UNIT- III

SUPPORT SYSTEMS

3.1 Categorisation of MSME and Ancillary

industries .
3.1.1 Categorisation of MSME

Government of India enacted Micro, Small and Medium

Enterprises Development Act, 2005 (MSME Act) under
which classification of micro, small and medium
enterprises (MSME) was dependent on two factors: (i)
investment in plant and machinery; and (ii) turnover of
the enterprise.

However, recently, under Aatmanirbhar Bharat Abhiyan

(ABA), Ministry of Micro, Small and Medium
Enterprises, vide its notification dated June 1, 2020,
revised MSME classification by inserting a composite
criterion for both investment in plant and machinery and
annual turnover of enterprises. Also, the distinction
between the manufacturing and the services sectors
under erstwhile MSME definition has been done away
with. This removal will create parity between the sectors.
A comparison of the erstwhile MSME classification to
the revised classification where the investment and
annual turnover, both are to be considered for
classification of an enterprise as an MSME, is set out
below:

Erstwhile MSME Classification

Criteria: Investment in Plant and Machinery/Equipment

Classification Micro Small Medium

Manufacturing Investment not more Investment not more Investment not more
Enterprises than INR 25 lakhs than INR 5 crores than INR 10 crores

Enterprises Investment not more Investment not more Investment not more
rendering Services than INR 10 lakhs than INR 2 crores than INR 5 crores

Revised MSME Classification (w.e.f. July 1, 2020)

Composite Criteria: Investment in Plant and Machinery/Equipment and Annual Turnover

Classification Micro Small Medium

Investment in
Investment in Investment in
Manufacturing P&M/Equipment not
P&M/Equipment not P&M/Equipment not
Enterprises and more than INR 50 crores
more than INR 1 crore more than INR 10 crores
Enterprises & Annual Turnover not
and Annual Turnover not and Annual Turnover not
rendering Services more than INR 250
more than INR 5 crores more than INR 50 crores
crores

3.1.2 Ancillary Industries .

Ancillary industry is an industry which has fixed investment in plant
and machines that do not exceed 1 crore rupees. Ancillary
industry manufactures parts, components, sub-assemblies, tools,
intermediates, machines etc.

Ancillary industries are those industries which help to both primary

and secondary industries. Example: transporting, banking, insurance,
warehousing , and advertising. I
Industries which manufacture automobiles, railway engines, tractors,
etc. are ancillary industries.
These industries are also called tertiary or service industries.

 Any heavy industry depends on the machinery for its work to

progress; the heavy industry always require support of ancillary
industry.

What are the main characteristics of the ancillary industries in India?

The industries which make parts and components used by big industries
to assemble their final products are known as ancillary industries.
Characteristics of Ancillary industries are:
 It is engaged in the manufacture or production of parts,
components, sub-assemblies, tooling or intermediates.
 It proposes to supply 50 per cent of its production or services to one
or more other industrial undertakings.
 They have fixed investment in plant and machinery not exceeding Rs.
1 crore.

3.2 Support Systems- Government agencies

1. MCED - Maharashtra centre for entrepreneurship
Development.
2. NI-MSME- National institute for Micro, Small and Medium
Enterprises
3. PMEGP- Prime Minister Employment Generation Programme
4. DI – Directorate of Industries
5. KVIC - Khadi Village industries commission

3.3 Support agencies for entrepreneurship

3.3.1 Guidance
3.3.2 Training
3.3.3 Registration
3.3.4 Technical Consultation
3.3.5 Technology transfer
3.3.6 Quality Control
3.3.7 Marketing and Finance
1. To understand the concept of Micro, Small and Medium
Enterprises & their available Export Promotion facilities;
To discuss policy & development of the small scale
industries in India;
To explain concession and Incentive facilities available for
small business enterprises;
To know the different financial support schemes;
To understand the role of DIC (District Industries Centre)
Micro, Small and Medium Enterprises Development Act
2006.
Concessions and Incentives,
Financial support schemes,
DIC (District Industries Centre’s role and functions),
Policies regarding SSI sector,
Export Promotion facilities for SMEs and Global Vision for
Entrepreneur.

