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INTRODUCTION
Cost volume profit (CVP) analysis generally defined as a planning tool by which
manages can evaluate the effect of a change(s) in price, volume, variable cost or fixed
cost on profit. Additionally, CVP analysis is the basis for understanding contribution
margin pricing, related short-run decisions, target costing and transfer pricing. In the
marginal costing varies directly with the volume of production or output. On the other
hand, fixed cost remains unaltered regardless of the volume of output. In net effects, if
volume is changed, variable cost varies as per the changes in volume. In this case, selling
price remains fixed, fixed remains fixed and then there is a change in profit.
Cost – Volume profit Analysis is a logical extension of Marginal costing. 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 maximum profits.
There elements need to be related ion order to achieve the maximum profit. Apart
from profit projection, the concept of cost volume profit is relevant the short run. The
relationship among cost, revenue and profit at different levels may be expressed in graphs
such as breakeven charts, profit volume graphs or in various statements forms.
Earning of maximum profit is the ultimate goal of almost all business
undertakings. The most important factors influencing the earning of profit is the level of
production. (I.e. Volume of production).
1
Profit depends on a large number of factors, most important of which are the cost
of manufacturing and the volume of sales, volume of sales depends upon the volume of
production and market forces which turns in related to costs.
Management has no control over market. In order to achieve certain level of
profitability, it has to exercise control and management of costs, mainly variable cost.
This is because fixed cost is a non-controllable cost.
It helps to find out the profitability of a product, department of division to have
better product mix, for profit planning and to maximize the profit of a concern.
These decisions can include such crucial areas as pricing policies, product mixes,
market expansion or contractions, outsourcing contracts, idle plant usage, discretionary
expenses planning and a variety of other important considerations in the planning
process. Given the broad range of context in which cost volume profit can be used.
In other words, it helps in locating the level of output which evenly breaks the
cost and revenues used in its broader sense, it means that system of analysis which
determine profit, cost and ales value at different levels of output. The cost Volume profit
analysis establishes the relationship of cost, volume and profit.
Thus cost volume profit furnishes the complete picture of the profit structure. In
other word, cost volume profit is a management accounting tool that expresses
relationship among sales, volume, cost and profit. The cost volume analysis uses the
techniques of breakeven analysis, operating leverage, margin of safety and effect of
changes on sales and contribution on margin and net operating income. The level of sales
needed to achieve desired target profit, in order to predict changes in net operating
income. The data are cost sheet and balance sheet collected from the company.
2
COMPANY PROFILE
HI – TEK MACHINES Is one of the leading manufacturers, suppliers and
exporters of manufactures of Machines Tools, gravity die casting, aluminum gravity die
casting, aluminum permanent mold casting, cylinder heads, Radial Drills, Rotary Lever,
flywheel housings, actuator cylinders, gearbox housings, switch gear components for
engineering and automobile. Started as a private company, it later on changed to a public
limited gaining enormous recognition worldwide.
The company was started in 2003. The company founder name is Mr. Srinivasa
Rao. The location is extremely convenient for our freight companies, suppliers, clients
and employees. And the site is suitable for future expansion.
Products:
Manufacturers, Suppliers and Exporters of aluminum die casting, gravity die
casting, Radial Drills, Rotary Lever , aluminum permanent mold casting, cylinder heads,
flywheel housings, actuator cylinders, gearbox housings, switch gear components for
engineering and automobile are :- -Aluminum Die Casting -Gravity Die Casting -
Aluminum Permanent Mold Casting -Engine Components :- .Cylinder Heads .Flywheel
Housings .Manifolds -Gear Components :- .Gearbox Housings .Adaptor
Housings .Extension Arms -Engineering and Electrical Components .Actuator
Housings .Actuator Cylinders .Switch Gear Components.
3
QUALITY POLICY:
WE SHALL PRODUCE HIGHEST QUALITY CASTINGS TO THE DELIGHT
OF OUR CUSTOMERS. OUR AIM IS TO ACHIEVE EXCELLENCE THROUGH
CONTINUOUS IMPROVEMENT IN QUALITY, COST AND DELIVERY WITH THE
INVOLVEMENT OF OUR EMPLOYEES, CUSTOMERS AND VENDORS.
QUALITY OBJECTIVES:
i. Enhance quality awareness and performance of employees through
training, motivation and involvement.
ii. Control, monitor and continuously improve the methods and technology of
casting processes to achieve higher quality of the cast products.
iii. Continuous improvements in the design and manufacture of casting dies
and manufacturing processes to improve productivity and to reduce
product cost.
iv. Continuous reduction of cost of poor quality due to rejections and recycles
by propagating and adhering to "DO IT RIGHT FIRST TIME" principle.
v. Ensure proper evaluation of customer requirements of products and
delivery schedules and through integrated planning and implementation;
improve ON-Time delivery performance towards 100%.
vi. Minimize and eliminate vendor related quality and delivery problems
through vendor development and guidance.
4
ALLOY MAKING:
Physical we have in-house alloy making facility with 1.0 Ton and 1.5 Ton fully
rotary furnaces.
To test the alloy quality, in house Spectro Analyzer - fully automatic non-
destructive testing equipment is available.
