c v p analysis hanani

7/29/2019 c v p Analysis Hanani

1/47

1

INTRODUCTION

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique

that is concerned with the effect of sales volume and product costs on

operating profit of a business. It deals with how operating profit is affected

by changes in variable costs, fixed costs, selling price per unit and the sales

mix of two or more different products. It is based on the same principles of

classifying the operating expenses into fixed and variable. Now-a-days it

has become a powerful instrument in the hands of policy makers to

maximize profits.

Earning of maximum profit is the ultimate goal of almost all business

undertakings. The most important factor influencing the earning of profit is

the level of production. Cost Volume profit analysis examines the

relationship of cost and profit to the volume of business to maximize profit.


2/47

2

REVIEW OF LITERATURE

CVP analysis has following assumptions:

1. All cost can be categorized as variable or fixed.2. Sales price per unit, variable cost per unit and total fixed cost are

constant.

3. All units produced are sold.Where the problem involves mixed costs, they must be split into their fixed

and variable component by High-Low Method, Scatter Plot Method or

Regression Method.

CVP Analysis Formula

The basic formula used in CVP Analysis is derived from profit equation:

px = vx + FC + Profit

In the above formula,

p is price per unit;


3/47

3

v is variable cost per unit;

x are total number of units produced and sold; and

FC is total fixed cost

Besides the above formula, CVP analysis also makes use of following

concepts:

Contribution Margin (CM)

Contribution Margin (CM) is equal to the difference between total sales (S)

and total variable cost or, in other words, it is the amount by which sales

exceed total variable costs (VC). In order to make profit the contribution

margin of a business must exceed its total fixed costs. In short:

CM = S VC

Unit Contribution Margin (Unit CM)

Contribution Margin can also be calculated per unit which is called Unit

Contribution Margin. It is the excess of sales price per unit (p) over variable

cost per unit (v). Thus:

Unit CM = p v


4/47

4

Contribution Margin Ratio (CM Ratio)

Contribution Margin Ratio is calculated by dividing contribution margin by

total sales or unit CM by price per unit.

Introduction

Break-even analysis is a technique widely used by production management

and management accountants. It is based on categorising production costs

between those which are "variable" (costs that change when the

production output changes) and those that are "fixed" (costs not directly

related to the volume of production).

Total variable and fixed costs are compared with sales revenue in order to

determine thelevel of sales volume, sales value or production at which the

business makes neither a profit nor a loss (the "break-even point").

The Break-Even Chart

In its simplest form, the break-even chart is a graphical representation of

costs at various levels of activity shown on the same chart as the variation

of income (or sales, revenue) with the same variation in activity. The point


5/47

5

at which neither profit nor loss is made is known as the "break-even point"

and is represented on the chart below by the intersection of the two lines:

In the diagram above, the line OA represents the variation of income at

varying levels of production activity ("output"). OB represents the total

fixed costs in the business. As output increases, variable costs are incurred,

meaning that total costs (fixed + variable) also increase. At low levels of

output, Costs are greater than Income. At the point of intersection, P, costs

are exactly equal to income, and hence neither profit nor loss is made.

Fixed Costs


6/47

6

Fixed costs are those business costs that are not directly related to the level

of production or output. In other words, even if the business has a zero

output or high output, the level of fixed costs will remain broadly the same.

In the long term fixed costs can alter - perhaps as a result of investment in

production capacity (e.g. adding a new factory unit) or through the growth

in overheads required to support a larger, more complex business.

Examples of fixed costs:

- Rent and rates

- Depreciation

- Research and development

- Marketing costs (non- revenue related)

- Administration costs

Variable Costs


7/47

7

Variable costs are those costs which vary directly with the level of output.

They represent payment output-related inputs such as raw materials, direct

labour, fuel and revenue-related costs such as commission.

A distinction is often made between "Direct" variable costs

and "Indirect" variable costs.

Direct variable costs are those which can be directly attributable to the

production of a particular product or service and allocated to a particular

cost centre. Raw materials and the wages those working on the production

line are good examples.