2. 4 Breakeven point, Return on investment and

return on sales.

Break Even Point (BEP) is the point where the business

revenue equals to the spent capital, there is no loss or profit.
Break Even Point is a crucial measurement in business.
However most entrepreneurs consider BEP as turnover. The
break-even and returned capital are different things.

Returned Capital

One of the first steps in opening the business is providing the

capital for rent, equipment, or other needs. Returned capital
means the profit earned from the business, the spent capital
has finally returned. In the financial term it is known as Return
On Investment (ROI).

The opposite of ROI, during the business activity, there is

expenses spent for business operational, as it is called
operational costs. There are two types of operational costs:
fixed costs and variable costs. The variable cost is a cost
calculation based on the business sales. For example, your
business needs to rent a place costs IDR. 400,000 / month.
Though there is no sales income, you still have to pay the
rent cost. Means, although your business sales decline and
less income, there is a cost to pay.

However, when there is a sales process, there are other

costs incurred. Such as you have to send your customer’s
order or have to change the order items. The costs incurred
are variable costs. The more sales, the higher the cost. In this
business process, operational cost means fixed cost plus
variable cost.

To illustrate the above explanation, following is the Break

Even Point (BEP) calculation of noodle restaurant:

Variable costs ( electricity bill, employee’s’ wage, counter

rent)IDR. 100,000 / day. You must spend this amount,
although there is no customers come to your restaurant. If
there is a customer who orders your noodle, the costs of each
portion sold IDR 5,000, includes to buy noodles, chicken,
spices etc. For example, you sold 10 portions, then the
variable cost incurred is IDR. 50,000. The total cost is
150,000. From the portion sold, you earn IDR
10.000. Means, if you sell 10 portions, the cost is IDR
150.000 with sales income IDR. 100.000. This calculation
shows that your business has not gained break even point.
To gain break even point, the cost should be equal to the
income. What’s the break-even point? Here is the calculation
formula:Fixed costs (A), operational costs (B), and product
selling prices (C), then the formula:A + (B x n) = C x n. From
the example above:IDR 100.000, – + (5000 x n) = 10000 x n

100000 = (10000 x n) – (5000 x n)100000 = 5000 x n

N = 100000/5000

Then n = 20.

Your breakeven point if you can sell 20 portions, then you will
get IDR. 200,000 and (fixed +variable) cost IDR. 100,000
plus IDR. 100,000 (from Rp 5000 x 20), then the total cost is
IDR. 200,000.

This is your break even point where there is no profit or loss.

If you manage to sell more than 30 portions, then you get a
profit.

Therefore the business owners need to understand Break

Even Point (BEP) in order to set a minimum daily or monthly
sales target. You can determine the target as your business
capability. The most important thing is you have to know how
many sales to be achieved to reach break even position. It
allows you to set your business profit or loss

Break Even Point is not the same as the Returned Capital

Some opinions that say BEP is a turning point should be

clarified. BEP or break even point is the business revenue
and should be equal to the spent capital, no loss or profit.
While the meaning of the return of capital is the profit
generated from business income, all capital that has been
spent (eg for lease , renovation, equipment etc.) can be
returned. In financial terms it is called Return on Investment.
Break-Even Analysis –
Definition, Formula &
Examples
Updated on: Mar 18, 2021 - 06:47:26 PM

12 min read

A break-even analysis is a financial tool which helps a company to

determine the stage at which the company, or a new service or a product,
will be profitable. In other words, it is a financial calculation for determining
the number of products or services a company should sell or provide to
cover its costs (particularly fixed costs).

Table of contents
[ Hide ]

 What is a Break-Even Analysis

 Components of Break-Even Analysis
 Calculation of Break-Even Analysis
 Contribution Margin
 When is Break-even analysis used
 Breakeven analysis is useful for the following reasons:
 Ways to monitor Break-even point
 Benefits of Break-even analysis

What is a Break-Even Analysis

Break-even is a situation where an organisation is neither making money
nor losing money, but all the costs have been covered.

