determine the BEP. How much profit is the company making?

(* Total number of units is 10,000 since sale at Rs. 200 per units is Rs. 20,00,000. Therefore variable cost

per unit is Rs. 12,00,000 10,000 = Rs. 120)

Profit being earned


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At break-even point, the contribution is just equal to fixed costs, any sales above the Bill also provide theprofit contribution. But as fixed costs are all met already such contributions become completely profit.

The sales above BEP are known as margin of safety 1 he contribution from margin of safety sales is profit

As P/V ratio is (contnbution/ sales) x 100 and as profit is the contribution from these sales above BEP

(i.e.), margin of safety, the following formula also is true.

Margin of Safety

Thus, in the above illustration margin of safety sales = 2,500 units x Rs. 200 = 5,00,000.

Profit = Rs. 2,00,000

Q. 45. From the following information calculate:

(1) P.V. ratio (ii) Break even point

(iii) Margin of Safety

Total sales Rs. 3,60,000

Fixed cost Rs. 1,00,000

Selling price Rs. 100/Unit


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Variable cost (per unit) = Rs. 50

(iv) if the selling price is reduced to Rs. 90 by how much is the margin of safety reduced ?

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