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Chapter 16
Volume-Cost-Profit
Analysis
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VOLUME-COST-PROFITANALYSIS
BREAK-EVEN ANALYSIS
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Volume-Cost-Profit Analysis
The cost-volume-profit (CVP) analysis is a tool to show therelationship between various ingredients of profit
planning, namely, unit sales price (SP), unit
variable cost (VC), fixed costs (FC), salesvolume, and sales-mix (in the case of
multi-product firms).
The crucial step in this analysis is the determination of
break-even point (BEP), which is defined as the saleslevel at which the total revenues equal total costs.
It is the level at which losses cease and beyondwhich profit starts.
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Break-Even Point
BEP can be determined by the followingtwo methods
(1) Algebraic Methods (2) Graphic Presentation
a) Contribution marginapproach
b) Equation technique
a) Break-even chart
b) Volume-profit graph
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1(a) Contribution MarginApproach
Contribution margin is the excess of unit sale price over unit variable cost
Example 1: How many ice-creams, having a unit cost of Rs 2 and a selling
price of Rs 3, must a vendor sell in a fair to recover the Rs 800 fees paid by
him for getting a selling stall and additional cost of Rs 400 to install the
stall? The answer can be determined by dividing the fixed cost by thedifference between the selling price (Rs 3) and cost price (Rs 2). Thus
BEP (units) =Fixed cost (Entry fees + Stall expenses)
(Sales price Unit variable cost)
(Rs 800 + Rs 400)/(Rs 3 Rs 2) = 1,200 units
BEP (units) =Fixed costs
Contribution margin (CM) per unit
BEP (amount)/BEP (Sales revenue)/BESR = BEP (units) Selling price (SP)
per unit = 1,200 Rs 3 = Rs 3,600
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BEP (amount) =Fixed costs
Profit volume ratio (P/V ratio)
P/V ratio =
Contribution margin per unit
Selling price per unit
BEP (amount) = Rs 1,200 0.3333 = Rs 3,600
From the P/V ratio, the variable cost to volume ratio (V/V ratio) can be easily
derived:
V/V ratio = 1 P/V ratio
In the vendors case, it is = 11/3 = 2/3 = 66.67 per cent
The V/V ratio, as the name suggests, establishes the relationship between
variable costs (VC) and sales volume in amount. The direct method of its
computation is:
Variable cost = Rs 2 Rs 3 = 66.67 per centSales revenue
Thus, P/V ratio + V/V ratio = 1 or 100 per cent
(1/3 + 2/3) = 1 (33.33 per cent + 66.67 per cent) = 100 per cent
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Margin of Safety
Margin of safety is the excess of actual sales revenue over the break-evensales revenue.
The excess of the actual sales revenue (ASR) over the break-even sales revenue(BESR) is known as the margin of safety. Symbolically, margin of safety = (ASR
BESR)
When the margin of safety (amount) is divided by the actual sales (amount), themargin of safety ratio (M/S ratio) is obtained. Symbolically,
M/S ratio = (ASR BESR)/ASR
Assume in the vendors case that sales is 2,000 units (Rs 6,000); margin ofsafety (Rs 6,000 Rs 3,600) = Rs 2,400; and the M/S ratio is Rs 2,400 Rs 6,000= 40 per cent.
The amount of profit can be directly determined with reference to the margin ofsafety and P/V ratio. Symbolically,
Profit = [Margin of safety (amount)] P/V ratio
Or Profit = [Margin of safety (units) CM per unit]
In the vendors case, profit = Rs 2,400 0.3333 (33.33 per cent) = Rs 800 or 800 Re 1 = Rs 800.
The reason is that once the total amount of fixed costs has been recovered,profits will increase by the difference of sales revenue and variable costs.
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1( b) Equation technique
The equation technique is particularly useful in
situations where unit price and unit variable costs arenot clearly defined. The excess of actual sales over theBE sales is the margin of safety. When margin of safetyis divided by the actual sales, we get margin of safetyratio which indicates the percentage by which actualsales may decline without causing any loss to the firm
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Sales revenue-Total costs = Net profit
Breaking up total costs into fixed and variable, Sales revenue Fixed
costs Variable costs= Net profit. Or Sales revenue = Fixed costs +
Variable costs + Net profit.
