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Economics & Principles of Economics & Principles of ManagementManagement
Economics & Principles of Economics & Principles of ManagementManagement
Break evenBreak even AnalysisAnalysis
Using the Breakeven Spreadsheet
“Cost” Tab Details Fixed Cost, Variable Cost, and Total Cost
© Dale R. Geiger 2011 2
Graphic Depiction of Breakeven
$
Units Sold© Dale R. Geiger 2011
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Graphic Depiction of Breakeven
$
Units Sold© Dale R. Geiger 2011
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Graphic Depiction of Breakeven
Units Sold
$
© Dale R. Geiger 20115
Graphic Depiction of Breakeven
Units Sold
$
© Dale R. Geiger 20116
Graphic Depiction of Breakeven
$
Units Sold© Dale R. Geiger 2011
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Graphic Depiction of Breakeven
$
Units Sold© Dale R. Geiger 2011
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Graphic Depiction of Breakeven
$
Units Sold© Dale R. Geiger 2011
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Breakeven Chart
Units of output
Rupe
es
BEP
FC
SR
Loss
Profit
Margin of safety
TC
Define Contribution Margin
Contribution Margin = Sales – Variable Cost• Unit Contribution Margin Represents the dollar amount that each unit
sold Contributes toward profitUnit Contribution Margin =
Selling Price $/Unit – Variable Cost $/Unit
• What is the Unit Contribution Margin for Sebastian’s Dinner Theater?• For every ticket sold, profit increases by:
$30 - $10 = $20
© Dale R. Geiger 2011 11
Define Contribution Margin
Unit Contribution Margin Represents the Rupees amount that each unit sold Contributes toward profit
Unit Contribution Margin = Selling Price Rs/Unit – Variable Cost Rs/Unit
• What is the Unit Contribution Margin for Sebastian’s Dinner Theater?
• For every ticket sold, profit increases by:$30 - $10 = $20
© Dale R. Geiger 2011 12
Using the Breakeven Spreadsheet
Blue Area indicates Contribution Margin atVarious Quantities
© Dale R. Geiger 201113
Linear Break-Even Analysis
• Over small enough range of output levels TR and TC may be linear, assuming– Constant selling price (MR)– Constant marginal cost (MC)– Firm produces only one product– No time lags between investment and resulting
revenue stream
Graphic Solution Method
• Draw a line through origin with a slope of P (product price) to represent TR function
• Draw a line that intersects vertical axis at level of fixed cost and has a slope of MC
• Intersection of TC and TR is break-even point
TR
TC
FC
Break-even point
MC
P
1 unit Q
1 unit Q Q
$’s
Algebraic Solution
• Equate total revenue and total cost functions and solve for QTR = SP x QTC = FC + (VC x Q)TR = TCSP x QBV = FC + VC x QBV
(SP x QBV) – (VC x QBV) = FC
QBE (SP – VC) = FC
QBE = FC/(SP – VC), or in terms of total Rupees sales,
SP QBE = (FCxSP)/(SP-VC)
= ((FCxSP)/SP)/((SP-VC)/SP) = FC/((SP/SP) – (VC/P)) = FC/(1-VC/SP)
Related Concepts
• Profit contribution = P – VC– The amount per unit of sale contributed to
fixed costs and profit
• Target volume = (FC + Profit)/(P – VC)– Output at which a targeted total profit
would be achieved
Concept of Breakeven Analysis
Finding the point at which revenues and costs agree exactly
The volume of output at which neither a profit is made nor a loss is incurred
Carried out algebraically or graphically
Importance and scope of Breakeven analysis
Volume of salesCompare costs and revenues for all possible
volumesTo find the price of an a article to give the
desired profitTo determine variable cost per unitTo compare a number of business enterprises by
arranging their earnings in order of magnitude
Calculation of Breakeven Point
• BEP = F / ( 1 – V / P )
• F – Fixed cost• V – Variable cost• P – Selling price
Breakeven Chart Shows a clear view of the position of a businessGraphic presentation of accounting data portrays profits and losses at various output levelsdepicts relationship between marginal costs and fixed
costsMarks no profit no loss situationPortrays margin of safetyMake specific plans to effect profits through the control
of expenses sum up the impact of alternative decisions on costs
and profitsDecision making tool in the hands of management
Breakeven Chart
DefinitionA graphical representation of the relationship
between cost and revenue at a given time
