Lesson-16 Numericals on BEP and CVP Problem 1 The ratio of profit and volume of a company is 50% while its

margin of safety is 4/1. The sales volume is Rs. 50 lacs. Find out its breakeven point and the net profit. Solution Sales Less: Margin of Safety (40% of Rs. 50,00,000) Breakeven Sales Margin of Safety Rs. 20,00,000 Rs. 20,00,000 x 50% Profit Alternatively, Breakeven Sales = Fixed Cost P/V Ratio = Fixed Cost 50% = Fixed Cost = 50% x 5,00,000 = Rs. 25,00,000 = Contribution Fixed Cost = Rs. 25,00,000 15,00,000 = Rs. 10,00,000 = = Profit P/V ratio Profit 50% Rs. 50,00,000 20,00,000 30,00,000

= Profit = Rs. 100,000

Rs. 30,00,000 Rs. 30,00,000 x 50% Fixed Cost Profit

Problem 2 From the following information of a company, calculate the breakeven point and turnover required to earn a profit of Rs. 36,000. Fixed Overheads Rs. 1,80,000

Selling Price Variable Cost Per Unit

Rs. 20 Rs. 2

If the company is earning a profit of Rs. 36,000, express the margin of safety available to it. Solution 1. Breakeven Point Contribution Per Unit (s v) Selling Price Per Unit Variable Cost Per Unit Contribution Fixed Overheads Breakeven Point = 1,80,000 = Fixed Overheads Contribution Per Unit = 1,80,000 18 = 10,000 Units or Sales of Rs. 2,00,000 Rs. 20 2 18

2.

Turnover required to earn a Profit of Rs. 36,000 = Fixed Overheads Contribution Per Unit = Rs. 1,80,000 + Rs. 36,000 18 = 2,16,000 18 = 12,000 units or Sales of Rs. 2,40,000

3.

Margin of Safety Actual Sales Sales at Breakeven Point Margin of Safety Units 12,000 10,000 2,000 Rs. 2,40,000 2,00,000 40,000

Margin of Safety may also be calculated as follows: Margin of Safety = Net Profit

Problem 3 The following information regarding the operations of 2001 has been made available from the records of a cosmetic company: Sales Rs. 100,000 Direct Materials used 40,000 Direct Labor 15,000 Fixed Manufacturing 20,000 Overheads There are no beginning or ending inventories. Calculate the following: Variable selling and administration expenses Contribution margin in rupees Variable factory overheads Breakeven point in rupees Factory cost of goods sold Fixed Selling Administration Expenses Gross Profit Net Loss Rs. 10,000 20,000 5,000

Solution 1. Cost of Production of Goods Sold = Sales Gross Profit = 100,000 - 20,000 = Rs. 80,000 2. Variable Factory Overheads Let the variable factory overheads be x. Then, the Cost of Goods sold = 40,000 +15,000 + 20,000 + x = 80,000 = 75,000 + x = 80,000 = x = 5000 3. Variable Selling and Administration Expenses Fixed and Variable = Net Loss = 20,000 10,000 x = 5000 = 10,000 + 5000 = x = x = Rs. 15,000 4. Contribution Margin Sales Variable Costs = 100,000 - (40,000 + 15,000 + 5000 + 15,000) = 100,000 75,000 = Rs. 25,000

5. Breakeven Point = Fixed Costs 1-Variable Costs Corresponding Sales = 30,000 1-75,000 100,000 = Rs. 120,000 6. Factory Cost of Goods Sold Direct Material Direct Labor Add: Factory Overheads Fixed Variable Fixed Cost Problem 4 The Profit-Volume (P/V) ratio of a pharmaceutical company is 50% and the margin of safety is 40%. Find out the breakeven point and the net profit if the sales volume is Rs. 50 lacs. Solution 1. B.E.P. Sales Margin of Safety 40% B.E.P 2. Contribution at B.E.P. Sales at B.E.P. x P/V Ratio 30 x 50%, i.e. Rs.15 lacs 3. Sales at B.E.P. Less: Contribution at B.E.P. Fixed Overheads 30 15 15 Rs. in Lacs 50 20 30 20,000 5000 25,000 80,000 40,000 15,000 55,000