If S be the number of units required for break-even and sales revenue
(SP) and variable costs (VC) are on per unit basis, the above equation
can be written as follows:
SP (S) = FC + VC (S) + NI
Where SP = Selling price per unit
S= Number of units required to be sold to break-even
FC= Total fixed costs
VC= Variable costs per unit
NI= Net income (zero)
SP (S)= FC + VC (S) + zero
SP (S) VC (S)= FC
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Example 2
SV Ltd, a multi-product company, furnishes you the following datarelating to the current year:
Particulars First half of the year Second half of the year
Sales
Total costs
Rs 45,000
40,000
Rs 50,000
43,000
Assuming that there is no change in prices and variable costs andthat the fixed expenses are incurred equally in the two half-year
periods, calculate for the year:(i)The profit-volume ratio, (ii) Fixed expenses, (iii) Break-even sales,and (iv) Percentage margin of safety.
Solution
Sales revenue Total costs = Net profitRs 45,000 Rs 40,000 = Rs 5,000 (first half)
Rs 50,000 Rs 43,000 = Rs 7,000 (second half)
On a differential basis: Sales revenue, Rs 5,000 Total costs, Rs3,000 = Total profit, Rs 2,000.
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We know that only VC changes with a change in sales volume and, hence,
change in total costs are equivalent to VC (Rs 3,000). Accordingly, theadditional sales of Rs 5,000 has earned a contribution margin of Rs 2,000 [Rs
5,000 (S) Rs 3,000 (VC)].
P/V ratio = Rs 2,000 Rs 5,000 = 40 per cent.
V/V ratio = 100 per cent 40 per cent = 60 per cent.
Accordingly, 60 per cent of the total costs are made up of variable costs and
the balance represents the total fixed costs (FC).
Sales revenue = Fixed costs + Variable costs + Net profit
Rs 95,000 = FC + 0.60 (Rs 95,000) + Rs 12,000
Rs 95,000 = FC + Rs 57,000 + Rs 12,000Rs 95,000 Rs 69,000 = FC or Rs 26,000 = FC
BEP (amount) = Rs 26,000 0.40 = Rs 65,000
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Verification
Particulars Amount Per cent
Break-even sales
Variable costs
Contribution
Fixed costs
Net income
Rs 65,000
39,000
26,000
26,000
Nil
100
60
40
40
Nil
M/S ratio =(Rs 95,000 Rs 65,000
= 31.58%
Rs 95,000
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Break-Even Application
Sales Volume Required to Produce Desired Operating Profit
(Fixed expenses + Desired operating profit) P/V ratio
In Example 2, if the desired operating profit of SV Ltd is Rs 14,000,required sales volume = (Rs 26,000 + Rs 14,000)/0.40 = Rs 1,00,000
Operating Profit at a Given Level of Sales Volume[Actual Sales Revenue (ASR) Break-even Sales Revenue (BESR)] P/V ratio
Effect on Operating Profit of a Given Increase in Sales Volume
[Budgeted Sales Revenue (BSR) BESR] P/V ratioSuppose that SV Ltd forecasts 10 per cent increase in sales next
year, the projected profit will be: (Rs 1,04,500 Rs 65,000) 0.40 =Rs 15,800
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Additional Sales Volume Required to Offset a Reduction
in Selling Price
Suppose that SV Ltd reduces its selling price from Rs 10a unit to Rs 9. The sales volume needed to offset
reduced selling price/maintain a present operating profit
of Rs 12,000 would be:
Desired profit (P) + Fixed expenses (FC) = Rs (12,000 + Rs 26,000)
0.3333 = Rs 1,14,000Revised P/V ratio (Rs 3/Rs 9)
The required sales volume of Rs 1,14,000 represents an
increase of about 20 per cent over the present level. Themanagement should explore new avenues of sales
potential to maintain the existing amount of profit
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Effect of Changes in Fixed Costs
A firm may be confronted with the situation of increasing fixed costs. An
increase in the total budgeted fixed costs of a firm may be necessitated
either by external factors, such as, an increase in property taxes, insurancerates, factory rent, and so on, or by a managerial decision of an increase in
salaries of executives. More important than this in the latter category are
expansion of the present plant capacity so as to cope with additional
demand. The increase in the requirements of fixed costs would imply the
computation of the following:
(a) Relative break-even points.
(b) Required sales volume to earn the present profits.
(c) Required sales volume to earn the same rate of profit on the proposed
expansion programme as on the existing ones.
The effect of the increased FCs will be to raise the BEP of the firm. Assume
the management of SV Ltd decides a major expansion programme of its
existing production capacity. It is estimated that it will result in extra fixed
costs of Rs 8,000 on advertisement to boost sales volume and another Rs
16,000 on account of new plant facility.