BHN Tester and UTL Testing machine for testing of properties
CORE MAKING:
The success / accuracy of aluminum die-casting depend on core making. To meet the
customer specs and close tolerances, we have:
Shell core shooter (2 nos.) - a fully automatic machine with the capacity of 1500
cores per day in each machine.
Semi automatic manual machines -12 nos.
Co2 core making facility for large cores.
DIE AND CORE BOX MAKING:
Since the accuracy of casting depends largely on the quality of die and core box
making, we have in house facilities like:
Designing & Programming with Pro-E, CAD, CAM facility with latest software
and advanced computer.
5
CNC Die sinking machines with direct programmed transferring facility in all
machines. CNC machines with OIM-MA Systems with look ahead capability for
die and core box making.
Dedicated and fully equipped tool room with mould making facility.
In house CMM measuring to inspect 3D measurement of die, core and casting.
CASTINGS:
To ensure the quality standards and process control, following features are available
in the manufacturing facilities:
All the dies have hydraulic movement and hydraulic clamping arrangement and
are operated by continuously trained and skilled persons.
Oil fired tilting furnaces and electrical holding furnaces.
All the furnaces have molten metal treatment facility.
All the furnaces have continuous temperature monitoring and control system as
standard equipment.
Systematic sample approval procedure with the help of highly skilled QC people
with modern inspection facility.
Test bar casting, physical testing and spectro analysis before continuous and
regular production.
6
Solution treatment fully automatic furnace.
FINISHING:
Skilled and experienced operators to finish and inspect the casting with power
tools.
Two-tier Inspection system to ensure quality of casting at all levels.
HEAT TREATIMENT FACILITY:
In-house solution treatment fully automatic furnace
Automatic aging furnace.
Pressure and Vacuum Impregnation with automatic control.
Well-equipped hardness testing, elongation and tensile testing facility.
Continuously trained Operators
MACHINING:
Well-equipped machining facilities with the following machines:
CNC Four Axis Machining Centres - 2 nos.
CNC Machining Centres -2 nos.
CNC Turning Centres - 2 nos.
All geared lathes - 5 nos.
7
Parts Cleaning System to clean up to 5 micron Millipore.
Millipore testing facility.
Leaking Testing Facility.
CMM Inspection & Air gauging facility.
AUXILIARY SUPPORT FACILITIES:
Well-equipped and trained Maintenance Department.
2 nos. 250KVA Generator Sets for uninterrupted Power Supply.
Windmill at Muppanthal - 250 KVA for which equivalent amount of Power will
be made available from the grid.
Compressor 400 CFM capacity as standby.
Centralized heating system for the total requirement of furnace oil.
Proposed Installation of environment friendly and ergonomic LPG/LNG heating
system for furnaces.
All the above departments are committed to continuous improvement, monitoring and
training.
8
OBJECTIVES
PRIMARY OBJECTIVE:
To analysis of the Cost Volume Profit and its impacts at HI- TEK MACHINES.
SECONDARY OBJECTIVE:
1. To identify the effect of breakeven point for multiple products and ascertain which
product is as advantages.
2. To study the level of sales need to achieve a desired target profit and identify Margin
of safety and it’s significance.
3. To measure the degree of leverages.
9
4. To analyze the trend with regards to income, expenditure and profits.
SCOPE OF THE STUDY
This study is performed by using the cost sheet and balance sheet of HI – TEK
MACHINES. The analysis done in the cost sheet are Breakeven analysis, profit volume,
etc., these calculation cover the major areas like contribution margin, profit. This would
be useful for company to make new strategy to compete in the market by adopting
various controlling techniques in the process of manufacturing.
This study was conducted only on overall cost volume profit analysis and not on
each and every variables. This study to help to forecast profit fairly and accurately as it is
essential to know the relationship between profits and costs.
10
This study assists in evaluation of performance for the purpose of control and also
assists in formulating policies by showing the effect of different price structure on costs
and profits.
This study predetermined overheads rates are related to a selected volume of
production.
REVIEW OF LITERATURE
Cost volume profit analysis is one of the most hallowed, and yet one of the
simplest, analytical tool in management accounting. In a general sense, it provides a
sweeping financial overview of the planning process (Horngren et. Al., 1994). That
overview allows managers to examine the possible impacts of a wide range of strategic
decisions. These decisions can include such crucial areas as pricing policies, product
mixes, market expansion or contractions, outsourcing contracts, idle plant usage,
discretionary expenses planning and a variety of other important considerations in the
planning process. Given the board range of context in which cost volume profit can be
used.
The basic simplicity of cost volume profit is quite remarkable. Armed with just
three inputs of data – Sales price, variable cost per unit, and fixed cost – a managerial
analyst can evaluate the effect of decision that potentially alter the basic nature of a firm.
11
3.1 RESEARCH METHODOLOGY
Research Methodology is a way to systematically analysis the research subject
and it may be understood as a science of study how research at done scientifically.
Research is common parlance refer to a research for knowledge. According to Redman
and Mary, research is defined as “a systematized effort to gain new knowledge”.
Research Methodology is a way to systematically solve the problem. It may be
understood as a science of studying how research is done scientifically. The advanced
learner’s dictionary lay down the meaning of research as a careful investigation or
inquiry especially through search for new facts in any branch of knowledge.
