VERIFICATION - Accounts and Finance for Managers

At the level of 100 units
At the level of 100 units
Break Even Point ( Sales Volume Rs):
Break even point in sales can be found out in two methods.

  1. Selling Price Method
  2. PV Ratio Method.

Selling Price Method

Under this method Break even sales volume in rupees is found out through the product of Break Even Point in Units and Selling price per unit
BEP (Rs)=Break Even Point (units) × Selling price per unit

PV Ratio Method

Under this method, Break even sales volume in rupees can be determined through the following ratio.

BEP(Rs)= Fixed Cost/PV ratio

What is PV ratio?
PV ratio is Profit Volume ratio which establishes the relationship in between the profit and volume of sales. It is a ratio normally expressed in terms of contribution towards volume of sales. It is expressed in terms of percentage.

Utility of PV ratio:

  • To find out the Break Even Point in sales volume
  • To identify the desired level of profit at any sales volume
  • To determine the sales volume to earn required level of profit
  • To identify better product mix among the alternatives available etc.

Utility of PV ratio

From the above workings, it obviously understood that every unit of sale contributes 50% towards in covering the fixed cost and profit.

Break Even Sales= Fixed Cost / PV ratio



At-100-units-level
PV Ratio = Rs.1000/Rs.2000 = 50%
50 % of what ?
If Rs.100 is Sales ; Rs.50 is Contribution and the remaining Rs.50 variable cost.

Break even sales


At Break even level, the fixed cost volume is equivalent to contribution; the later which is related in terms of sales i.e. PV ratio will be applicable to the earlier i.e. fixed cost.

At break even sales


is the volume which neither earns nor incurs loss.

Illustration :

Calculate Break Even Point from the following particulars
Fixed Cost Rs.3,00,000
Variable Cost Per Unit Rs.20/-
Selling Price Per Unit Rs.30/-

Break Even Point (Units)= Fixed Cost/Contribution Margin Per Unit

First Step to find out Contribution margin per unit
Contribution Margin Per Unit = Selling Price Per Unit – Variable Cost Per Unit= Rs.30 – Rs.20 = Rs. 10
B.E.P(U)= 30,000 units
Break Even (Rupees) can be found out in two ways


Method I:
= B.E.P (Units) × Selling Price= 30,000 units × Rs.30= Rs.9,00,000/-


(Or)

Method II:
Under this method PV ratio component has to be found out

PV ratio= Contribution*100/Sales


Method 2

Illustration :
Calculate Break even point Rs.
Variable-Expenses
First step to find out the total volume of Variable expenses
Variable Expenses = Direct Material + Direct Labour + Overhead Expenses = Rs.2,00,000 + 1,20,000 + 80,000 = Rs.4,00,000/-
Second Step to find out the contribution
Contribution = Sales- Variable Expenses= Rs.6,00,000- 4,00,000= Rs. 2,00,000/-
Third step to find out PV ratio
PV ratio= Contribution/ Sales= Rs,2,00,000/Rs.6,00,00= 1/3
Final Step to find out Break even sales

Break Even Point (Rupees)= Fixed Cost/PV ratio=Rs.1,50,000 / (1/3)= Rs.4,50,000/-

Note: Break even point in units is not possible to find out due to non availability of selling price and variable cost per unit; which constrained the computation of contribution margin per unit.

Illustration :

From the following particulars find out the BEP. What will be the selling price per unit BEP is brought down to 900 units?
Variable Cost Rs 75/
Fixed Cost Rs.27,000/
Selling price per unit Rs.100/
First step is to find out the Break even Point in Units

Break Even Point (Units)= Fixed Cost/Contribution Margin Per Unit


Second step is to find out Contribution margin per unit
Contribution margin per unit = Selling price per unit- variable cost per unit
= Rs.100-75 = Rs.25
= 1080 units
If break even point is reduced to the level of 900 units; what is the new selling price?

First step to find out the contribution margin per unit; contribution margin per unit will be computed from the BEP (units) formula.

Break Even Point (Units)=900=Rs.27,000

Contribution Margin Per Unit


Contribution margin per unit = Rs. 27,000/900 units = Rs.30
The second step is to determine the new selling price through the following equation
Contribution = selling price-variable cost; X = Selling Price
Rs.30 = X-Rs.75 ; X = 30+75 = Rs.105/-
The new selling price for new break even level of 900 units is Rs.105/-

Graph Method

Statement of Fixed, variable and total costs and per unit

Graph Method

Graph Method


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