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(a) The relative BEPs will be:
Present facilities = Fixed costs P/V ratio = Rs 26,000/0.40 = Rs
65,000.
Proposed facilities = (Present FCs + Additional FCs) P/V ratio.
= (Rs 26,000 + Rs 24,000)/0.40 = Rs 125,000.
It may be noted that increase in FCs (from Rs 26,000 to Rs 50,000)
has caused disproportionate increase in the BEP (from Rs 65,000 to
Rs 1,25,000).(b) The required sales volume to earn the present profit
[Present FCs + Additional FCs + Present profit (NI)] P/V ratio.
= [Rs 26,000 + Rs 24,000 + Rs 12,000] 0.40 = Rs 1,55,000.
(c) The required sales volume to earn the present rate of profit oninvestment:
(Present FCs + Additional FCs + Present return on investment +
Return on new investment) P/V ratio.
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Let us assume that the present investment is Rs 1,00,000 and the newinvestment will involve an additional financial outlay of Rs 60,000. Therequired sales volume will be (Rs 26,000 + Rs 24,000 + Rs 12,000+ Rs 7,200(0.12 Rs 60,000)/0.40 = Rs 1,73,000.
These computations may be reported in a summary form to the managementas follows (Table 1).
Table 1: Effect of Changes in Fixed Costs
Particulars Presentfacilities
Prospectivefacilities
Increase
Fixed costs Rs 26,000 Rs 50,000 Rs 24,000
BEP sales volume 65,000 1,25,000 60,000
BEP sales volume (units) 6,500 12,500 6,000
Sales volume to earn existingprofit
95,000 1,55,000 60,000
Sales volume in units to earn
existing profit
9,500 15,500 6,000
Sales volume to earn existing ROI 95,000 1,73,000 78,000
Sales volume to earn existing ROI(in units)
9,500 17,300 7,800
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Effect of Changes in Variable Costs
Assuming an increase of VC by Re 1 a unit for SVLtd, the new contributionmargin will be: Rs 3 (Rs 10 Rs 7) and the revised P/V ratio 0.30 that is, (Rs 3 Rs 10).
Revised BEP = (Rs 26,000)/0.30 = Rs 86,667
Desired sales volume to earn existing profit = Rs 38,000/0.30 = Rs 1,26,667
Assuming that variable costs of SVLtd decline by Re 1 per unit, revised BEP= Rs 26,000/0.50 = Rs 52,000.
Desired sales volume to maintain existing profit = Rs 38,000/0.50 = Rs 76,000.
Effects of Multiple Changes
So far we have assumed that a change takes place in one of the threevariable affecting profitscost, price and sales volume. In cases where morethan one factor is affected, the BEP analysis can be applied as shown below:
FC + FC (new) +Desired NI
1 tax rate
[Contribution margin per unit (New SP New VC) New selling price (NewSP)]
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Assuming the following set of new Figures for SV Ltd:
Particulars Existing data New data
Selling price per unit Rs 10 Rs 11
Fixed costs 26,000 40,000
Variable cost per unit 6 5.50
Contribution margin per unit 4 5.50
Desired net income after taxes (to maintain
the existing ROI)
12,000 25,000
Tax rate 35 per cent
Solution
Desired sales volume (on the basis of new data) [Rs 26,000 + Rs 14,000 +(Rs 25,0000.65)] 0.50, that is (Rs 5.5 Rs 11) = (Rs 78,461.5) 0.50 = Rs
1,56,923
Desired sales volume on the basis of existing data = [Rs 26,000 + (Rs12,000 0.65)] 0.40 (Rs 4 Rs 10) = Rs 44,462 0.40 = Rs 1,11,154.
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Multi-product Firms (Sales-mix)
Example 3
The Garware Paints Ltd presents to you the following income statement in a
condensed form for the first quarter ending March 31:Particulars Product Total
X Y Z
Sales
Variable costs
Contribution
Fixed costs
Net income
P/V ratio
Break-even sales
Sales-mix (per cent)
Rs 1,00,000
80,000
20,000
0.20
0.50
Rs 60,000
42,000
18,000
0.30
0.30
Rs 40,000
24,000
16,000
0.40
0.20
Rs 2,00,000
1,46,000
54,000
27,000
27,000
0.27
1,00,000
100
If Rs 40,000 of the sales shown for Product Xcould be shifted equally toproducts Yand Z, the profit and the BEP would change as shown in Table 2.
