DETERMINATION OF SALES VOLUME IN RUPEES AT DESIRED LEVEL OF PROFIT - Accounts and Finance for Managers

Desired Sales Formula

To determine the sales volume (Rupees) at desired level of profit, the existing formula for finding out the break even sales has to be redesigned.

Break Even Sales (Rupees)=Fixed Cost /PV ratio

The above formula is in accordance with the method of coverage i-e covering the fixed cost and profit.
Contribution = Fixed Cost + Profit

To earn desired level of profit, which the firm intends to earn should have to be combined with the fixed cost, are the two different components to be covered only in order to find out the contribution level to the tune of unchanged selling price and variable cost per unit.

New volume of Sales (Rupees)=

Fixed Cost + Desired Level Profit /PV ratio

Illustration :

From the following information relating to quick standards ltd., you are required to find out i) PV ratio ii) break even point iii) margin of safety iv) calculate the volume of sales to earn profit of Rs.6,000/
Total Fixed Costs Rs.4,500/
Total Variable Cost Rs.7,500/
Total Sales Rs.15,000/-
First step to find out the Contribution volume
Sales Rs 15,000/
Variable Cost Rs. 7,500/
Contribution Rs.7,500/
Fixed Cost Rs.4,500/-
Profit Rs.3,000
Second step to determine the PV ratio

PV ratio=

Contribution*100 /Sales

=7,500*100 / 15,000

=50%

Third step to find out the Break even sales

Break even sales=Fixed cost / PV ratio

= 4,500 / 50%

=9,000

Margin of safety can be found out in two ways
Margin of Safety = Actual sales- Break even sales
= Rs.15,000-Rs.9,000 = Rs.6,000

Margin of Safety= Profit / PV ratio

=3,000 / 50%

=6,000

Sales required to earn profit = Rs.6,000/
To determine the sales volume to earn desired level of profit

Margin of Safety=Profit / PV ratio

= 3,000 / 50%

=6,000

Illustration :

Break even sales Rs.1,60,000
Sales for the year 1987 Rs.2,00,000
Profit for the year 1987 Rs.12,000
Calculate
Profit or loss on a sale value of Rs.3,00,000
During 1988, it is expected that selling price will be reduced by 10%. What should be the sale if the company desires to earn the same amount of profit as in 1987 ?

The major aim to compute fixed expenses.
In this problem, the profit volume is given which amounted Rs.12,000
Profit = contribution- Fixed expenses
From the above equation, the volume of contribution only to be found out
To find out the volume of contribution, the PV ratio has to be found out
Before finding out the PV ratio, the margin of safety should be found out
Margin of safety = Actual sales - Break even sales
= Rs.2,00,000-Rs.1,60,000 = Rs.40,000
Another formula for to find out the Margin of safety is as follows

Margin of safety

Contribution = Rs.2,00,000 * 30% = Rs.60,000
Now with the help of the available information, the fixed expenses to be found out from the illustrated formula
Fixed expenses = Contribution- Profit = Rs.60,000 – Rs,12,000 = Rs.48,000
The next one is to find out the corresponding variable cost. The variable cost could be found out with the help of the following formula
Sales- Variable cost = Contribution
Rs.2,00,000- Rs.60,000= Variable cost= Rs.1,40,000

Profit or loss on the sale value of Rs 3,00,000
For a sale value of Rs.3,00,000 what is the contribution ?
Contribution for Rs.3,00,000 sale= Rs.3,00,000 * 30%= Rs.90,000
Profit or Loss= Contribution – Fixed expenses= Rs.90,000–Rs,48,000=
Rs 42,000 (Profit)

Sales to be found out to earn same level of profit
Sale value reduced 10% from the actual
Rs. 2,00,000–Rs.20,000 Rs.1,80,000
Variable cost Rs.1,40,000
Contribution Rs.40,000
For the new level of sale volume in rupees, the new PV ratio has to be found out

PV ratio= Contribution*100 / Sales

=Rs.40,000*100 / Rs.1,80,000

=2/9 times

The next important step is to determine the volume of the sales to earn the desired level of profit

= Fixed expenses + Desired level profit / PV ratio

=Rs.48,000 + Rs.12,000 / 2/9

=Rs.2,70,000

Illustration :

SV ltd a multi product company, furnishes you the following data relating to the year 1979

Illustration

Assuming that there is no change in prices and variable costs that the fixed expenses are incurred equally in the two half year periods calculate for the year 1979
Calculate
PV ratio
Fixed expenses
Break even sales
Margin of safety

The first step is to find out the PV ratio

Formula for PV ratio=

Change in Profit*100 /Sales

To identify the change in profit, the profits of the two different periods should be known
Profit= Sales-Total cost
Profit of the first half of the year = Rs.45,000–Rs.40,000 = Rs.5,000
Profit of the second half of the year= Rs.50,000–Rs.43,000 = Rs.7,000
Change in profit= Rs.7,000–Rs.5,000= Rs.2,000
Change in sales= Rs.50,000–Rs.45,000=Rs.5,000

PV ratio=Rs.2,000*100 / Rs.5,000

=50%

Fixed expenses, to find out the contribution should be initially found out
Contribution = Sales * PV ratio
= Rs.50,000 × 40% = Rs.20,000
The fixed expenses to be found out through the following equation
Contribution-Fixed expenses= Profit
Rs.20,000–Rs.7,000= Rs.13,000= Fixed expenses
The fixed expenses found only for six months ; for the entire year
= Rs.13,000* 2=Rs. 26,000

BE Sales =Fixed expenses / PV ratio

=Rs.26,000 / 40%

=Rs.65,000

Margin of safety
= Total sales- BE sales
The next component to be found out is total sales
Total sales = Sale of the first half of the year + Sale of the second half of the year
= Rs.45,000 + Rs.50,000 = Rs.95,000
Margin of safety= Rs.95,000 – Rs.65,000= Rs.30,000

Margin of safety in percentage of sales=

Rs.30,000*100 /Rs. 95,000

=31.578%


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