Indirect variable costs cannot be directly attributable to production but

they do vary with output. These include depreciation (where it is calculated

related to output - e.g. machine hours), maintenance and certain labour

costs.

Semi-Variable Costs

Whilst the distinction between fixed and variable costs is a convenient way

of categorising business costs, in reality there are some costs which are


8/47

8

fixed in nature but which increase when output reaches certain levels.

These are largely related to the overall "scale" and/or complexity of the

business. For example, when a business has relatively low levels of output

or sales, it may not require costs associated with functions such as human

resource management or a fully-resourced finance department. However,

as the scale of the business grows (e.g. output, number people employed,

number and complexity of transactions) then more resources are required.

If production rises suddenly then some short-term increase in warehousing

and/or transport may be required. In these circumstances, we say that part

of the cost is variable and part fixed.


9/47

9

INDUSTRY PROFILE

The world production of rubber was considered to be very unstable during

the last few years. Comparatively, India's production of rubber is consistent

at the rate of 6% per annum. The Rubber industry in India has been growing

in strength and importance. This is the result of India's burgeoning role in

the global economy. India is the world's largest producers and third largest

consumer of natural rubber. Moreover, India is also one of the fastest

growing economy globally. These factors along with high growth of

automobile production and the presence of large and medium industries

has led to the growth of rubber industry in India.

Rubber Producing Areas in India

Rubber producing regions in India are divided into two zones traditional

and non-traditional.


10/47

10

Traditional zone Non-traditional zone

Kanyakumari in

Tamil Nadu

Coastal regions of

Karnataka

Districts of Kerala Goa

Andhra Pradesh

Orissa

Some areas of

Maharashtra

Northeastern states

(mainly Tripura)

Andaman and Nicobar

Islands

Kerala contributes 90% of Indias total production of natural rubber. Also,

Kerala and Tamil Nadu together occupies 86% of the growing area of

natural rubber.

Rubber Production in India

Here are some facts regarding rubber industry in India.

India is the third largest producer of rubber in the world. It is the fourth largest consumer of natural rubber.


11/47

11

It is the fifth largest consumer of natural rubber and synthetic rubbertogether in the world.

India is the world's largest manufacturer of reclaim rubber. India and China are the only two countries in the world which have

the capacity to consume the entire indigenous production of natural

rubber.

To know more about India's export opportunities regarding rubber

products and also to have an idea about global rubber industry, take

the Rubber Industry Overview

Rubber Consumption in India

The following industrial sector consume most of the rubber products.

Automotive tyre sector: 50% consumption of all kinds of rubbers Bicycles tyres and tubes: 15% Footwear: 12% Belts and hoses: 6% Camelback and latex products: 7% Other products: 10%
http://www.industrialrubbergoods.com/rubber-industry-overview.htmlhttp://www.industrialrubbergoods.com/rubber-industry-overview.html


12/47

12

Indian Rubber Market

Indias production varies between 6 and 7 lakh tons annually which

amounts to Rs. 3000 crores. Seventy percent of the total rubber production

in India is in the form of Ribbed Smoked Sheets (RSS). This is also imported

by India accounting for 45% of the total import of rubber. The Indian rubber

industry has a turnover of Rs 12000 crores. Most of the rubber production

is consumed by the tyre industry which is almost 52% of the total

production of India. Among the states, Kerala is the leading consumer of

rubber, followed by Punjab and Maharashtra. The exports of Indian natural

rubber have increased tremendously over the years and have reached

76000 tons in 2003-04.

Though, India is one of the leading producers of rubber but it still imports

rubber from other countries. At present, India is importing around 50000

tons of rubber annually.