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Table 2 Break-even Point
Particulars Product Total
X Y Z
Sales
Less: Variable costs
Contribution
Less: Fixed costs
Net income
P/V ratio
BE sales
Sales-mix (per cent)
Rs 60,000
48,000
12,000
0.20
0.30
Rs 80,000
56,000
24,000
0.30
0.40
Rs 60,000
36,000
24,000
0.40
0.30
Rs 2,00,000
1,40,000
60,000
27,000
33,000
0.30
90,000
100
Example 3 shows that by increasing the mix of high P/V products (Y from 30to 40 per cent, Z from 20 to 30 per cent) and decreasing the mix of a low P/V
product (X from 50 to 30 per cent), the company can increase its overallprofitability. In fact, it can further augment its total profits, if it can make, andthe market can absorb, more quantities of Y and Z, say Rs 1 lakh each (Table3).
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Table 3
Particulars Product Total
Y Z
Sales
Less: Variable costs
Contribution
Less: Fixed costs
Net income
P/V ratio
BE sales
Sales-mix (per cent)
Rs 1,00,000
70,000
30,000
0.30
0.50
Rs 1,00,000
60,000
40,000
0.40
0.50
Rs 2,00,000
1,30,000
70,000
27,000
43,000
0.35
77,143
100
From the above, it can be generalised that, other things being equal,management should stress products with higher contribution margins. For
individual product line income statements, fixed costs should not beallocated or apportioned.
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2(a) Break-Even ChartThe break-even chart is a graphic presentation of the relationship between
costs, profits, and sales. It shows not only the break-even sales but alsothe estimated costs and profit at various levels of the sales revenue. It is,therefore, also referred to as volume-cost-profit (VCP) graph/chart
Assumptions Regarding the VCP Graph are
1. Costs can be bifurcated into variable and fixed components.
2. Fixed costs will remain constant during the relevant volume range ofgraph.
3. Variable cost per unit will remain constant during the relevant volumerange of graph.
4. Selling price per unit will remain constant irrespective of the quantitysold within the relevant range of the graph.
5. In the case of multi-product companies, in addition to the above fourassumptions, it is assumed that the sales-mix remains constant.
6. Finally, production and sales volumes are equal.
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Example 4
Selling price per unit
Fixed costs
Variable costs per unit
Relevant range (units) : Lower limit
: Upper limit
Break-up of variable costs per unit:
Direct material
Direct labour
Direct expenses
Selling expenses
Actual sales, 18,000 units (Rs 1,80,000)Plant capacity, 20,000 units (Rs 2,00,000)
Tax rate, 50 per cent
Rs 2
1.50
1
0.50
Rs 10
60,000
5
6,000
20,000
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Revenueandcosts(in000rupees)
Sales volume (in thousand units)
Y
X
Figure 1: Volume-Cost-Profit Graph (Traditional)
200
6 8 12 16 18 20 24 28 30
180
160
120
140
100
60
40
4
20
0
0
Or Rs 60 Rs 120 Rs 180 Rs 240 Rs 300
Sales revenue (in thousand units)
Per cent of plant capacity
20% 40% 60% 80% 100%
80
Relevant range
BEP
Margin of safety
(units)
Variable cost area
Fixed cost line
Fixed cost line
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Figure 1 has been drawn by using a sales line and a total cost line (including bothfixed and variable costs). The steps involved in drawing the VCP graph areenumerated as follows:
1. Select an appropriate scale for sales volume on the horizontal axis, say, 2,000 units
(Rs 20,000) per square, and plot the point for total sales revenues at relevantvolume: 6,000 units Rs 10 = Rs 60,000. Draw the sales line from the origin to Rs2,00,000 (the upper limit of the relevant range). Ensure that all the points, 0, Rs60,000 and Rs 2,00,000 fall in the same line. This should be ensured for the totalcost line also.
2. Select an appropriate scale for costs and sales revenues on the vertical axis, say,Rs 10,000 per square. Draw the line showing Rs 60,000 fixed cost parallel to thehorizontal axis.
3. Determine the variable portion of costs at two volumes of scales (beginning andending): 6,000 units Rs 5 = Rs 30,000; 20,000 units Rs 5 = Rs 1,00,000.
4. Variable costs are to be added to fixed costs (Rs 30,000 + Rs 60,000 = Rs 90,000).Plot the point at 6,000 units sales volume and Rs 1,00,000 + Rs 60,000 = Rs1,60,000. Point is to be plotted at 20,000 units sales volume. This obviously is thetotal cost line.