Break-even analysis is useful in studying the relation between the variable

cost, fixed cost and revenue. Generally, a company with low fixed costs will
have a low break-even point of sale. For example, say Happy Ltd has fixed
costs of Rs. 10,000 vs Sad Ltd has fixed costs of Rs. 1,00,000 selling
similar products, Happy Ltd will be able to break-even with the sale of
lesser products as compared to Sad Ltd.
Components of Break-Even Analysis
Fixed costs
Fixed costs are also called overhead costs. These overhead costs occur
after the decision to start an economic activity is taken and these costs are
directly related to the level of production, but not the quantity of production.
Fixed costs include (but are not limited to) interest, taxes, salaries, rent,
depreciation costs, labour costs, energy costs etc. These costs are fixed
irrespective of the production. In case of no production also the costs must
be incurred.

Variable costs
Variable costs are costs that will increase or decrease in direct relation to
the production volume. These costs include cost of raw material, packaging
cost, fuel and other costs that are directly related to the production.

Calculation of Break-Even Analysis

The basic formula for break-even analysis is derived by dividing the total
fixed costs of production by the contribution per unit (price per unit less the
variable costs).
For an example:
Variable costs per unit: Rs. 400 Sale price per unit: Rs. 600 Desired profits:
Rs. 4,00,000 Total fixed costs: Rs. 10,00,000 First we need to calculate the
break-even point per unit, so we will divide the Rs.10,00,000 of fixed costs
by the Rs. 200 which is the contribution per unit (Rs. 600 – Rs. 200).
Break-Even Point = Rs. 10,00,000/ Rs. 200 = 5000 units Next, this number
of units can be shown in rupees by multiplying the 5,000 units with the
selling price of Rs. 600 per unit. We get Break-Even Sales at 5000 units x
Rs. 600 = Rs. 30,00,000. (Break-even point in rupees)

Contribution Margin
Break-even analysis also deals with the contribution margin of a product.
The excess between the selling price and total variable costs is known as
contribution margin. For an example, if the price of a product is Rs.100,
total variable costs are Rs. 60 per product and fixed cost is Rs. 25 per
product, the contribution margin of the product is Rs. 40 (Rs. 100 – Rs. 60).
This Rs. 40 represents the revenue collected to cover the fixed costs. In the
calculation of the contribution margin, fixed costs are not considered.

When is Break-even analysis used

 Starting a new business: To start a new business, a break-
even analysis is a must. Not only it helps in deciding whether
the idea of starting a new business is viable, but it will force the
startup to be realistic about the costs, as well as provide a basis
for the pricing strategy.

 Creating a new product: In the case of an existing business,

the company should still peform a break-even analysis before
launching a new product—particularly if such a product is going
to add a significant expenditure.

 Changing the business model: If the company is about to the

change the business model, like, switching from wholesale
business to retail business, then a break-even analysis must be
performed. The costs could change considerably and breakeven
analysis will help in setting the selling price.

Breakeven analysis is useful for the

following reasons:
  It helps to determine remaining/unused capacity of the company
once the breakeven is reached. This will help to show the
maximum profit on a particular product/service that can be
generated.

 It helps to determine the impact on profit on changing to

automation from manual (a fixed cost replaces a variable cost).

 It helps to determine the change in profits if the price of a

product is altered.

 It helps to determine the amount of losses that could be

sustained if there is a sales downturn.

Additionally, break-even analysis is very useful for knowing the overall

ability of a business to generate a profit. In the case of a company whose
breakeven point is near to the maximum sales level, this signifies that it is
nearly impractical for the business to earn a profit even under the best of
circumstances.
Therefore, it’s the management responsibility to monitor the breakeven
point constantly. This monitoring certainly reduces the breakeven point
whenever possible.

Ways to monitor Break-even point

 Pricing analysis: Minimize or eliminate the use of coupons or
other price reductions offers, since such promotional strategies
increase the breakeven point.
  Technology analysis: Implementing any technology that can
enhance the business efficiency, thus increasing capacity with
no extra cost.

