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Economics Notes

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Published in: Business Studies | Economics
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BEP Analysis For Maximising The Profit.

Rohit K / Kolkata

3 years of teaching experience

Qualification: B.Tech/B.E. (WEST BENGAL UNIVERSITY OF TECHNOLOGY - 2017)

Teaches: Chemistry, Computer Science, IT & Computer Subjects, Mathematics, All Subjects, Physics

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  1. BREAK EVEN POINT (BEP) & PROFIT VOLUME (PV) ANALYSIS ATC = > ATC = > Profit (X) => MC = at BEP = > at BEP = > BEQ BEQ BEQ BES BES BES VC + FC TVC + TFC TVC + TFC AVC + AFC or TVC + TFC TR Total Revenue TC = > Total Cost S => Sales or selling price Q => Quantity of production VC => Variable Cost FC Fixed Cost ATC => Average Total Cost AVC => Average Variable Cost AFC => Average Fixed Cost => Profit MC => Marginal Cost Ctb - FC TC (n) - TC(n-1) AVC (n) - AVC(n-1) Loss = Profit (X) TC S/unit -VC/unit PV Ratio TFC Ctb / unit X S/unit Ctb 1-(VC/S) BEP BEQ BES => Ctb MOS Act S Break Even Point Break Even Point Quantity Break Even Sales Contribution Margin of safety Actual Sales CHANGE IN COSTS > S(n) => > Ä(n) => > > vc (0) VC (n) FCO) FC(n) Old Selling Price New Selling price Original/same Profit New Profit Original Sales Volume or C New Sales Volume /Quant Original Varible cost New Variable Cost Original Fixed Cost New Fixed Cost
  2. BES Ctb => Ctb amt => Ctb Ctb/unit => MOS MOS (as % of Sales) MOS PV Ratio FC 1- (VC/TR) PV Ratio s - vc PV Ratio X S S/unit - VC/unit Actual Sales - BES Ctb MOS s PV Ratio Ctb s x 100 s- vc s
  3. FORMULAE luantity :ity CHANGE IN COSTS ( Original Sales - Break Even Sales ) X 100 MOS Sales Target Sales Volume => New Sales Volume to maintain earlier/same Profit => or Q(n) [if Selling price(S) changes] New Selling Price => or S(n) New Selling Price or S(n) => (if VC changes) New Selling Price or S(n) => (if FC changes) PV Ratio PV Ratio PV Ratio Change in Contribution Change in sales Change in Profit Change in sales Profit Margin of safety ratio S- BES s Ctb Marg S(n) -VC S(0) + [VC(n) S(O) + A Ctb AS AS MOS
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  6. PROBLEMS ON BREAK EVEN POINT (BEP) & PRO Question 1 Alpha Co has the following details:- FC = Rs VC /unit = Rs 100/- Selling price/ unit = Rs 200/- Find Break Even Sales amount and Break Even quantity? If production quantity is 60,000 find the contribution and margin of safety? 120,000 - 45,000 BEQ or BEQ => BES or BES => Contribution => Contribution => or Contribution => Question 2 s-vc FC s-vc X 20 oo 000 200-100 20 oo 000 200-100 20,000 units x 200 Consider the following data of a company for the year 2012:- Sales(Rs) = FC (Rs) = 25,000 VC (Rs) = 45,000 Find the following :- Contribution, Profit, BEP and MOS? Contribution => Contribution Profit Profit s-vc Contribution - FC => >>>> Sales - Variable Cost [(200 x 60,000) - (100 x 60,000)] 75,000 Rs 75,000 - 25,000 50,000 Rs
  7. BEP PV Ratio=> PV Ratio=> PV Ratio=> Question 3 PV Ratio Contribution Sales 75000 x 100 120,000 62.5 62.50% A hotel can accommodate maximum 1,000 tourists at a time with daily fare of Rs 800. The VC per tourist is Rs 100 and FC is Rs 140,000. Find the number of tourists that will break even? T FC Sales => AVC = > BEQ or BEQ Question 4 See Question 3 & find BES? BES or BES Question 5 See Question 3 140,000 800 100 TFC Sales -AVC TFC IS-AVC] x Q 140000 800-100 200 tourists 140 000 (800-100) x 1,000 0.2 If the desired profit is Rs 6,000, calculate the target sales volume? Target Sales Volume => FC + Target Profit Ctb Margin Unit