The secondary data is collected from the annual report of HI TEK MACHINES,
Ambattur, Chennai for the financial year 2008-2009 and the various records maintained
in the Finance Department.
12
Also the data collected by interviewing the Finance Department employees is
used in this study to understand the thing clearly. It is necessary for the research method,
techniques but also the methodology.
RESEARCH DESIGN:
Research Design is the conceptual structure within which the research is
conducted,. A research is the arrangement of conditions for the collection and analysis of
data in a manner that aims to combine the relevance to the research purpose with
economy in procedures. Research constitutes the blue print for the collection.
Measurement and analysis of data.
ANALYTICAL AND DESCRIPTIVE RESEARCH DESIGN:
ANALYTICAL DESIGN:
The researcher has to use facts or information already availability and analyze
these to make a critical evaluation of the materials.
DESCRIPTIVE RESEARCH:
Descriptive research is those studies concerned with describing the characteristics
of the state of affairs as it’s exist at present. The main purposes descriptive research
study is to specify the objectives with sufficient precision to ensure that data collected are
relevant. The data collected are examined collected the information. The research
design is prepared keeping in view the objectives of the study the resources available.
METHOD OF DATA COLLECTION;
13
The base data has been collected as below
SECONDARY DATA
The secondary data is to be collected from the financial reviews of the company it
consists of Balance and cost sheet which already been collected and analyzed by
someone else the secondary data may either be published data or unpublished data.
ANALYTICAL TOOL;
The following were the various analytical tools applied.
BREAKEVEN ANALYSIS;
The breakeven analysis indicates at what level cost and revenue an in equilibrium.
It is a simple and easily understandable method of presenting to management the effect of
changes in volume on profit detailed analysis of breakeven data will reveal to
management the effect alternative decision which reduce or increase cost and which
increases sales volume and income. It is a device which portrays the effects of any type
of future planning by evaluating alternative course of action.
BREAKEVEN POINT;
Under this analysis at the breakeven point profit being zero, contribution is equal
to the fixed cost. If the actual volume of sales is higher than the breakeven volume, there
will be a profit.
14
Fixed Cost Breakeven sales (in Rupees) = _____________________
Contribution Margin Ratio
Fixed Cost Breakeven point (in units) = _________________
Contribution units
MULTIPLE PRODUCTS IN BEP;
There are multiple products with different has a direct effect on the fixed cost
recovery and total profits of the firm. Different products have different profit volume
ratio because of different selling price and variable cost. The total profit depend to some
extent upon the proportion is the products are sold.
Sales – Variable Cost P/V ratio = _____________________ * 100 Sales
Fixed Cost B/E Sales = _________________ * 100
Total Contribution
MARGIN OF SAFETY;
This is the difference between the sales and breakeven point. If the distance is
relatively short it indicates that a small drop in production or sales will reduces profit
considerably. If the distance is long it means that the businesses can still making profit
even after a serious drop in production. It is important that there should be a reasonable
margin of safety otherwise reduces level of production may prove dangerous.
15
Margin of Safety = Sales – BES
Margin of Safety Margin of Safety = _____________________ * 100
Sales
DESIRED TARGET PROFIT;
The management faces two decisions
(i) To increases sales volume through reduction in selling price
(ii) To increase selling price in case the profit volume ratio is low, with the
expectation that the higher profit will be earned. If reduction is selling price does not
increase the sales volume the price reduction will result only in lower profits. If the
profit makes only small contribution, then a reduction in selling price makes it all the
more difficult to recover the fixed cost and to earn profit.
Fixed expenses + Target Profit Required sales in units = ___________________________
Unit Contribution Margin
Fixed expenses + Target Profit Required sales value = ____________________________
Contribution Margin Ratio
PROFIT FROM GIVEN SALES:
It can be appropriately used to solve most of the problems of cost volume profit
analysis.
Profit is different from the contribution which is net margin increasing after reducing
fixed expenses from the total contribution profit can be ascertained as given below
16
Contribution = Sales - P/V ratio
Profit = Contribution - Fixed Cost
DEGREE OF OPERATING LEVERAGE:
Operating leverage is determined by the firm’s sales revenue and its earnings before
interest and tax (EBIT). The earnings before interest and taxes are called as operating
profit ( EBIT), while financial leverage can be quite significant for the earning available
to ordinary shareholders.
EBIT Financial Leverage = ____________
Profit
Contribution Operating Leverage = ____________
EBIT
Contribution Combined Leverage = _________________
EBT
CONTRIBUTION MARGIN RATIO:
17
The P/V ratio which establishes the relationship between contribution and sales is of
vital importance for studying the profitability of operation of a business. It reveals the
effects on profit of changes the volume. The profit volume ratio is also called the
contribution ratio or Marginal ratio.
Contribution = Sales – Variable Cost
Contribution Contribution Margin ratio = ________________ * 100
Sale
TREND ANALYSIS:
Trend is the long term movement of a time series. It helps to ascertain the growth
factor. If a trend can be ascertained and tentative estimates concerning future is made
accordingly. The equation for the straight lines used to describe the linear relationship
between independent variable and the dependent variables.
Y = a + b(x)
COMPARATIVE INCOME STATEMENT:
The income statement discloses net profit or net loss on account of operations. A
comparative income statement will show the absolute figures for two or more periods.
