Page 222 - DMGT409Basic Financial Management

Unit 14: Break Even Analysis

Solution: Notes

For plotting the data, we need at least two points – one for plotting the total cost line
and the other for plotting the total sales line. Therefore, it will be necessary to presume
different levels of output and sales as below:
Output Units Fixed costs Variable costs Total costs Sales
(Rs.) (Rs.) (Rs.) (Rs.)
0 1,50,000 — 1,50,000 —
10,000 1,50,000 1,00,000 2,50,000 1,50,000
20,000 1,50,000 2,00,000 3,50,000 3,00,000
30,000 1,50,000 3,00,000 4,50,000 4,50,000
40,000 1,50,000 4,00,000 5,50,000 6,00,000
50,000 1,50,000 5,00,000 6,50,000 7,50,000
60,000 1,50,000 6,00,000 7,50,000 9,00,000

Caselet To Break Even, Tata hopes to sell 12,500 Nanos a month

espite the slow start and low sales, Tata Motors hopes to sell more than 20,000
Nanos a month. And, if sales pick up, the company may increase the Sanand
Dplant’s capacity to 3.5 lakh units.
Tata Motors produces the Nano at Sanand in Gujarat.
The company should sell at least 12,500 units to make Nano a profi table venture.

Mr C. Ramakrishnan, Chief Financial Officer, Tata Motors, has indicated that it requires

more than 60 per cent of plant capacity realisation for Nano to start making profi t. The
Sanand plant’s installed capacity is 2.5 lakh units a year.
From July 2009 to October 2010, Tata Motors despatched 70,000 Nanos. The despatch to
select customers is coming to an end and the company has started retail sales in 11 States.
“Typically in a small segment car, the margins are low, it’s a volume and scale issue.
Typically one would operate at around 60 per cent to 65 per cent break even. I do not want
to comment specifically on Nano but that is typically the broad picture in passenger car

industry, particularly in these segments,” Mr Ramakrishnan said in a recent interaction
with analysts.
“The plant has a capacity of 250,000 which can be increased to about 300,000 or even
350,000. So, on an average our hope and expectation would be we should be able to do
about 20,000 to 25,000 cars a month,” he said.

However, analysts do not share this optimism. Four auto analysts with stock broking fi rms
whom Business Line spoke to expressed doubts over Nano clocking 20,000-plus numbers.

Three of them did not want to be identified or their firms mentioned. Analysts said that
issues related to availability and safety had impacted the sales prospect of Nano.
Immediate target
“I don’t think they will make 20,000 anytime soon. Their immediate target would be around
10,000 units a month,” said Mr Amol Bhutada, auto analyst with Elara Capital. “The sales
might not exceed 8,000-10,000 levels in the near future,” said another analyst.
Contd...

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