India Rubber Industry Overview

There are about 6000 unit comprising 30 large scale, 300 medium scale and

around 5600 small scale and tiny sector units. These units are

manufacturing more than 35000 rubber products, employing 400 hundred


13/47

13

thousand people, which also includes 22000 technically qualified support

personnel, contributing Rs. 40 billions to the National Exchequer through

taxes, duties and other levies. The Indian Rubber Industry plays a vital role

in the Indian national economy. The rubber plantation sector in India

produces over 630 hundred thousand tones of natural rubber and there is a

projected production of more than one million tones in near future. This

has helped in the radical and rapid growth of the Indian rubber industry.

This prospect of growth is further enhanced by a boom in the vehicle

industry, improved living standards of the people and rapid over-all

industrialization. The per capita consumption of rubber in India is only 800

grams compared to 12 to 14 kilos in Japan, USA and Europe. So far as

consumption of rubber products is concerned, India is far from attaining

any saturation level. This is another factor leading to tremendous growth

prospects of the industry in the years to come

COMPANY PROFILE


14/47

14

For over 30 years Hanani Rubber Industries has been a technological leader

in manufacturing, Supplying, and trading high quality rubber products.

Hanani rubber Industries today offers a diverse range of rubber products

from the land of latex, Kottayam, South India . Made exclusively out of pure

natural rubber, straight from its own plantations,our products find demand

in overseas market, worldwide.

We proud to reveal that our products are widely distributed in world class

chain stores-Metro Cash & Carry, Auchan, OBI, Real, Leroy Merlen,

Castorama, Victoria, Hyperglobus, Carrefour, Home Centre through our

buyers.

Hanani Rubber Industries an ISO 9001:2008 certified company always

works towards achieving total customer satisfaction. It is committed to give

clients product and service excellence by providing in time delivery and

consistent products. It has a highly skilled, competent, and experienced

management team and manufacturing staff with over 30 years of

manufacturing experience. Hence, clients are guaranteed that they receive

only the best products and quality service.


15/47

15

All products pass through quality testing at every step of the production

process - starting from the selection of raw materials and mixing of rubber

compounds to completion of the final product. Thus, ensuring that each

and every unit that goes out of the production is in its best quality.

VISION and MISSION

"Our vision is to be recognized as one of the leading manufacturers and

suppliers of moulded rubber products. Our mission is to ensure total

customer satisfaction and cost effectiveness by providing quality rubber

products and delivering them to clients promptly."

OBJECTIVE

The company aims not just to be considered as a leading supplier of quality

materials but also to develop partnership with its clients, suppliers and

manufacturers.


16/47

16

PRODUCT PROFILE

The Rubberized Poultry Cage Mats

The rubberized poultry cage mats introduced found and believed to be very

effective and useful. They are affordable in prize, let the litter pass easily

avoid the possibility of the presence of microorganism that may cause

infection. Again the rubberized poultry cage mats are eco friendly. All over

India, Bangladesh, Sri Lanka and Middle East these are used successfully.

The wire mesh at the bottom of the cage covered completely. The mats can

be fixed very accurately to the mesh.

Tile Mats

Tile mats with interlocking system are available mainly in four colors Black,

Blue, green and Magenta. These can be used to cover a vast area

decoratively for having a smooth surface. The interlocking tile mats can be

used to cover a large area beautifully


17/47

17

The Rubber Floor Mats

The rubber floor mats keep the floors neat and clean. They are attractive as

well as affordable and available in very many designs.

Hollow Mats

Hollow Mats are mainly in two sizes .i.e., 600m x 40m and 75m x 45m. Both

are available with 12 mm thicknesses and 16mm thickness

The Honey Comb Mat

The honey comb Mat is as exclusive as the hollow mats. Any design

prescribed by the buyer can be excellently manufacture.

Tray Mats

Tray Mats - The coir decorated tray mats are extremely attractive. The tips

of coir brush produce an acupuncture effect.


18/47

18

RESEARCH METHODOLOGY

DATA COLLECTION

Data plays a very vital role in any research program. Source

of data are of mainly two types i.e., primary and secondary. The data

used in this study were collected from the published annual reports

and magazines of relevant periods of the company.

PERIOD OF STUDY

The period covered by the present study is based on the

financial year 2011.