The absolute change from one period to another and if desired. The change in terms of
percentages. Since, the figures for two or more periods are shown side by side; the reader
18
can quickly ascertain whether sales have increased or decreased, whether cost of sales has
increased or decreased etc.
ANALYSIS AND INTERPRETATION
i ) Contribution Margin Ratio:
Table showing Contribution Margin Ration of Radial Drills:
Particulars 2007 2008 2009
19
Sales
(-) Variable Cost
Contribution
Contribution MarginRatio
2,41,702
1,27,168_________
1,14,534
47.4
2,61,115
1,46,892________
1,14,223
43.8
2,35,175
1,28,760________
1,06,415
45.24
Contribution = Sales – Variable Cost
Contribution Contribution Margin Ratio = __________________ * 100
Sales
FINDINGS:
It is found that a sale reduces from 07 to 08 in Radial Drills Contribution Margin
Ratio in the year 07 – 47.4%, 08 – 43.8%, 09 – 45.24%.
INFERENCE:
Contribution Margin of the Radial Drills has increased to 45.24 compared to the
previous year.
20
Chart showing Contribution Margin Ration of Radial Drills:
Table showing Contribution Margin Ration of Rotary levers:
Particulars 2007 2008 2009
21
Sales
(-) Variable Cost
Contribution
Contribution MarginRatio
2,79,615
1,37,439_________
1,42,176
50.8
2,74,715
1,38,558________
1,36,176
49.56
2,41,795
1,25,000________
1,16,795
48.3
FINDINGS:
It is found that sales reduce from 07 to 08 in Rotary Levers Contribution Margin
Ratio in the year 07 – 50.8%, 08 – 49.56%, 09 – 48.3%.
INFERENCE:
Previous year, the contribution Margin Ratio has declined in 08 – 49.56% and also
shown negative trend in 09 – 48.3% of Rotary Levers.
Chart showing Contribution Margin Ration of Rotary levers:
22
(II) BREAKEVEN SALES:
23
RADIAL DRILLS:
Table showing Breakeven Sales:
Year Fixed Cost
Contribution Margin Ratio
Breakevensales (Rs)
2006 - 2007
2007 - 2008
2008 - 2009
53,038
55,276
52,970
47.4
43.8
45.24
1118.9
1262
1170.86
Fixed Cost Breakeven sales = _____________________
Contribution Margin Ratio
FINDINGS:
It is found that the Breakeven Sales Value of Radial Drills for the 2006-2007 are
1118.9 and 2007-2008 are 1262 and 2008-2009 are 1170.86.
INFERENCE:
The breakeven sales values of Radial Drills are decline from Rs.1262 to Rs.1170.86
MT. It shows decline trend.
( i ) Chart showing Breakeven Sales of year 2007:
24
( ii ) Chart showing breakeven sales of 2008:
25
( iii ) Chart showing Breakeven Sales of 2009:
26
ROTARY LEVER:
27
(i) Table showing Breakeven Sales:
YearFixed Cost
Contribution Margin Ratio
Breakevensales (Rs)
2006 - 2007
2007 - 2008
2008 -2009
62,003
60,986
58,485
50.8
49.56
48.3
1220.5
1230.5
1210.86
FINDINGS:
It is found that the Breakeven Sales Value of Rotary Levers for the 2006-2007 are
1220.5 and 2007-2008 are 1230.5 and 2008-2009 are 1210.86.
INFERENCE:
The breakeven sales values of Rotary Lever are decline from Rs.1230.5 to Rs.1230.86
MT. It shows decline trend.
( i ) CHART SHOWING BREAKEVEN SALES OF 2007:
28
( ii ) Chart showing Breakeven Sales of 2008:
29
( iii ) Chart Showing Breakeven Sales of 2009:
30
(ii) BREAKEVEN POINT:
31
RADIAL DRILLS:
Table showing Breakeven Point:
YearFixed Cost
ContributionBreakeven
Point (units)
2006 - 2007
2007 - 2008
2008 - 2009
53,038
55,276
52,970
11.4
11.4
10.6
4652.45
4848.77
4997.16
Fixed Cost Breakeven point = _________________
Contribution per unit
FINDINGS:
For 2007, when the output is at 4652 units revenue equal cost i.e. it reaches the
critical point of no profit/ no loss. Radial Drills sales increases the level there shall not be
loss of the company. In 2008, the Breakeven Points is increases and shown positive trend
and in 09, the Breakeven points increases and there shall be profit of the company.
INFERENCE:
32
The breakeven Points in which in units for Radial Drills has increased in 2008 –
2009 and show positive trend.
Chart showing breakeven point
ROTARY LEVER:
33
Table showing Breakeven Points:
YearFixed Cost
ContributionBreakeven
Points (units)
2006 - 2007
2007 - 2008
2008 - 2009
62,003
60,986
58,485
14.2
13.6
11.6
4366
4484.2
5041.81
FINDINGS:
For 2007, when the output is at 4366 units revenue equal cost i.e. it reaches the
critical point of no profit/ no loss. Rotary Levers sales increases the level there shall not
be loss of the company. In 2008, the Breakeven Points is increases and shown positive
trend and in 09, the Breakeven points increases and there shall be profit of the company.
INFERENCE:
The breakeven Points in which in units for Rotary Levers has increased in 2008 –
2009 and show positive trend.
