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DR. RANA SINGH Associate Professor in Management MBA (Gold Medalist), Ph.D.
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
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
Approach
Profit earned in 2007 Profit =Total contribution on the sale of 50000 units Fixed Costs =(50000 units Rs. 12 Rs. 3,60,000
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%
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 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
= Rs. 6,00,000
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 30% ) Rs. 1,08,000
= (Rs. 9,00,000
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
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