19/47

19

DATA ANALYSIS AND INTERPRETATION

Problem of the Study

Mrs. Glory Jocob of Hanani Rubbers enjoys a monopoly in his local

market catering to around 1000000 customers every year. His friend James

mathew of M M Rubbers supplier him good Quality materials kit Very

measurable rate (14400 per unit). The year 2011 was not a good year for

Mrs.Glory Jacob He lost his good friend James Mathew in a road accident.

He also lost of his savings in a share market scam. The Sun God did not

bless him with a hot summer and sales was expected to fall by 20% . Te

make the matter worse the new head of M M Rubbers Mr. Mathew

Varghese increase the price of material kit by 30%.

On the above situation Mrs. Glory reduced his market share from

1000000 customers to 800000 customers. Because of increasing the

material cost.


20/47

20

COST DATA

The cost data is divided in to two parts.

1. Fixed cost2. Variable costThe fixed and the variable components of the mixed cost are

separated. The variable cost are divided in to three major categories

Direct materials cost, Direct labor cost, and the variable overhead .

The division of all the cost rate is tabulated for 1000000 units as well

as 800000 units as follows:-

Present scenario(1000000 units)


21/47

21

Table No : I

Fixed cost AmountLabor 1210000.00

Electricity 35000.00

Depreciation 1506620.00

Telephone 4580.00

Rent (office) 120000.00

Office expenses 22000.00

Bank charges 18000.00Insurance 35000.00

Repairers and maintenance 25000.00

Convergence 16800.00

Post courier and parcel 7000.00

Total 3000000.00


22/47

22

Table No: II

Direct materials

Packing materials 6000000.00

Materials 4000000.00

Other materials 2900000.00

Total 12900000.00

Table No: III

Direct Labour

Direct Labor 2000000.00

Total 2000000.00


23/47

23

Table No: IV

Variable Overhead


Telephone 460000.00

Office expense 346000.00

Repairs and Maintenance 240000.00

Recruitment 64000.00

Travelling expense 380000.00

Conveyance 190000.00


Miscellaneous 150000.00


24/47

24

Total 2100000.00

Future Scenario If Are Budget From H2O (800000Units)

Table No: V

Fixed cost Amount

Labor 1210000.00Electricity 35000.00


Telephone 4580.00


Office expenses 22000.00

Bank charges 18000.00

Insurance 35000.00Repairers and maintenance 25000.00




25/47

25

Total 3000000.00

Table No: VI

Direct Materials

Packing materials 4800000.00

Materials kit (520/kit) 4160000.00

Other materials 2320000.00

Total 11280000.00

Table No: VII

Direct labour

Direct Labor 1600000.00

Total 1600000.00

Table No: VIII

Variable overhead


Telephone 2768000.00




26/47

26


Travelling expense 304000.00



Miscellaneous expense 120000.00

Total 1680000.00

Comparative analysis of Both Scenarios

Table IX

Profitability analysis of 1000000 units

Sales revenue Rs.25/ units 25000000.00

Less : Variable overhead

Direct materials

Direct labor

Variable overheads

12900000.00

2000000.00

2100000.00


27/47

27

Contribution

Less :Fixed cost

Operating Profits

8000000.00

3000000.00

5000000.00

Table No: X

Profitability Analysis Of 800000 units

Sales revenue Rs.25/ units 20000000.00

Less :Variable overhead

Direct material

Direct labor

Variable Overhead

11280000.00

1600000.00

1680000.00


28/47

28

Contribution

Less Fixed cost

5440000.00

3000000.00

2440000.00

FINDINGS

After going through the report of Mrs. Glory Jacob realized that his

profit would drop by Rs. 25.60 lakhs if he continued to purchase materials

kit from H2O care sales drops to 800000 units.

Analysis of alternative solution of the problem.