34
Chart showing breakeven point.
(iii) MULTIPLE PRODUCTS BREAKEVEN POINTS:
35
. Table showing the cumulative Sales and Cumulative Contribution in the year of 2007:
ProductSales
CumulativeSales
P/V RatioContributio
nCumulative contribution
RD
RL
2,41,702
2,79,615
2,41,702
5,21,317
47.4
50.8
1,14,534
1,42,176
1,14,534
2,56,710
Sales – Variable Cost P/V Ratio = ____________________
Sales
Fixed Cost BREAKEVEN Sales = _____________________ * Total Sales
Total Contribution
1, 29,458 = ___________ * 5, 21,317
2, 56,710
= Rs.2, 62,898
FINDINGS:
36
It is found that the profit Volume ratio of Radial Drills is 47.4% and Rotary
Lever is 50.8%. The Rotary Lever Sales and Contribution is high.
INFERENCE:
In the year 07, best product is Rotary Lever the Profit Volume Ratio also high.
In the Breakeven is Rs. 2, 62,898.
( i ) Chart showing Multiple Product Breakeven Point of 2007.
Table showing the cumulative Sales and Cumulative Contribution in the year 2008:
37
ProductSales
CumulativeSales
P/V RatioContributio
nCumulative contribution
RD
RL
2,61,115
2,74,715
2,61,115
5,35,830
43.8
49.56
1,14,223
1,36,157
1,14,223
2,50,380
Fixed Cost BREAKEVEN Sales = _____________________ * Total Sales
Total Contribution
1, 35,138 = ___________ * 5, 35,830
2, 50,380
= Rs.2, 89,204
FINDINGS:
It is found that the profit Volume ratio of Radial Drills is 43.8% and Rotary
Lever is 49.56%. The Rotary Lever Sales and Contribution is high
INFERENCE:
In the year 08, best product is Rotary Lever the Profit Volume Ratio also high. In
the Breakeven is Rs. 289204.
38
(ii) Chart showing multiple product breakeven point of 2008
39
(iii) Table showing the cumulative Sales and Cumulative Contribution in the year 2009:
ProductSales
CumulativeSales
P/V RatioContributio
nCumulative contribution
RD
RL
2,35,175
2,41,795
2,35,175
4,76,970
45.24
48.3
1,06,415
1,16,795
1,06,415
2,23,210
Fixed Cost BREAKEVEN Sales = _____________________ * Total Sales
Total Contribution
1, 32,580 = ___________ * 4, 76,970
2, 23,210
= Rs.2, 83,305
FINDINGS:
It is found that the profit Volume ratio of Radial Drills is 45.24% and Rotary
Lever is 48.3%. The Rotary Lever Sales and Contribution is high.
INFERENCE:
In the year 2009, best product is Rotary Lever the Profit Volume Ratio also high.
In the Breakeven is Rs. 2, 83,305.
40
(iii) Chart showing Multiple Product Breakeven Point of 2009
(IV) MARGIN OF SAFETY:
RADIAL DRILLS:
Table showing Margin of Safety
41
YearBreakeven
Sales SalesMargin
of SafetyRatio
%
2006 - 2007
2007 - 2008
2008 - 2009
1118.9
1262
1270
2,41,902
2,01,115
2,35,175
2,40,584
2,59,853
2,34,005
99.53
99.51
99.5
Margin of Safety = Sales – Breakeven Sales
Margin of Safety Margin of Safety Ratio = ________________ * 100
Sale
FINDINGS:
It is found that the Margin of Safety ratio in the Year 07 – 99.53%, 08 – 99.51%,
09 – 99.5%. It is kept on constant for the three years. It is the strength of the business
INFERENCE:
The large Margin of Safety that the business is sound in Radial drills.
Chart Showing Margin of Safety.
42
ROTARY LEVERS
Table showing Margin of Safety
43
YearBreakeven
Sales SalesMargin
of SafetyRatio
%
2006 - 2007
2007 - 2008
2008 - 2009
1220.5
1230.5
1210.86
2,79,615
2,74,715
2,41,795
2,78,395
2,73,485
2,40,585
99.56
99.55
99.50
FINDINGS:
It is found that the Margin of Safety ratio in the Year 07 – 99.56%, 08 – 99.55%,
09 – 99.50%. It is kept on constant for the three years. It is the strength of the business.
INFERENCE:
The large Margin of Safety that the business is sound in Rotary Lever.
Chart Showing margin of Safety.
44
(V) DESIRED TARGET PROFIT:
45
The contribution Margin Method can be used to find the number of units that
must be sold to attain a target profit. In the case of the contribution Margin Method, the
Formulas are
Fixed Expenses + Target Profits Required sale in units = ________________________
Units contribution Margin
52,970 + 162.27 = _______________
10.6 = 5012.47 units
Fixed cost + target profits In rupees = __________________________
Contribution Margin Ratio
52,970 + 162.27 = _______________
45.24
= Rs. 1174.4
FINDINGS:
It is found that to achieve desired Target profit required sales in units 5012 and
the required sales value is Rs. 1174.
INFERENCE:
46
The target profit of Rs. 162.27 lakhs the units to be sold is 5012 units and the sales
to be achieved is Rs. 1174.45 lakhs.
