You are given the following information for the coming year of a factory:
Particulars | Amount
---|---
Fixed expenses | Rs. 4,00,000
Selling price per unit | Rs. 20
Variable expenses per unit | Rs. 10
Budgeted output | 80,000 units
Calculate Break-even Point in Rupees and Margin of Safety in Rupees.
Answer (1)
To solve this problem, we need to calculate two things: the Break-even Point (BEP) in Rupees and the Margin of Safety in Rupees. Let's break down the problem step-by-step.
Break-even Point (BEP) in Rupees
The break-even point is where total revenue equals total expenses, meaning there is no profit or loss. It's a threshold to understand how much sales revenue is needed to cover the fixed and variable costs.
Formula for BEP in Units: BEP (Units) = Selling Price per Unit − Variable Expenses per Unit Fixed Expenses
Substitute the given values:
Fixed Expenses = Rs. 4,00,000
Selling Price per Unit = Rs. 20
Variable Expenses per Unit = Rs. 10
Calculation: BEP (Units) = 20 − 10 4 , 00 , 000 = 10 4 , 00 , 000 = 40 , 000 units
Convert BEP in Units to BEP in Rupees: BEP (Rupees) = BEP (Units) × Selling Price per Unit BEP (Rupees) = 40 , 000 × 20 = Rs. 8,00,000
Thus, the break-even point is Rs. 8,00,000.
Margin of Safety in Rupees
The margin of safety indicates how much sales can drop before reaching the break-even point. It is a measure of risk.
Formula for Margin of Safety: Margin of Safety (Rupees) = Actual Sales − BEP Sales
Calculate actual sales:
Actual Sales = Budgeted Output × Selling Price per Unit
Budgeted Output = 80,000 units
Calculation: Actual Sales = 80 , 000 × 20 = Rs. 16,00,000
Substitute into the Margin of Safety formula: Margin of Safety (Rupees) = 16 , 00 , 000 − 8 , 00 , 000 = Rs. 8,00,000
Therefore, the margin of safety in Rupees is Rs. 8,00,000.
In conclusion, understanding the break-even point and margin of safety helps businesses manage risks and plan for profitability by knowing how much must be sold to cover costs and how much buffer exists before incurring losses.
