Q. Compute Profit when - Sales Rs.4,00,000 Fixed Cost Rs. 80,000 BEP Rs. 3,20,000
To compute the profit when the sales amount
to Rs. 4,00,000, fixed costs are Rs. 80,000, and the break-even point (BEP) is
Rs. 3,20,000, we can use a structured approach by analyzing the relationship
between fixed costs, sales, contribution margin, and break-even point. In this
calculation, we will explore the significance of the break-even point, how to
calculate the contribution margin, and the final profit.
1. Understanding Key Terms:
- Sales: Rs. 4,00,000
- Fixed Costs: Rs. 80,000
- Break-even Point (BEP): Rs.
3,20,000
The break-even point represents the level of
sales at which total revenue equals total costs, meaning there is neither
profit nor loss. This value is critical for businesses to understand the
minimum sales needed to cover all their fixed and variable costs.
2. Contribution Margin:
The contribution margin is the difference
between sales revenue and variable costs. It is an essential metric because it
shows how much of the sales revenue is contributing to covering fixed costs and
generating profit once the break-even point is surpassed. The contribution
margin can be expressed as a ratio or a per-unit value, and it plays a critical
role in determining profitability.
3. Calculate Contribution Margin Ratio:
We can calculate the contribution margin
ratio using the break-even point and fixed costs.
Formula for Break-even Point:
BEP=Fixed CostsContribution Margin RatioBEP
= \frac{\text{Fixed Costs}}{\text{Contribution Margin Ratio}}BEP=Contribution Margin RatioFixed Costs
From the given data:
3,20,000=80,000Contribution Margin Ratio3,20,000
= \frac{80,000}{\text{Contribution Margin Ratio}}3,20,000=Contribution Margin Ratio80,000
Solving for the contribution margin ratio:
Contribution Margin Ratio=80,0003,20,000=0.25 or 25%\text{Contribution
Margin Ratio} = \frac{80,000}{3,20,000} = 0.25 \text{ or } 25\%Contribution Margin Ratio=3,20,00080,000=0.25 or 25%
This means that for every rupee of sales, Rs.
0.25 contributes toward covering fixed costs and generating profit.
4. Contribution Margin per Unit:
If we have the unit sales price and variable
cost per unit, we could calculate the contribution margin per unit. However,
with the given data, we’ve used the contribution margin ratio directly to
understand the relationship between sales and fixed costs.
5. Calculate Profit:
Now, to calculate the profit, we need to
determine the total contribution margin based on the actual sales and subtract
the fixed costs.
Total Contribution Margin:
Total Contribution Margin=Sales×Contribution Margin Ratio\text{Total
Contribution Margin} = \text{Sales} \times \text{Contribution Margin Ratio}Total Contribution Margin=Sales×Contribution Margin Ratio Total Contribution Margin=4,00,000×0.25=1,00,000\text{Total
Contribution Margin} = 4,00,000 \times 0.25 = 1,00,000Total Contribution Margin=4,00,000×0.25=1,00,000
Profit Calculation:
The profit is simply the total contribution
margin minus the fixed costs:
Profit=Total Contribution Margin−Fixed Costs\text{Profit}
= \text{Total Contribution Margin} - \text{Fixed Costs}Profit=Total Contribution Margin−Fixed Costs Profit=1,00,000−80,000=20,000\text{Profit} = 1,00,000 -
80,000 = 20,000Profit=1,00,000−80,000=20,000
6. Conclusion:
The profit when sales are Rs. 4,00,000, fixed
costs are Rs. 80,000, and the break-even point is Rs. 3,20,000 is Rs. 20,000.
This means that the company has successfully covered all its fixed costs and
earned a profit of Rs. 20,000 after surpassing the break-even point. Understanding
the break-even point, contribution margin, and fixed costs allows businesses to
make informed decisions about pricing, cost management, and sales targets.
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