(VI) PROFIT FROM GIVEN SALE
RADIAL DRILLS:
. Table showing Profit from given Sales:
YearContribution
Fixed CostProfit
2006 - 2007
2007 - 2008
2008 - 2009
1,14,534
1,14,223
1,06,415
55,038
55,276
52,970
59,496
58,947
53,445
Contribution = Sales - P/V ratio
Profit = Contribution - Fixed Cost
FINDINGS:
It is found that the profit from given sales of Radial for the 2006 -2007 are 59,496
and 2007 – 2008 are 58,947 and 2008 – 2009 are 53,443.
INFERENCE:
47
The Profit from given sales of Radial Drills are decline from Rs. 59,496 to Rs.
53,443. It shows decline trend.
Chart showing Profit from given Sales:
ROTARY LEVER:
Table showing Profit from given Sales:
YearContribution
Fixed CostProfit
2006 - 2007
2007 - 2008
2008 - 2009
1,42,176
1,36,176
1,16,795
62,003
60,986
58,485
80,173
75,190
58,310
48
FINDINGS:
It is found that the profit from given sales of Rotary Lever for the 2006 -2007 are
80,173 and 2007 – 2008 are 75,190 and 2008 – 2009 are 58,310.
INFERENCE:
The Profit from given sales of Rotary Levers are decline from Rs. 80,173 to Rs.
58,310. It shows decline trend.
Chart showing Profit from given Sales:
49
(VII) DEGREE OF OPERATING LEVERAGES:
Table showing Degree Operating Leverages:
50
Particulars 2007 2008 2009
Sales
(-) Variable Cost
Contribution
(-) Fixed Cost
EBIT
(-) Interest
2,62,175
1,33,734___________
1,28,441
58,941__________
69,500
14,747
2,69,115
1,49,992___________
1,19,123
57,889___________
61,234
14,099
2,39,185
1,27,403_________
1,11,782
57,662_________
54,120
33,564
EBIT Financial Leverage = ____________
Profit
Contribution Operating Leverage = ________________ EBIT
Contribution Combined Leverage = _______________ EBT
Table Showing the Leverages:
Year Financial Leverage
Operating Leverage
Combined Leverage
51
2007
2008
2009
1.27
1.29
1.61
1.85
1.95
2.07
2.35
2.53
3.33
CALCULATION:
For 2007 69,500
Financial Leverage = ______________
54,753
= 1.27
1, 28,441 Operating Leverage = ____________ 69,500
= 1.85
1, 28,441 Combined Leverage = __________
54,753
For 2008 61,234 Financial Leverage = ______________
47,134
= 1.29
52
1, 19,123 Operating Leverage = ____________
61,234
= 1.95
1, 19,123 Combined Leverage = __________
47,135
= 2.53 For 2009
54,120 Financial Leverage = ______________
33,564
= 1.61
1, 11,782 Operating Leverage = ____________
54,120 = 2.07
1, 11,782 Combined Leverage = __________
33,564 = 3.33
53
FINDINGS:
It is found that Financial Leverage is in 2007 – 1.27 increasing 1.29 - 2008 the
increase 1.61 - 2009 the increase and operating Leverage is in is in 2007 – 1.85
increasing 1.95 - 2008 the increase 2.07 - 2009 the increasing and Combined Leverage
is in 2007 – 2.35 increasing 2.53 - 2008 the increase 3.33 - 2009 the increased
INFERENCE:
High Operating Leverage is good since the revenue is increasing every year.
Positive Financial Leverage is seen of indicates that the ratio on investment. On amount
was more than fixed cost of their use.
Chart Showing the Degree of Leverages:
54
(VIII) TREND ANALYSIS:
55
Table showing trend analysis on Expenditure:
Year Y X=x-04 X2 XY
2005
2006
2007
2008
2009
1,52,485
1,12,750
1,34,000
1,68,785
1,79,115
_____________7,47,135
-2
-1
0
1
2
4
1
0
1
4
________10
-3,04,970
-1,12,750
0
1,68,785
3,58,230
______________1,09,295
Σy ΣxyA = _________ b = ____________ n Σx2
7, 47,135 1, 09,295 = _________ = __________ 5 10
= 1, 49,427 = 1, 09, 29.5
X = 2009
56
Y = a + b X
2009 = 1, 49,427 + 10,929.5(3) = 1, 82,215.5
2010 = 1, 49,427 + 10,929.5(4) = 1, 93,145
2011 = 1, 49,427 + 10,929.5(5) = 2, 04,074.5
2012 = 1, 49,427 + 10,929.5(6) = 2, 15,004
2013 = 1, 49,427 + 10,929.5(7) = 2, 25,933.5
FINDINGS:
It is found that an expense for the next five year is trend analysis. The expenses
keep in increasing in the year 2009 – 1, 82,215, 2010 – 1, 93,145, 2011 – 2, 04,074, 2012
– 2, 15,004, 2013 – 2, 25,933.
INFERENCE
It is inferred that trend projected for the expenses of HI TEK MACHINES to be
increased to a great extent. The company takes the step to control its expenditure.