A graphic device to determine the breakeven point and profit potential under varying conditions of output and costs
Interpretations and analysis of a Breakeven Chart
Marking no profit no loss situation occurs for a given volume of production
The area between total cost line and revenue line on the left hand side of the BEP marks loss whereas the area between the same lines on the right side of the BEP represents profit
Profit appears only when more than a volume of output reached
Interpretations and analysis of a Breakeven Chart
Profit margin as % = 1 - Variables cost / Sales
Breakeven Chart Effect of increase in fixed costs
Units of output
Rupe
es
BEP
FC
SR
TCNBEP
NFC
NTC
Interpretations and analysis of a Breakeven Chart
Effect of increase in fixed costs Owing to the purchase of a new machine ,
increases the total costs and thus shifts BEP towards the right hand side
Decrease in profit
Breakeven Chart Effect of an increase in variable cost
Units of output
Rupe
es
BEP
FC
SR
TCNBEP
NTC
Interpretations and analysis of a Breakeven Chart
Effect of an increase in variable cost Owing to an in labour cost, shifts the BEP
towards the right hand side
Decrease in profit for the same units of output
Breakeven Chart Effect of an increase in sales price
Units of output
Rupe
es
BEP
FC
SR
NBEP
NSR
Interpretations and analysis of a Breakeven Chart
Effect of an increase in sales price
If the price of an article rises , a new sales revenue drawn with a greater slope shifting the BEP towards the left hand side
Increase the company profits for the same volume of output
Interpretations and analysis of a Breakeven Chart
Effect of a decease in fixed cost, variable cost and sales price changes the BEP by drawing separate break even charts
Margin of safety
The distance between BVP and the output being producedIf this distance is large , profits will be thereIf this distance is relatively small, profits will be
reduced considerablyExpressed in monetary terms or as a percentage
--- the margin of safety in relation to total mass.
Angle of incidence
The angle ( ) at which sales revenue line cuts the total costs line
A large angle indicates that profits made at a high rate
A large angle of incidence with a high margin safety make favourable business position
Limitation of breakeven chartDifficult to determine breakeven point because
of the difficulty in in classifying costsA tool for short analysisThe total cost line need not be a straight lineThe straight line representing sales revenue may
also misrepresent the true factsA chart represents a static picture Presents additional difficulties ( ie product mix )
when a company produces a variety of products
Economics & Principles of Economics & Principles of ManagementManagement
Economics & Principles of Economics & Principles of ManagementManagement
IndustrialIndustrial
OwnershipOwnership
Types of OwnershipTypes of Ownership
Single ownership(Private Undertakings )Single ownership(Private Undertakings )PartnershipPartnershipJoint Stock Companies Joint Stock Companies Cooperative organizationsCooperative organizationsState & central Government owned State & central Government owned
Single ownership ConceptsSingle ownership Concepts
A business owned by one manA business owned by one maneg eg Printing press , a small fabrication shop Printing press , a small fabrication shopContributes the original assets and reaps full Contributes the original assets and reaps full
profitprofit
Single ownership AdvantagesSingle ownership AdvantagesOwner free to take all decisionsOwner free to take all decisionsSimplicity of organizationSimplicity of organizationSecrecy kept as regards to method of Secrecy kept as regards to method of
manufacture manufacture
Single ownership DisadvantagesSingle ownership Disadvantages
Limited opportunities for employees as regards Limited opportunities for employees as regards monetary benefitsmonetary benefits
Firm may cease to exist with the death of the Firm may cease to exist with the death of the proprietorproprietor
Single ownership ApplicationsSingle ownership Applications
Business not involving high risk of failureBusiness not involving high risk of failure
A small capital to start with and to runA small capital to start with and to run
Partnership - Concept Partnership - Concept