 Cost analysis: Reviewing all fixed costs constantly to verify if

any can be eliminated can surely help. Also, review the total
variable costs to see if they can be eliminated. This analysis will
increase the margin and reduce the breakeven point.

 Margin analysis: Push sales of the highest-margin (high

contribution earning) items and pay close attention to product
margins, thus reducing the breakeven point.

 Outsourcing: If an activity consists of a fixed cost, try to

outsource such activity (whenever possible), which reduces the
breakeven point.

Benefits of Break-even analysis

 Catch missing expenses: When you’re thinking about a new
business, it’s very much possible that you may forget about a
few expenses. Therefore, a break-even analysis can help you to
review all financial commitments to figure out your break-even
point. This analysis certainly restricts the number of surprises
down the road or atleast prepares a company for them.

 Set revenue targets: Once the break-even analysis is

complete, you will get to know how much you need to sell to be
profitable. This will help you and your sales team to set more
concrete sales goals.
  Make smarter decisions: Entrepreneurs often take decisions in
relation to their business based on emotion. Emotion is
important i.e. how you feel, though it’s not enough. In order to
be a successful entrepreneur, decisions should be based on
facts.

 Fund your business: This analysis is a key component in any

business plan. It’s generally a requirement if you want outsiders
to fund your business. In order to fund your business, you have
to prove that your plan is viable. Furthermore, if the analysis
looks good, you will be comfortable enough to take the burden
of various ways of financing.

 Better pricing: Finding the break-even point will help in pricing

the products better. This tool is highly used for providing the
best price of a product that can fetch maximum profit without
increasing the existing price.

 Cover fixed costs: Doing a break-even analysis helps in

covering all fixed cost.

Break-Even Analysis (With

Diagram) | Management
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Break-Even Analysis:
Another form of financial analysis is breakeven analysis. It is a
technique for finding a point at which a project will cover its costs,
or break even. It is often used to make an initial decision on
whether to proceed with a project. Breakeven analysis is also a
technique of financial control in the sense that further analyses may
be necessary as conditions change.

For example, an initial breakeven analysis may have indicated that

sales of 80,000 units would be needed for a division to breakeven.
Midway through the project, however, material costs could rise,
anticipated demand could change, or price for the product could
drop.

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Any or all of these changes would alter the breakeven point. This in
turn would signal to the organisation that it might wish to cancel
the project to minimise losses. Hence, breakeven analysis can be
used initially for decision-making and later for control.

Break-Even Chart:
The objective of most private firms is to make profits — or at least to
avoid losses. All business firms need to know at what point their
sales revenue or income will permit them to meet all their
obligations — fixed (contractual) and variable (non-contractual).
This point is called the breakeven point. They are also interested in
knowing at what point income from sales will exceed expenses, thus
yielding a profit.

Break-even analysis, also known as cost-volume-profit analysis, is a

useful tool that permits firms to visualize more clearly the revenue-
cost relationship at different levels of output. It is based on certain
concepts used in preparing a variable budget.

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The objective of break-even analysis is to show diagrammatically
revenues and costs to determine at what volume (of production or
sales) a company’s total costs equal total revenues, leaving neither
profit nor loss.

Computing the Break-Even Point:

The break-even point (BEP) is the point on a chart at which total
revenue exactly equals total costs (fixed and variable), Fig. 18.5
illustrates how the BEP is computed.

There are three main elements in the chart: total fixed costs,
variable costs connected with each unit of production, and total
revenue or income connected with each unit of production, and
total revenue or income connected with each unit of sales.

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In our example total fixed cost is Rs.10,000 at all levels of output.

We superimpose the total variable cost curve on the total fixed cost
curve. The total revenue curve starts from the origin. It is plotted by
multiplying the number of units sold by the unit price.

It intersects the total cost curve at a point which corresponds to 500

units of output. This is the break-even point, at which there is
neither profit nor loss. Fig.18.7 illustrates this relationship in a
simplified form.
There are different ways of calculating the BEP- Normally it is
computed by dividing fixed costs by the difference between the sales
price per unit and the variable cost per unit.

