PROFIT PLANNING

BREAK EVEN POINT

• BEP= FIXED COST / P/V RATIO
• P/V RATIO = C/SALES*100
• CONTRIBUTION= SALES-V.C
• Y LTD= 30,000/ 1,50,000= 20%
• Z LTD = 50,000/1,50,000 = 33.13%
• BEP:
• Y LTD =15,000/20*100= 75,000
• Z LTD= 35,000/33.13*100= 1,05,000

•
• 2. SALES VOLUME= F.C+ DESIRED PROFIT/ P.V RATIO
• Y LTD = 15,000+5000/20*100= 1,00,000
• Z LTD = 35,000+5000/33.13*100= 1,20,000
• 3) SALES VOLUME(FOR BOTH THE FIRMS TO EARN
EQUAL PROFIT)
• DIFFERENCE IN FIXED COST /DIFFERENCE IN P/V
RATIO
• 15,000-35,000=20,000/20%-33.13%= 13.13%
• 20,000*3/40*100= 1,50,000.
• In conditions of Heavy demand , a concern with larger P/V ratio
can earn greater profits because of greater contribution. Thus, Z
Ltd., is likely to earn greater profit.
• In conditions of Low demand , a concern with lower break even
point is likely to earn more profit because it will start earning
profit at lower level of sales. In this case Y Ltd.,will start earning
profits when its sales reach the level of Rs. 75,000. where as Z
Ltd., will start earning profits
when its sales reach the level of Rs.1,05,000.
• Therefore , in case of low demand break even point should be
reached as earlier as possible .
• So that the concern may start earning profits.
• Margin of Safety= ACTUAL SALES-BEP SALES
• Y LTD., 1,50,000- 75,000 = 75,000
• Z LTD ., 1,50,000-1,05,000 = 45,000