5. The point of intersection of the total cost line and sales line is the BEP. To the rightof BEP, there is a profit area and to the left of it, there is a loss area.
6. Verification: FC CM per unit = Rs 60,000 Rs 5 per unit = 12,000 units or Rs1,20,000
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Figure 1 has been drawn using different scales for the horizontal andvertical axis. Figure 2 has been drawn on a uniform scale for both axes.Since the scales are the same, the 45 line will always be the proxy of thesales line. Any amount of sales revenue on the horizontal axis willcorrespond to costs and revenue on the vertical axis. Let us illustrate
taking two sales levels.
1. Rs 60,000: FC = Rs 60,000
VC = 30,000 (50 per cent variable cost to volume ratio)
TC = 90,000
Loss = 30,000 (TC, Rs 90,000 Rs 30,000, sales revenue)
Thus, Rs 60,000 = Rs 60,000 + Rs 30,000 Rs 30,000. Point A in Figure 2clearly shows these three relevant figures at the sales volume of Rs 60,000.
2. Rs 1,80,000: FC = Rs 60,000
VC = 90,000
TC = 1,50,000
Profit = 30,000
Thus, Rs 1,80,000 = Rs 60,000 (FC) + Rs 90,000 (VC) + Rs 30,000 (Profit).Point B in Figure 2 portrays these three relevant figures at the sales volumeof Rs 1,80,000.
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Revenueand
costs(in000rupees)
Sales revenue (in 000 rupees)
Y
X
Figure 2: Volume-Cost-Profit Graph, Same Scale
40
0
0
BEP
Fixed cost line80
120
160
200
240
40 60 80 120 240160 180 200140
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The VCP graph in Figure 3 is drawn with the details of the individual segmentof variable cost and is more informative. The steps involved in drawing thegraph include an additional step of adding variable costs to the fixed cost.
This is to be repeated four times for four different components: material,
labour, direct expenses and selling expenses. In fact, fixed costs can also befurther split-up into parts. Such a graph provides a birds-eye view of theentire cost structure to the management. By drawing a line perpendicularfrom any volume (horizontal axis), the corresponding cost and profitvariables can be ascertained on the vertical axis.
For instance, at 20,000 unit level, following are the various cost figures, asshown by the VCP graph (line A).
Fixed costs
Variable costs:
MaterialLabour
Direct expenses
Selling expenses
Profit before taxes
Rs 60,000
40,00030,000
20,000
10,000
40,000
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Revenueand
costs(in000rupe
es)
Sales Volume (in thousand units)
Y
X
Figure 3: Volume-Cost-Profit Graph, Cost-Wise
40
BEP
80
120
160
200
4 8 12 16 20
Rs 20,000 Net income
Rs 20,000 Income tax
Rs 10,000 Selling expenses Variablecosts&exp
enses
Totalcosts
and
expenses
Rs 20,000Direct
expenses
Rs 30,000Direct labour
cost
Rs 40,000 Direct materialcost
Rs 60,000
Fixed expenses(Factory,
administration,selling)
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The VCP graph can be modified to show the changes in the
profitability factors of Example 4, such as,
1.Change in fixed costs (Rs 10,000 both ways)
2.Change in variable costs (20 per cent both ways)
3.Change in selling price (25 per cent both ways).
Table 4 provides a summary of the results due to the above changes.
Only one change is taken at a point of time.