There was no other material manufactures in the market the

only alternative for Mrs.Glory Jacob was to manufacture materials

indigenously. But he had cost of his money and for manufacture material

he need to expand his factory and purchase a new machinery (overall Rs 5

lakhs more was needed). Row material received is Rs 300/unit. Additional

labour is required. There by labour cost increased to Rs 250/unit. The


29/47

29

making of material would also drow more electricity there by increasing the

variable overhead cost. The banks were not willing to finance him. Mr.

Lalchi Singh, the loan shark saw opportunity to make money and offered

the loan money to Mrs. Glory Jacob for a period of one year at the rate of

more than 20%. The loan to be paid in two instalments Rs 3 lakh each , the

first one is to be made in the first six months and the second instalment at

the end of the year. The interest would be paid at the end of the year. If

Mrs.Glory Fails to pay back the interest and the principal on the due dates

Mr.Lalchi would be entitled to auction of the factory and get back his sum.

The problem is that Mrs.Glory now has to decide whether to accept the

offer of not.

Table XI

Fixed Cost

Labor 1210000.00



Telephone 4580.00


30/47

30



Bank charges 18000.00

Insurance 35000.00


Conveyance 16800.00

Post, Courier and parcel 7000.00

Machinery 500000.00

Total 3500000.00

Table XII

Direct material cost

Packing Materials 4800000.00


31/47

31

Raw Materials 2320000.00

Other Materials 2400000.00

Table XIII

Direct labour cost

Direct labour cost 2000000.00

Table XIV

Other Variable Over Heads


32/47

32


Telephone 368000.00

Office Expense 346000.00



Travelling Expense 304000.00


Postage, Courier and Parcel 136000.00


Total 2114000.00

Table XV

Projected profit when materials are produced


33/47

33

Particulars Amount

Sales Revenue

8000 unit @ Rs 2500

Less: Variable cost

Direct materials 9520000.00

Direct labor 2000000.00

Variable Overheads 2114000.00

Less: Fixed Cost

Operating Profit

Less: Interest of instalment

Earnings Before Tax

20000000.00

13634000.00

6366000.00

3500000.00

2866000.00

600000.00

2266000.00

Table XVI

Table showing Break even units


34/47

34

(A)Contribution 6366000.00(B)Sales in Units 8000.00(C)Contribution per unit (A/B) 795.75(D)Fixed Cost 3500000.00(E)Break even Units (A/C) 4398.00

Table XVII


35/47

35

Table showing BEP units if fixed cost is devided in to 300000 in First six

months and 3200000 in the next six months

Total Fixed Cost 3500000.00

A. Fixed cost in first 6 months 300000.00B. Fixed cost in next 6 months 3200000.00C. Contribution margin per unit 795.75D. BEP units in First 6 months (A/C) 377.00E. BEP units in next 6 months(A/D) 4021.00

Table XVIII


36/47

36

Table showing BEP units if fixed cost divided in equally in first six months

and next six months.

Total Fixed Cost 3500000.00

A) Fixed cost in First 6 months 1750000.00B) Fixed cost in Next 6 months 1750000.00C) Contribution Margin / unit 795.75D)BEP units in first 6 months 2199.00E) BEP units in Next 6 months 2199.00

Findings of the alternative solution


37/47

37

Manufacturing materials indigenously, would eat away the profit by

another Rs 174000 There is also an inherent risk of default of the first

instalment to Mr.Lalchi as it would not be possible to sell even 377 units in

the off season. There is no reason why Mr.Coolgay should go ahead with

the idea of manufacturing materials. After seeing the income statement

and Break-even analysis Mrs. Glory Jacob decided not to take the loan.

