Page 231 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Variable Expenses

Direct Material 2,00,000
Direct Labour 1,20,000
Overhead Expenses 80,000
The first step is to find out the total volume of variable expenses.

Variable Expenses = Direct Material + Direct Labour + Overhead Expenses
= ` 2,00,000 + 1,20,000 + 80,000 = ` 4,00,000

The second step is to find out the contribution.
Contribution = Sales – Variable Expenses
= ` 6,00,000 – 4,00,000 = ` 2,00,000
The third step is to find out PV ratio.

PV ratio = Contribution/Sales
= ` 2,00,000/` 6,00,00 = 1/3
The final Step is to find out Break-even sales

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

Note It is not possible to fi nd out the break-even points in units due to non-availability
of selling price and variable cost per unit; this constrains the computation of contribution
margin per unit.

11.4.1 Uses of Break-even Analysis

Break-even analysis is a very generalised approach for dealing with a wide variety of questions
associated with profit planning and forecasting. Some of the important practical applications of

break-even analysis are:
1. What happens to overall profitability when a new product is introduced?

2. What level of sales is needed to cover all costs and earn, say, ` 1,00,000 profit or a 12% rate

of return?
3. What happens to revenues and costs if the price of one of a company’s product is hanged?

4. What happens to overall profitability if a company purchases new capital equipment or
incurs higher or lower fixed or variable costs?

5. Between two alternative investments, which one offers the greater margin of profi t
(safety)?
6. What are the revenue and cost implications of changing the process of production?
7. Should one make, buy or lease capital equipment?

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