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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.
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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;
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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
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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
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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
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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
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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
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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.
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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.
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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.
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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%
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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
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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
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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.
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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.
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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
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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.
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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.
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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.
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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)
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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
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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
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Table No: IV
Variable Overhead
Electricity 100000.00
Telephone 460000.00
Office expense 346000.00
Repairs and Maintenance 240000.00
Recruitment 64000.00
Travelling expense 380000.00
Conveyance 190000.00
Post courier and parcel 170000.00
Miscellaneous 150000.00
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Total 2100000.00
Future Scenario If Are Budget From H2O (800000Units)
Table No: V
Fixed cost Amount
Labor 1210000.00Electricity 35000.00
Depreciation 1506620.00
Telephone 4580.00
Rent (office) 120000.00
Office expenses 22000.00
Bank charges 18000.00
Insurance 35000.00Repairers and maintenance 25000.00
Convergence 16800.00
Post courier and parcel 7000.00
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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
Electricity 368000.00
Telephone 2768000.00
Office expense 276800.00
Repairs and Maintenance 192000.00
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Recruitment 51200.00
Travelling expense 304000.00
Conveyance 152000.00
Post courier and parcel 136000.00
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
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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
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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
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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
Electricity 35000.00
Depreciation 1506620.00
Telephone 4580.00
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Rent (office) 120000.00
Office expense 22000.00
Bank charges 18000.00
Insurance 35000.00
Repairs and Maintenance 25000.00
Conveyance 16800.00
Post, Courier and parcel 7000.00
Machinery 500000.00
Total 3500000.00
Table XII
Direct material cost
Packing Materials 4800000.00
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Raw Materials 2320000.00
Other Materials 2400000.00
Table XIII
Direct labour cost
Direct labour cost 2000000.00
Table XIV
Other Variable Over Heads
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Electricity 360000.00
Telephone 368000.00
Office Expense 346000.00
Repairs and Maintenance 276800.00
Recruitment 51200.00
Travelling Expense 304000.00
Conveyance 152000.00
Postage, Courier and Parcel 136000.00
Miscellaneous 120000.00
Total 2114000.00
Table XV
Projected profit when materials are produced
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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
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(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
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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
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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
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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
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Table XIX
Table showing Fixed Cost
Fixed cost Amount
Labor 1210000.00
Electricity 35000.00
Depreciation 1506620.00
Telephone 4580.00
Rent (office) 120000.00
Office expenses 22000.00Bank charges 18000.00
Insurance 35000.00
Repairers and maintenance 25000.00
Convergence 16800.00
Post courier and parcel 7000.00
Depreciation of machinery 100000.00
Interest 100000.00
Total 3200000.00
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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
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Table XXII
Table Showing Other Variable Over Heads
Electricity 360000.00
Telephone 368000.00
Office Expense 346000.00
Repairs and Maintenance 276800.00
Recruitment 51200.00
Travelling Expense 304000.00
Conveyance 152000.00
Postage, Courier and Parcel 136000.00
Miscellaneous 120000.00
Total 2114000.00
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Table XXIII
Table Showing Revised Projected profit
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
20000000.00
13634000.00
6366000.00
3200000.00
3166000.00
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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.
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Table XXIII
Statement showing the above analysis.
Particulars Amount
New selling Price 2000
Sales Revenue 8000 units @ Rs 2000
Less: Variable cost
Direct materials 9520000.00
Direct labor 2000000.00
Variable Overheads 2114000.00
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.
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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.
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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.
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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.
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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.