Chart showing Trend analysis on Expenditure
57
Table showing trend analysis on Income:
58
YearY X=x-04 X2 XY
2005
2006
2007
2008
2009
1,62,175
1,51,785
1,79,385
1,93,785
1,98,145
_____________8,85,275
-2
-1
0
1
2
4
1
0
1
4
________10
-3,24,350
-1,51,785
0
1,93,785
3,96,290
______________1,13,940
Σy ΣxyA = _________ b = ____________ n Σx2
8, 85,275 1, 13,940 = _________ = __________ 5 10 = 1, 77,055 = 11,394
X = 2009
59
Y = a+bX
2009 = 1, 77,055 + 11,394(3) = 2, 11,237
2010 = 1, 77,055+ 11,394(4) = 2, 22,631
2011 = 1, 77,055 + 11,394(5) = 2, 34,025
2012 = 1, 77,055 + 11,394(6) = 2, 45,419
2013 = 1, 77,055 + 11,394(7) = 2, 56,813
FINDINGS:
It is found that income for the next five year is trend analysis of HI TEK
MACHINES. The incomes for the year 2009 are found to be projected as Rs. 2, 11,237
where as it is found to be Rs. 2, 56,813 for 2013.
INFERENCE:
It is inferred that income of M/s HI TEK MACHINES to be increased. So the
company is making profit
Chart showing Trend analysis on Income.
60
Table showing trend analysis on Profit
61
YearY X=x-04 X2 XY
2005
2006
2007
2008
2009
3,12,82
3,51,86
3,81,72
4,18,60
4,57,60
_____________1,92,260
-2
-1
0
1
2
4
1
0
1
4
________10
-62,564
-35,186
0
41,860
91,520
______________35,630
Σy ΣxyA = _________ b = ____________ n Σx2
1, 92,260 35,630 = _________ = __________ 5 10 = 38,452 = 3563
X = 2009
62
Y = a + b X
2009 = 38,452 + 3563(3) = 49,141
2010 = 38,452+ 3563(4) = 52,704
2011 = 38,452 + 3563(5) = 56,267
2012 = 38,452+ 3563(6) = 59,830
2013 = 38,452 + 3563(7) = 63,393
FINDINGS:
It is found that income for the next five year is trend analysis of HI TEK
MACHINES. The profit for the year 2009 is found to be projected as Rs. 49,141 where
as it is found to be Rs. 63,393 for 2013.
INFERENCE:
It is inferred that income of M/s HI TEK MACHINES to be increased. So the
company is making profit
Chart showing Trend Analysis on Profit.
63
64
. STATEMENT SHOWING COMPRATIVE PROFITBILITY OF RADIAL DRILL AND ROTARY LEVER OF 2006 - 2007
PARTICULARS UNITSRADIAL DRILLS UNITS
ROTARY LEVER TOTAL
A. Sale Value of Production 241 2,41,702 266 2,79,615 5,21,317
VARIABLE COSTRaw Materials 75 75,145 81 85,131 1,60,276Variable Over Heads 44 44,369 54 57,045 1,05,850B. Variable Cost 119 1,19,514 135 1,42,176 2,61,690 CONTRIBUTIONC.CONTRIBUTION 122 1,22,188 130 1,37,439 2,61,690LESS: FIXED COST 97,250
Profit 1,62,377
Working Notes:
Radial Drills = 1000*50 = 50,000Rotary Lever = 1050*45 = 47,250
_______ 97,250
FINDINGS:
It is found that Comparative profitability of Radial Drills and Rotary Lever is sale
Value of production is Rs. 5,21,317 and variable cost is 2,61,680 and after reduction from
Sale 2,61,690 and less the fixed cost is 97,250. The profit of the both products is Rs. 1,
62,377.
INFERENCE:
The profit of the radial Drills and Rotary Lever has positive trends in the year of
2006 – 2007.
65
3.2.19.STATEMENT SHOWING COMPRATIVE PROFITBILITY OF RADIAL DRILL AND ROTARY LEVER OF 2007 – 2008
PARTICULARS UNITSRADIAL DRILLS UNITS
ROTARY LEVER TOTAL
A. Sale Value of Production 261 2,61,115 261 2,74,716 5,35,831
VARIABLE COSTRaw Materials 78 75,145 79 83,152 1,58,297Variable Over Heads 39 39,078 51 53,605 92,683B. Variable Cost 114 1,14,223 129 1,36,157 2,50,960 CONTRIBUTIONC.CONTRIBUTION 147 146,892 132 1,38,559 2,84,871LESS: FIXED COST 1,02,400
PROFIT 1,82,471
Working Notes:
Radial Drills = 1000*52 = 52,000Rotary Lever = 1050*48 = 50,400
_______ 1,02,400
FINDINGS:
It is found that Comparative profitability of Radial Drills and Rotary Lever is sale
Value of production is Rs. 5, 35,181 and variable cost is 2,50,960 and after reduction
from Sale 2,84,871 and less the fixed cost is 1,02,400. The profit of the both products is
Rs. 1, 82,471.
INFERENCE:
66
The profit of the radial Drills and Rotary Lever has positive trends in the year of 2007 – 2008.
