6. Management of ABC Ltd.is seeking your advice relating to two of its product X* and "Y".
It sells its product X'm Rs.15 per unit. In a particular period when company produces and
sells its 80,000 units, it incurs a loss of Rs.5 per unit. If the volume is raised to 2,00.000
units, it earns a profit of Rs.4 per unit Calculate Break even points of this product both in
terms of rupees as well as in terms of units.
For product Y' break-even sales level is at Rs.50,00,000. P/V ratio of the product is 20%
The company now wants to replace the old machinery being used in the production of
product "Yº with new one. This will result in an increase of its fixed cost by 25% though
selling price and variable cost remains unchanged. What should be the percentage crease in
sales for break-even if fixed cost goes up by 25%?
Answers
when 80000 units sold: (80000*15) = 1200000 (Sales Value)
when 200000 units sold: 200000*15= 3000000 (Sales Value)
change in value: 1800000
Profit/ Loss (in Rs.) (Loss is shown as minus)
80000*5=-400000
200000*4= 800000
change in value: 1200000
+(80000*5)=1600000 (1200000+400000)
PV Ratio = (Change in Profit / Change in Sales) * 100
(1200000/1800000) *100 = 66.6666%
When 80000 units are sold
PV Ratio = (Fixed Cost + Profit) / Sales *100
66.6666 = Fixed Cost + (-400000)/ 1200000 *100 ( At 80000 units of sale the loss is Rs. 400000 and Sale value is Rs. 1200000)
Fixed Cost -400000 = (1200000*66.6666)/100
Fixed Cost - 400000 = 800000
Fixed Cost = 800000 + 400000
Fixed Cost = 1200000
PV Ratio = (Fixed Cost / Breakeven sales) *100
66.6666= (1200000 / Breakeven sales) * 100
breakeven sales= 1800002
breakeven points in sales: 120000
When 20000 units are sold
PV Ratio = (Fixed Cost + Profit) / Sales *100
66.6666 = Fixed Cost + 800000/ 3000000 *100 ( At 20000 units of sale the profit is Rs. 800000 and Sale value is Rs. 3000000)
Fixed Cost+800000= (3000000*66.6666)/100
Fixed Cost + 800000 = 1999998
Fixed Cost = 1999998 - 800000
Fixed Cost = 1199998
PV Ratio = (Fixed Cost / Breakeven sales) *100
66.6666= (1199998 / Breakeven sales) * 100
breakeven sales= 1799999
breakeven points in sales: 119999.93