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Break-even point (in units) = Total fixed costs/Sales price per unit –
Variable cost per unit

Suppose fixed costs are Rs.10,000 and variable costs per unit is
Rs.20 for a commodity and the selling price is Rs.40.

Therefore, BEP = Rs. 10,000/Rs. 40 – Rs. 20 = 500 units as shown

in Fig. 18.5.

Use of Break-Even Analysis:

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Break-even analysis enables producers to determine the effect of

various changes in costs and sales revenue on their availability of
capital and helps them to set optimum or maximum selling prices.
As a control technique, break-even analysis provides an objective
measurement by which to evaluate the performance of an
organisation and provides a basis for possible corrective action.

One proximate cause of a high BEP is high investment in fixed

assets. Management can locate or identify this point before deciding
to invest in a new building or machine. Again, a firm may incur
losses due to inadequate control of expenses. Break-even analysis
can help management to detect increases in variable costs before
they get out of control.

It may, however, be noted that all costs and selling prices are not
entirely under the control of a procedure. Actions by competitors,
suppliers, carriers, governments and changes in consumer
preferences can affect costs and selling prices, as well as sales
volumes at any given time. Changes in any of these variables can be
plotted arid the net effect determined at a glance.
Managers can use break-even analysis to study the relationships
among cost, sales volume, and profits. The break-even quantity
does not remain fixed for ever. Thus output has to be shifted to the
right if more profit is desired. Break-even analysis also provides a
rough estimate of profit or loss at various sales volumes.

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As an aid to decision making break-even analysis can;

(i) Identify the sales volume needed to prevent a loss,

(ii) Identify the minimum production and sales volume needed to

meet established objectives,

(iii) Provide data to help decide whether to add or drop a product

from the product line, and

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(iv) Help decide whether to raise or lower prices.

Limitations in its use:

The very simplicity of break-even analysis is its major limitation. In
practice we observe that cost and revenue functions are not linear,
as specified in Fig.18.5. This is based on the assumption that
variable cost per unit, total fixed costs and selling price per unit are
all fixed.

But if these vary with output changes the cost and revenue functions
may appear to be non-linear. In such cases we have two break
points and the virtue of our analysis is partly lost.

Secondly, break-even analysis is based on the assumption that fixed

and variable costs can be separated and classified. But in practice it
is difficult to determine whether a cost is fixed or variable. For
example, machinery is considered a fixed expense, but if it is
operating at capacity and production is to be increased, it is no
longer fixed.
The producer will have to buy or rent additional machinery to
increase the volume of production. Also — due to wage fluctuations
and changes in prices of raw materials — variable costs change
greatly.

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However, in spite of these difficulties, this type of analysis is

valuable to management.

3.4.2 Return on Investment (ROI)

What Is Return on Investment (ROI)?

Return on investment (ROI) is a performance measure used to evaluate the
efficiency or profitability of an investment or compare the efficiency of a
number of different investments. ROI tries to directly measure the amount
of return on a particular investment, relative to the investment’s cost.

To calculate ROI, the benefit (or return) of an investment is divided by the cost
of the investment. The result is expressed as a percentage or a ratio.

KEY TAKEAWAYS

 Return on Investment (ROI) is a popular profitability metric used to

evaluate how well an investment has performed.
 ROI is expressed as a percentage and is calculated by dividing an
investment's net profit (or loss) by its initial cost or outlay.
 ROI can be used to make apples-to-apples comparisons and rank
investments in different projects or assets.
 ROI does not take into account the holding period or passage of time,
and so it can miss opportunity costs of investing elsewhere.
Volume 75

How to Calculate Return on Investment (ROI)

The return on investment (ROI) formula is as follows
Understanding Return on Investment (ROI)
ROI is a popular metric because of its versatility and simplicity. Essentially,
ROI can be used as a rudimentary gauge of an investment’s profitability. This
could be the ROI on a stock investment, the ROI a company expects on
expanding a factory, or the ROI generated in a real estate transaction

3.4.3 Return on sales (ROS)

Return on sales (ROS) is a measure of how efficiently a company turns sales into
profits. ROS is calculated by dividing operating profit by net sales.