STATEMENT SHOWING COMPRATIVE PROFITBILITY OF RADIAL DRILL AND ROTARY LEVER OF 2008 - 2009
PARTICULARS UNITSRADIAL DRILLS UNITS
ROTARY LEVER TOTAL
A. Sale Value of Production 248 235,175 264 241,795 4,16,890
VARIABLE COSTRaw Materials 78 72,136 78 70,180 1,42,310Variable Over Heads 39 37,429 56 50,275 87,704B. Variable Cost 115 1,09,559 133 1,20,435 2,30,014 CONTRIBUTIONC.CONTRIBUTION 133 1,25,615 136 1,21,340 1,86,876LESS: FIXED COST 107,400
PROFIT 79,476
Working Notes:
Radial Drills = 950*60 = 57,000Rotary Lever = 900*56 = 50,400
_______ 1,07,400
FINDINGS:
It is found that Comparative profitability of Radial Drills and Rotary Lever is sale
Value of production is Rs. 4,16,890 and variable cost is 2,30,014 and after reduction from
Sale 1,86,876 and less the fixed cost is 1,07,400. The profit of the both products is Rs.
79,476.
INFERENCE:
67
The profit of the radial Drills and Rotary Lever has positive trends in the year of
2008 - 2009.
Chart showing the Comparative profitability of Radial Drills and Rotary Lever:
FINDINGS
68
1. Contribution Margin of the Radial Drills and Rotary Lever has shown Positive
trend.
2. The Break even sales values of Radial Drills have shown a decline trend which is
the positive indicators.
3. The Break even points in units for Radial Drills have shown a decline trend.
4. The Best Product during the three years 2006 – 2009 in Rotary Lever. This
Product show high profit volume ratio when compared to Radial Drills Multi
products of Break even charts are very useful for the costs and profit planning
and growth of both products.
5. The target profit of Rs. 162.27 lakhs the units to be sold is 5012 units and the
sales to be achieved in Rs. 1174.27 lakhs.
6. The Profit from given sales of Rotary Levers are decline from Rs. 80,173 to Rs.
58,310. It shows decline trend.
7. The large Margin of Safety indicates that the business is sound in Radial Drills.
8. High Leverage is good since the revenue are increasing positive financial
Leverage is seen 2008 indicates that the return on investment on asset was more
than fixed cost of their use. In 2009, this is negative which indicates that the
return on investment a financial asset is less than the funds cost.
9. The profit for the both the Radial Drills and Rotary Lever have decline trend.
10. It is inferred that trend project for the expenses of M/s HI TEK MACHINES to
be increased to a great extent. The company takes the step to control its
expenditure.
SUGGESTIONS
69
1. It is beneficial to growth of the company if it maintain the break even points are
multiple products.
2. Trend analysis shows that the expenditure is likely to increase for the next five
year. If this state continues the expenditure may overcome the income which will
unproductive for the company. So the company should give more attention to its
expenses.
3. From the regression line of production on sales, sales variables can be obtained
for the any value of production variable. Thus, this method can be used by the
company to easily achieve its target sale.
4. The company can maintain the fixed cost and long as it brings some profit to the
company.
5. Break even points for radial drills and rotary lever through has come down in
2008 – 2009. This has to be maintained as there is found to be an increase in the
year 2007 – 2008.
6. Low financial leverage in 2009 indicates that the company must concentrate on
fixed cost involve in usage of assets.
CONCLUSION
70
The study was done at HI TEK MACHINES to find out the cost volume profit
stability of the company with the help of cost sheet for three years. After an extensive
and exhaustive analysis, it was found that the company should maintain fixed cost as long
as it brings some profit. The total cost of productions should be reduced in order to
increase net operating income. Although the Margin of Safety was found to be high. The
leverage, it indicates that the return on investment a financial asset is less than the funds
cost. It is found that trend project for the expenses of the company to be increased to a
great extent.
The company should focus on improving its costs. Margin is forth coming years.
Also it will be beneficial to the growth of the company, if it maintain breakeven point is
multiple products. High operating leverage is good since the revenue is increasing. Low
financial leverage indicates that the company must concentrates on fixed involve is usage
of assets. The company can maintain the fixed cost and long as it brings some profit to
the company.
We conclude of this analysis, Company or management enables to predict the
profit as a wide range of volume and to determine the price of the products very
carefully. Through the analysis, the manager can easily take decision showing in its
reports how utilization of available capacity will lead to increase in profit.
71
BIBLIOGRAPHY
SOURCES:
1. V.K SAXENA and C.D.VARSHID – Basic of Cost and Management Accounting,
Sultan Chand & Son, 3rd Edition New Delhi-2005.
2. BHABATOR and BANERJEE – Cost Accounting Theory & Practice, Prentice
Hell of India Private Ltd, 12th Edition New Delhi -2006.
3. M Y KHAN and P K JAIN – Basic Financial Management, Tata Me Graw Hill
Publishing Company Ltd, 2nd Edition New Delhi -2005
4. G C BERI – Statistics for Management, Tata Me Graw Hill Publishing Company
Ltd, 2nd Edition New Delhi -2003
5. C R KOTHARI – Research Methodology & Techniques, Wishwa Prakashan, 2nd
Edition New Delhi -2002
JOURNALS:
Journals of the financial Management Association International, Volume – 43, No.4
December 2008. Published by the University of Washington.
Journals of Financial and Quantitative Analysis, Volume – 37, Issue 4 winter 2008.
Sponsors: Vanderbilt University and University of South Florida.
WEBSITE:
Web site: www.businessfinancemag.com
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