4. Net Profit if the Sales Volume is Rs. 50 lacs Profit = (Sales x P/V Ratio) - Fixed Cost

= (50 x 50%) - 15 = 25 -15 = Rs. 10 lacs Alternatively, Profit = P/V Ratio x M/S Ratio x Sales = 50% x 40% x Rs. 50 lacs = Rs. 10 lacs Problem 5 The sales of rubber industries in the first half of 2003 amounted to Rs. 2,70,000 and the profit earned was Rs. 7,200. The sales in the second half of 2003 amounted to Rs. 3,42,000 and profit earned was Rs. 20,700 for that half year. Assuming no change in fixed cost, calculate the following: 1. The amount of profit when sales is Rs. 2,16,000 2. The amount of sales required to earn a profit of Rs. 36,000 Solution Calculation of P/V Ratio P/V Ratio = Change in Profit Change in Sales

Change in Profit = 20,700 7,200 = Rs. 13,500 Change in Sales = 342,000 270,000 = Rs. 72,000 P/V Ratio = 18.75% Calculation of Fixed Expenses (Second half) Fixed Cost = P/V Ratio of Sales Profit = 18.75% of 3,42,000 20,700 = Rs. 43,425 (First half) Fixed Cost @18.75% of 2,70,000 - 7200 = Rs. 43,425 Calculation of Profit when Sales is at Rs. 2,16,000 P/V Ratio x 2,16,000 - Fixed Cost = 18.75% of 2,16,000 - 43,425 = Rs. 40,500 Sales to earn a Profit of Rs. 36,000 = Fixed Cost + Desired Profit P/V Ratio = 43,425 + 36,000 or Rs. 423,600 18.75%

Problem 6 A multi-product company furnishes the following data relating to the year 2002: 1st Half of the Year (Rs.) Sales Total Cost 45,000 40,000 2nd Half of the Year (Rs.) 50,000 43,000

Assuming that there is no change in the prices and variable cost and the fixed expenses are incurred equally in the two half years, calculate for the year 2002 the following: (i) (ii) (iii) (iv) Solution Period 2nd Half of the Year 1st Half of the Year Change (i) (ii) Sales 50,000 45,000 5000 Total Cost 43,000 40,000 3000 Profit 7000 5000 2000 The P/V ratio The fixed expenses The breakeven sales The percentage of margin of safety to total sales

P/V Ratio = Change in Profit x 100, i.e. 2000 x 100 = 40% Change in Sales 5000 Fixed Expenses Sales for the Year = 45,000 + 50,000 = 95,000 Contribution for the Year = Rs. 95,000 x 40 = 38,000 100 Less: Profit for the Year Rs. 5000 + Rs. 7000 = 12,000 Fixed Expenses for the Year = 26,000

(iii) (iv)

Breakeven Sales = Fixed Cost, i.e. 26,000 x 100 = Rs. 65,000 P/V ratio 40 Margin of Safety = Total Sales Breakeven Sales = 95,000 65,000 = Rs. 30,000 Percentage of Margin of Safety to Total Sales = 30,000 x 100 = 31.58% 95,000

Problem 7

Alpha Ltd. and Beta Ltd., two competing companies, produced and sold the same type of product in the same market for the year ended March 2002. Their forecasted profit and loss accounts are as follows: Alpha Ltd. Rs. Rs. Sales Less: Variable Cost of Sales Fixed Costs Forecasted Net Profit Before Tax 250000 200000 25000 25000 225000 75000 Beta Ltd. Rs. Rs. 250000 150000 225000 25000

You are required to compute the following: P/V ratio Breakeven sales volume

You are also required to state which company is likely to earn greater profit in the following conditions of: low demand high demand Alpha Ltd. Sales Contribution (F + P) P/V Ratio 250000 Beta Ltd. 250000

Solution

50000 x 100 250000 = 20%

100000 x 100 250000 = 40% 75000 = 187500 40%

Breakeven Sales

25000 = 125000 20%

Profit situation for Alpha Ltd. will be better than that of Beta Ltd. in case of low demand, since even if sales are halved Alpha Ltd. will still not incur a loss. Beta Ltd. has a safety margin of only Rs. 62500. If sales drop to Rs. 200000, in both the cases the profit position would be as follows: Alpha Ltd. Contribution Fixed Expenses Rs. 40000 25000 Beta Ltd. Rs. 80000 75000