Another alternative

The machinery was meant for long term use. It could not be prudent

to change its cost in current year itself. It would be better amortize the cost

over a period of five years,ie. amortize Rs 1 lakh every year. Then the

difference are


38/47

38

Table XIX

Table showing Fixed Cost

Fixed cost Amount

Labor 1210000.00



Telephone 4580.00


Office expenses 22000.00Bank charges 18000.00

Insurance 35000.00

Repairers and maintenance 25000.00



Depreciation of machinery 100000.00

Interest 100000.00

Total 3200000.00


39/47

39

Table XX

Table showing Direct material Cost

Packing Materials 4800000.00

Raw Materials 2320000.00

Other Materials 2400000.00

Table XXI

Table showing Direct Labour Cost

Direct labour cost 2000000.00


40/47

40

Table XXII

Table Showing Other Variable Over Heads


Telephone 368000.00

Office Expense 346000.00



Travelling Expense 304000.00


Postage, Courier and Parcel 136000.00


Total 2114000.00


41/47

41

Table XXIII

Table Showing Revised Projected profit

Particulars Amount

Sales Revenue

8000 unit @ Rs 2500

Less: Variable cost




Less: Fixed Cost

Operating Profit

20000000.00

13634000.00

6366000.00

3200000.00

3166000.00


42/47

42

Findings

From this alternative the profit was actually increase by

Rs 900000

Another alternative

On the basis of the above profit loan taken is suggested. But it

has some conditions. It would be deficult to sell even a modest target of

377 units in the off season. But offering heavy off season discount ie up to

20% the sales can be pushed up significantly. Proper advertising should be

done so as to inform the people that the discount would be available. As

the Hanani Rubbers has a monopoly in the region the people would like to

cash this opportunity and the sales would go up. The discount should be

discontinued as soon as cash position is reached.


43/47

43

Table XXIII

Statement showing the above analysis.

Particulars Amount

New selling Price 2000

Sales Revenue 8000 units @ Rs 2000

Less: Variable cost




Contribution

Contribution per unit = 2366000/8000

Break even Unit= 300000/295.75= 1014units

16000000.00

13634000.00

2366000.00

295.75

1014

As soon as 1014 units are sold the discount should be discontinued.


44/47

44

FINDINGS

1. On the first alternative his profit would drop up by Rs 25.60 lakhsif he continued to purchase material kit from M M Rubbers and

sales drop to 8000 units.

2. Manufacturing materials indigenously, would eat away the profitby another Rs 174000 There is also an inherent risk of default of

the first instalment to Mr.Lalchi as it would not be possible to sell

even 377 units in the off season. There is no reason why

Mr.Coolgay should go ahead with the idea of manufacturing

materials. After seeing the income statement and Break-even

analysis Mrs. Glory Jacob decided not to take the loan.

3. From the third alternative it is find that profit was actuallyincrease by 900000.

4. In the fourth alternative it is find that the discount is discontinuedIf the sales reach to 1014 units.

5. When the discount offered is the fourth alternative thecontribution/unit is 295.75 and break even unit is 1014 units.


45/47

45

SUGGESTIONS

1. On the first alternative his profit would drop up by Rs 25.60lakhs if he continued to purchase material kit from M M

Rubbers and sales drop to 8000 units. So materials should not

be purchased from M M Rubbers and sales not to drop by

8000 units.

2. Manufacturing materials indigenously, would eat away theprofit by another Rs 174000 There is also an inherent risk of

default of the first instalment to Mr.Lalchi as it would not be

possible to sell even 377 units in the off season. There is no

reason why Mr.Coolgay should go ahead with the idea of

manufacturing materials. After seeing the income statement

and Break-even analysis Mrs. Glory Jacob decided not to take

the loan.

3. As per the report of third alternative the discount isdiscontinued when sales is reach to 1014 units.

4. Mrs.Glory should not take loan for the year.


46/47

46

5. A mild summer one year is usually a harbinger of a shortcoming summer in the following year. The demand for the

product is likely to shoot up the next year. It would not be

prudent then to keep up purchasing material from M M

Rubbers

6. Investment for making materials should be made next yearswinter from the profit of the year summer.


47/47

CONCLUSION

Based up on the study of my B.com program I conduct a Cost

Volume Profit Analysis of M/s Hanani Rubbers, I learn many things about

the Concern. I am glad to give suggestion to the concern on the problem

arised on my study. Based up on the study I find that the Financial position

of the concern satisfactory and it has all possibilities to expand their

activities in the near Feature.

c v p analysis hanani

Documents