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Me Break Even Cvp

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Transcript of "Me Break Even Cvp"

1. 1. C-V-P ANALYIS (Cost – Volume – Profit) OR BREAK-EVEN ANALYSIS
2. 2. <ul><li>A firm is faced with a number of uncertainties </li></ul><ul><li>Demand (consumer behaviour) </li></ul><ul><li>Nature of competition (related to product or price or both) product competition is greater. </li></ul><ul><li>Cost (no control over wages, raw materials, </li></ul><ul><li>Indirect taxation) </li></ul><ul><li>Technology (continuous improvements make products obsolete) </li></ul>
3. 3. <ul><li>Unless a firm is prepared to face the uncertainties created by these risks, its profits would be left to chance. </li></ul><ul><li>Under such circumstances, a thorough understanding of the relationship of </li></ul><ul><li>cost, price and volume is helpful. </li></ul><ul><li>Method of determining this relationship is </li></ul><ul><li>Break-even Analysis. </li></ul>
4. 4. Break-even analysis <ul><li>Break-even analysis involves the study of revenues and costs of a firm in relation to its volume of sales and specifically the determination of that volume at which the firm’s costs and revenues will be equal. </li></ul><ul><li>The Break-even Point (BEP) is that level of sales at which total revenues equal total costs and the net income is equal to zero. </li></ul><ul><li>This is the no-profit-no-loss point. </li></ul>
5. 5. Objective of BEP <ul><li>The main objective of the break-even analysis is not simply to spot the BEP, but to develop an understanding of cost, price and volume within a company’s practical range of operations. </li></ul><ul><li>The break-even chart is an “excellent instrument panel for guidance in controlling one’s business”. </li></ul>
6. 6. DETERMINATION OF BREAK-EVEN POINT
7. 7. Determination of Break-even Point <ul><li>Physical Units. </li></ul><ul><li>Money Terms or </li></ul><ul><li>Sales Value </li></ul>
8. 8. BEP – Physical Units <ul><li> Fixed Costs </li></ul><ul><li>BEP = -------------------------------------- </li></ul><ul><li>(quantity) Contribution Margin per unit </li></ul><ul><li>Contribution margin = SP - AVC </li></ul><ul><li>At this point the company will not make any profit or loss. </li></ul>
9. 9. <ul><li>BEP (Quantity) Example: </li></ul><ul><li>Problem :Suppose the fixed costs of a factory are Rs.10000 per year, </li></ul><ul><li>the variable costs are Rs.2 per unit and </li></ul><ul><li>selling price is Rs.4 per unit. </li></ul><ul><li>How many units the firm should produce in order not to make any profit or loss. </li></ul><ul><li>Solution: </li></ul><ul><li>We have to calculate the BEP. </li></ul><ul><li>Total Fixed Costs (TFC) = Rs.10,000 </li></ul><ul><li>Contribution margin per unit = Selling price – Average variable cost. </li></ul><ul><li>(SP – AVC) = Rs. 4 – Rs.2 </li></ul><ul><li>BEP = Total Fixed Costs  Contribution margin per unit. </li></ul><ul><li>BEP = TFC = 10000 = 10000 = 5000 </li></ul><ul><li>SP-AVC 4-2 2 </li></ul><ul><li>Break-even Point in terms of physical units or quantity = 5000 units. </li></ul>
10. 10. BEP (Sales Value) <ul><li> Fixed Costs </li></ul><ul><li>BEP = ---------------------------------------- </li></ul><ul><li> Contribution margin ratio </li></ul><ul><li>Contribution margin ratio = Sales - variable costs </li></ul><ul><li> Sales </li></ul>
11. 11. <ul><li>BEP – IN TERMS OFSALES VALUE </li></ul><ul><li>Problem : Sales Rs.10000 </li></ul><ul><li> Total Variable Costs 6000 </li></ul><ul><li> Total Fixed Costs 3000 </li></ul><ul><li>Contribution margin ratio = (10000 – 6000)  </li></ul><ul><li> P = Fixed Costs . </li></ul><ul><li>Contribution margin ratio </li></ul><ul><li>= 3000 = 7500 Rs.7,500 </li></ul><ul><li> 0.4 </li></ul><ul><li>At Sales value of Rs.7500 there is no profit-no-loss. </li></ul>
12. 12. <ul><li>Problem: Sales were Rs.15000 giving a profit of Rs.400 in a week. Sales increased to Rs.19000 giving a profit of Rs.1200. Calculate the BEP. </li></ul><ul><li>Solution: </li></ul><ul><li>Increase in sales 19000 – 15000 = Rs.4000 </li></ul><ul><li>Increase in profit 1200 – 400 = Rs. 800 </li></ul><ul><li>Increase in variable costs 4000 - 800 = Rs.3200 </li></ul><ul><li>On sales of Rs.4000 variable costs are Rs.3200 </li></ul><ul><li> Variable cost for 1 rupee of sales Rs. 3200  </li></ul><ul><li> Given sales of Rs.15000, fixed costs are as under: </li></ul><ul><li>TVC = 15000 x 0.8 = 12000 </li></ul><ul><li> Profit = 400 </li></ul><ul><li>TVC + Profit = 12400 </li></ul><ul><li>Sales Value = 15000 </li></ul><ul><li>Fixed Cost = 2600 </li></ul><ul><li>Now, Contribution ratio = S-V = 15000 – 12000 = 3000 = 0.2 S 15000 15000 </li></ul><ul><li>Now, BEP = TFC  Contribution ratio = 2600/0.2 = Rs.13000. </li></ul>
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