CVP /BEP Analysis

DR. RANA SINGH

Associate Professor in ManagementMBA (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

60100 = 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. 6,00,000Contribution = 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 safetyii) 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