15000

5000

In case of high demand, Beta Ltd. will do better than Alpha Ltd. since additional sales will produce profit at the rate of 40% of sales as against only 20% in the case of other company. If sales improve to Rs. 300,000, the profit position will be as follows: Alpha Ltd. Contribution Fixed Expenses Problem 8 LU conducts a special course on corporate communication for a month during summer. For this purpose it invites applications from graduates. An entrance test is given to the candidates and based on the same a final selection of a hundred candidates is made. The entrance test consists of four objective types of examinations and is spread over four days, one examination each day. Each candidate is charged a fee of Rs. 50 for taking up the entrance test. The following data was gathered for the past two years: LU Statement of Net Revenue from the Entrance Test for the Course of Corporate Communication 2000 2001 Rs. Rs. Gross Revenue (Fees Collected) 1,00,000 1,50,000 Cost: Valuation 40,000 60,000 Question Booklets 20,000 30,000 Hall Rent at Rs. 2000 per day 8,000 6,000 Supervision Charges 4,000 6,000 (One supervisor for every 100 candidates at the rate of Rs. 50 per day) 6,000 6,000 Total Cost 84,000 1,16,000 Net Revenue 16,000 34,000 Compute the budgeted net revenue if 4000 candidates take up the entrance test in 2002. Solution 1. Statement showing Budgeted Net Revenue from the Entrance Test in 2001 Number of Candidates (a) Gross Revenue (Fees Collected) 4,000 x 50 Costs(i) Cost: (ii) Variable Valuation (4,000 x Rs. 20) Question Booklets (4,000 x Rs. 10) Supervision Charges (4,000 x Rs. 2) Contribution (i) - (ii) 4,000 Rs. 2,00,000 80,000 40,000 8,000 1,28,000 72,000 Rs. 60000 25000 35000 Beta Ltd. Rs. 120000 75000 45000

Fixed: Hall Rent Rs. 2,000 x 4 days Honorarium to Chief Administrator General Administrative Expenses (b) Total Cost (Variable + Fixed) Net Revenue (A - B) Working Note (i) (ii)

8,000 6,000 6,000 20,000 1,48,000 52,000

Gross revenue is given. Number of candidates can be found by dividing gross revenue with fees charged per candidate. Supervision costs vary with every 100 candidates. If the candidates are less than 100, it becomes fixed.

2. Breakeven Number of Candidates P/V Ratio Contribution Per Candidate = (72,000 + 2,00,000) x 100 = 36% Breakeven Number of Candidates = 72,000 + 4,000 or Rs. 18 = Fixed Cost + Contribution per Candidate = Rs. 20,000 + 18 or 1,11,111 Candidates Supervision cost is semi-fixed if candidates are less than 100 in number. This cost is variable if the candidates are in multiples of 100. The supervision charges are recovered to the extent of 1,100 candidates. For 11.11 candidates, another supervisor has to be engaged for four days. The supervision charges will be Rs. 50 x 4 days = 200 (fixed cost). The variable cost @ Rs. 2 per candidate has already been recovered. The unrecovered fixed cost will be Rs. 200 11.11 x Rs. 2 or Rs. 177.78 as additional 8.89 units (Rs. 177.78 + Rs. 20) will have to be added to the existing BEP. Hence, the revised BEP = 1,111.11 + 8.89 = 1,120 candidates. 3. No. of Candidates to be enrolled if the Net Income desired is Rs. 20,000 = Fixed Cost + Profit Contribution Per Candidate = Rs. 20,000 + Rs. 20,000 Rs. 18 = 2,222.22 Candidates For 22.22 candidates, additional fixed cost = Rs. 200 - (22.22 x 2) or 155.56 To recover this amount, 7.78 candidates will have to be added to 2,222.22. Thus, the desired number of candidates = 2,222.22 + 7.78 or 2,230 candidates Gross Revenue Less: Variable Cost without Supervision Charges No. of Candidates in 1987 Rs. 2,00,000 1,20,000 80,000 4,000

Revised Contribution Per Candidate

Rs. 20