  8. S/unit - VC/unit Contribution Margin Unit => or Contribution Margin Unit => >>>> Target Sales Volume => Target Sales Volume => or Target Sales Volume => Quastion 6 140 000 + 6 000 700 >>>> 800 -100 700 208.5714286 209 tourists (tourists) See Question 3. If there is a reduction of 10% in price (from Rs 800 to Rs 720), what is the new sales volume needed to maintain the previous profit of Rs 6,000? New Sales Volume to maintain earlier/same Profit => or Q(n) [if Selling price(S) changes] Q(n) or Q(n) Question 7 son) -vc 140 000 + 6000 720 - 100 235.483871 tourists 236 tourists See Question 3. If the VC increases from Rs 100 to Rs 110 per unit, then what is the new sales volume to maintain the same profit and the new selling price per unit? New Sales Volume to maintain earlier/same Profit => or Q(n) => or Q(n) => >>>> son) -vc 140 000 + 6000 800 - 110 211.5942029 tourists 212 tourists
  9. Question 8 A shopkeeper plans to sell switches. His purchase price is Rs 10/switch. The shop is rented at Rs 3,000. The selling price is fixed at Rs 15/switch. What is the number of switches to attain BES and what is the amoul BEQ BEQ or BEQ => Question 9 s-vc 3000 15-10 600 units The following details of furniture of a furniture store is as follows:- Sales/unit file cabinet office table chair VC/unit 1000 500 200 900 400 125 FC Sales VC % of Sales % of Sales (given) 20 30 50 20 30 50 Capacity of the firm is Rs 150,000 of the total sales volume. Annual FC is Rs 20,000. Calculate the BES and Profit of the firm if it works at 80% capacity? File Cabinet Office Table Chairs BES BES BES Contribution (S-VC) Rs 1,000- Rs 900 100 Rs 500 - Rs 400 100 Rs 200- Rs 125 75 % Contribution 10 20 37.5 Total Contribution per Rupee => or Total Contribution per Rupee => Contribution Margin ratio _U@QQ__ 74074.07407 Total Revenue => Total Revenue => or Total Revenue =>
  10. or BES Profit Profit Profit or Profit Question 10 Rs 74,074/- Trotal Revenue - Total Costs Rs 120,000 - Rs 107,600/- 12400 Rs 12,400/- Calculate PV Ratio, BEQ and MOS from the following information of XYZ Ltd Production (units) No of units => Selling price /unit Variable Cost/unit Fixed Cost/unit Contribution/unit (S-VC) PV Ratio Contribution/unit Selling Price/unit BEQ Contribution/unit BEQ as 0/0 of Total Sales MOS (0/0 of Total sales) (Actual sales - BES) Question 11 x 100 Present 10,000 50 30 60,000 Present 20 40 3000 30 70 Total Cost Total Cost Total Cost or Total Cost => Proposed 10,000 40 30 60,000 Proposed 10 (Rs) 25 (0/0) 6000 (units) 60 (0/0) 40 (%) ABC Co sells units @ Rs 10/unit. Its Vc is Rs 6/unit and FC per annum is Rs Calculate MOS. BES BES Contribution/unit Rs 3 OO 000 MOS MOS
  11. or BES 75000 (units) or MOS MOS (in Rs) MOS (in Rs) or MOS (in Rs) MOS >
  12. FIT VOLUME (PV) RATIO MOS Profit Profit Profit MOS or MOS MOS (as % of sales) => MOS (as % of sales) => MOS (as % of sales) => or MOS (as % of sales) => BEP or BEP MOS Profit Contribution X Sales (60,000 x 200) - +(100 x 60,000)] 40 oo 000 x MOS X 100 Sales 80 oo 000 x 100 66.66667 PV Ratio Profit 25000 62.5 40,000 Rs 50 000 x 100 x 100
  13. PV Ratio 62.5 80,000 Rs or MOS To check BEQ TR => or TR TC TC or TC Hence TR = TC at BEQ BES ( 0/0) or BES ( 0/0) we have to find TR = TC SXQ 800 x 200 160,000 Rs TFC + TVC TFC + (AVC X Q) 140,000 + (200 x 100) 160,000 Rs 0.2 x 100 20
  14. New Selling Price or S(n) => S(n) or S(n) => SO) + [VC(n) - VC(O)] 800+ (110-100) 810
  15. 3,000 units Rs15/unit Rs 10/unit Contribution /Rupee [(%Contribution) X (% of sales)] 1100 (IOX20)/100 2 (20X30)/100 6 18.75 26.75 of Rs 150,000/- 120000 Rs 120.000/- BES BES or BES => TFC 1-(VC/S) 3000 1-(10/15) 9000
  16. TFC + TVC 20,000 + 120,000/100 107600 Rs 107,600/- ANALYSIS When selling price reduces by Rs 10 ( from Rs 50 to Rs 40), at same level of FC, VC and production levels, the following occur- (1) A reduction in Contribution/unit has reduced PV Ratio from 4% to 25%. (2) Due to lower contribution, BEQ increase from 3,000 to 6,000. (3) Lower selling price leads to higher BEQ, lower MOS and PV Ratio. (4) Higher BEQ, leads to lower MOS and lower profits. (5) Any change in any one of selling price FC and VC, directly impacts the profits. Actual Sales - BEQ - 75,000
  17. 25000 units X Selling price per unit 25,000 X Rs 10 250000 Rs 250,000/- (units)
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