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.

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:

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 remain constant 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.

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:

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 shown below, 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.

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

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% Profit Fixed expenses Rs. 4,000 Rs. 26,000 Rs. 30,000

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

Total cost equals sales, hence, there is neither profit nor loss. Q44. The sales of company are @ Rs. 200 per unit Variable cost Fixed cost The capacity of the Factory Rs. 20,00,000

Rs. 12,00,000 Rs. 6,00,000 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

At break-even point, the contribution is just equal to fixed costs, any sales above the Bill also provide the profit 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 (iii) Margin of Safety Total sales Fixed cost Selling price Rs. 3,60,000 Rs. 1,00,000 Rs. 100/Unit (ii) Break even point

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 ?