Accounting Assignment Help With Graphical Presentation of BEP

1.2 Graphical Presentation of BEP

In the figure, Horizontal axis measures output in units and the vertical axis measures sales and costs. Sales line ( os ) is an upward rising straight line. This is because sales increase with production. OA is fixed cost which maintained within the given range of output.

Total Costs = Fixed Costs + Variable Costs

So, total costs line (AT) starts from A. It means even if output is zero and you are at point O, still you have to incur fixed costs of OA. Thus AT represents total costs line. OS represents sales line. OS and OT intersect at point P. It is breakeven point. BP represents both total costs and sales at breakeven point.

Illustration 1:

Assam Pharmaceutical Ltd. Manufactured 26000 lakhs tablets and capsules for Rs 2860 crore. Its coat of sales and profit analysis is gven below :

$ Crore Per unit

Direct material	785	3.02
Direct wages	312	1.2
Direct Expenses	212	.82
Prime cost	1309	5.03
Manufacturing overhead ( 60% variable )	300	1.15
Administrative Overhead ( 100% fixed )	400	1.54
Selling & distribution Overhead ( 30% variable )	300	1.15
R & D – Amortisation	200	.77
Total cost	2509	9.65
Profit	351	1.35
Sales	2860	11.00

The company was operating at 60 % capacity.

Find out BEP & margin of safety?

The company was considering a proposal to operate at 75% capacity level. Since the fixed cost is step cost in nature, a proper analysis has been made on the behaviour of fixed cost. It is projected that fixed cost (expecting R & D cost ) would increases @ 5 % for every 10% capacity utilisation above 60 %. However, the additional production can be sold only at 20% discount. Apply marginal cost analysis explain whether additional production and sales should be carried out.

Solution:

Break even and margin of safety analysis

	$ In crore	Per unit
Sales	2860	11.00
Variable cost :
Direct material	785	3.02
Direct wages	312	1.2
Direct expenses	212	.82
Manufacturing overhead	180	.69
Selling & administration overhead	90	.35
Selling & administration overhead	90	.35
	1579	6.07
Contribution	1281	4.93
P/V ratio (%)	44.79

Fixed cost

Manufacturing overhead	120
Selling & administration overhead	210
Administration overhead	400
R&D – amortisation	200
	930
BEP ( units in crore ) ( fixed cost/ contribution per unit )	188.76
BEP ( in value ) ( fixed cost/ P/V ratio )	2076.35
Margin of safety	783.65
Margin of safety(%)	37.74

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