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Table 4
Variable Effect on BEP Margin of safety Operating profit
Fixed costs (Rs 10,000):
Increase
Decrease
(Figure 4)
Variable costs:
Increase (to 60 per cent)
Decrease (to 40 per cent)
(Figure 5)
Selling price (25 per cent):
Increase
Decrease
(Figure 6)
Increase (Rs 20,000)
Decrease (Rs 20,000)
Increase (Rs 30,000)
Decrease (Rs 20,000)
Decrease (Rs 20,000)
Increase (Rs 60,000)
Decrease (Rs 20,000)
Increase (Rs 20,000)
Decrease (Rs 30,000)
Increase (Rs 20,000)
Increase (Rs 20,000)
Increase (Rs 60,000)
Decrease (Rs 10,000)
Increase (Rs 10,000)
Decrease (Rs 18,000)
Increase (Rs 18,000)
Increase (Rs 18,000)
Decrease (Rs 30,000)
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Revenueandcosts(in000rupees)
Y
Figure 4: Volume-Cost-Profit Graph, Change in Fixed Cost
Sales revenue (in 000 rupees)
40 80 120 160 200 240 280 320
4500
0
Profits (FC Rs 70)
FC line (A)
FC line (B)
BEP (FCRs 50)
BEP (FCRs 70)
Profit (FC Rs 50)
Margin of safety(MS)
X
280
320
240
200
160
120
80
40
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Revenue
andcosts(in000r
upees)
X
Y
Figure 5: Volume-Cost-Profit Graph, Change in Variable Cost
Sales revenue (in 000 rupees)
300
260
220180
150
140
100
60
20
40 80 120 160 200 240 280 320
450
Profits Rs 12,000(VC 60%)
FC line
Margin ofsafety(MS)
BEP (VC40%)
BEP (VC60%)
Profits Rs 48,000(VC 40%)
(MS)
0
0
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Revenueand
costs(in000rupe
es)
40 80 120 160 200 240 280 320
450
Sales revenue (in 000 rupees)
Profit (at higher SP)
BEP (at lower SP)
Profit (at higher SP)
FC line
Margin of
safety
320
320
320
200
160
120
80
40
0
0
Figure 6:Volume-Cost-Profit Graph, Change in Selling Price
X
Y
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Important Points Regarding Figure 6
In Figures 4 and 5, there are two cost lines to show the increase and
decrease. But Figure 6, which is designed to reveal the change due to the
selling price, has only one sales line (45). The impact of change in the
sales price is reflected indirectly in the variable cost line (which is merged
with FC line and is represented by the total cost line). This is due to the fact
that the V/V ratio which is an essential input for drawing the chart gets
changed when the selling price is changed. In other words, Figure 6 is like
Figure 5. The new V/V ratio has been determined as follows.
(1) When there is an increase in selling price by 25 per cent
Sales price ( revised) = Rs 5.50 (Rs 10 + 25 per cent) or 125 per cent (Rs 12.5
per unit).
Variable costs = Rs 5 or 50 per cent (existing).
V/V Ratio = (Rs 5 Rs 12.50) or (50 125) or 40 per cent.
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(2) When there is a decrease in sales price by 25 per centSales price= Rs 7.50 (Rs 10 Rs 2.50) or 75 per cent (Rs 7.5 per unit).
Variable costs= Rs 5 or 50 pr cent (existing).
V/V Ratio= (Rs 5 Rs 7.50) or (50 75) or 66.67 per cent .
Total cost line= Rs 60,000 + 66.67 per cent sales.
Since the V/V ratio assumes a fractional form, care has been taken to plot
points at sales levels of Rs 1,50,000 and Rs 2,40,000 so that corresponding
variable cost figures can be whole numbers, that is, Rs 1,00,000 and Rs
1,60,000 respectively.
Figure 7 portrays VCP relationships of a sales-mix for multi-product firm
(Example 3).
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Dr. Shailendra Kumar, LMTSOM, Thapar University, Patiala 16-38
140
160
120
100
80
60
40
20
20
X
Y
40 60 80 90 100 120 140 160
Revenueandcos
ts(in000rupees)
Sales revenue (in 000 rupees)
BEP (original)
BEP (changed mix)
Total cost line (original mix)
FC line
450
00
Figure 7: Volume-Cost-Profit Graph, Change in Sales Mix
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Dr. Shailendra Kumar, LMTSOM, Thapar University, Patiala 16-39
Cash Break-Even Point
The VCP relationship can also be used to show the liquidity position of the
firm. This is done through the computation of cash break-even point or
cash break-even sales revenue (CBEP/CBESR). Algebraically:
CBEP =Total cash fixed cost (CFC)
Equation 1Contribution margin per unit
CBESR =Total cash fixed cost
Equation 2
P/V ratioGraphically, the CBEP is determined at the point of intersection of total
cash cost line and total sales line. The area to the left of the curve
signifies cash losses and the area on the right side is indicative of cash
profits.
Assuming for Example 4, the cash fixed cost to be Rs 15,000, the CBESRusing Equation 2 would be Rs 30,000 = Rs 15,000 0.50
Figure 8 portrays the graphic presentation of the cash break-even sales
revenue.
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16 40
60
50
40
30
20
10
0 10 20 30 40 50 60
Costsandprofit(in000rupees)
Sales revenue (in 000 rupees)
Total cash fixed cost
Cash BEP
Figure 8: Cash Break-even Point
X
Y