A single owner becomes inadequate as the A single owner becomes inadequate as the business growsbusiness grows
More persons have either capital to invest or More persons have either capital to invest or special skill to make the business more special skill to make the business more profitable. Such combinations of traders profitable. Such combinations of traders called Partnershipcalled Partnership
Kinds of PartnersKinds of Partners
Partnership defined as they have agreed to Partnership defined as they have agreed to share the profits share the profits
They put together their property, ability, skill , They put together their property, ability, skill , knowledge etcknowledge etc
Associations of 2 or more (up - to 20 )Associations of 2 or more (up - to 20 )Partnership –agreement in writing (how profit, Partnership –agreement in writing (how profit,
loss etc divided among partners)loss etc divided among partners)
Kinds of PartnersKinds of Partners
Active partners take part in the businessSleeping partners do not take part in the
business
Both are responsible for debts
General Duties of PartnersGeneral Duties of Partners
Faithful to one anotherFaithful to one anotherRender true accountsRender true accountsCooperateCooperateMutual understandingMutual understandingRespect the views of one -anotherRespect the views of one -another
Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership
Each partner may act as though he were an Each partner may act as though he were an
individual proprietorindividual proprietor
Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership
Advantages Advantages Large capital availableLarge capital availableBetter talents , judgment and skillsBetter talents , judgment and skillsEasy to formEasy to formHigh incentiveHigh incentiveDefinite legal statusDefinite legal statusFull control of the business & profitsFull control of the business & profitsTax advantageTax advantageBorrow money easily from the bankBorrow money easily from the bankLosses sharedLosses shared
Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership
Applications Applications Law firmsLaw firmsRetail trade organizationRetail trade organizationMedical clinicsMedical clinicsSmall engg firmsSmall engg firms
Types of Partnership-Types of Partnership-General PartnershipGeneral Partnership
DisadvantagesDisadvantagesEach partner has unlimited liability for the Each partner has unlimited liability for the
debtsdebtsDanger of disagreement & distrustDanger of disagreement & distrustAuthority dividedAuthority dividedLacks permanence & stability in case partner Lacks permanence & stability in case partner
dies. Therefore investors &lenders dies. Therefore investors &lenders hesitate to provide moneyhesitate to provide money
All partners suffer if wrong steps taken by All partners suffer if wrong steps taken by one partner one partner
Limited PartnershipLimited PartnershipOvercomes some disadvantages of general Overcomes some disadvantages of general
partnershippartnershipLiability limited to the capital they have Liability limited to the capital they have
invested in the businessinvested in the businessShare the profit & their liabilities limited to Share the profit & their liabilities limited to
the amount of their investmentthe amount of their investmentInvestors and lenders not to hesitate to Investors and lenders not to hesitate to
provide moneyprovide moneyEasy and less costly to formEasy and less costly to formThough he invests in the business has no Though he invests in the business has no
voice in the managementvoice in the management
Concept of Joint stock company
Overcomes the disadvantages associated with partnership types of industries
1) raising capital2) Easy disruption3) lack of facility4) unlimited liability
Concept of stock company
Association of individuals called shareholdersDeath , insolvency disablement of shareholders
does not affectConsists of more than 20 personsAfter issue of a certificate from Registrar of
Companies , the company starts functioning
Concept of stock company
Board of Directors elected by the shareholders .They make
1) policies2) decisions3) runs the company
Concept of stock company
Liability of the members limited to the capital only
Finance raised by issuing shares , debentures, bank loans from industrial and financial corporations
Types of Stock Company
Private limited company
Public limited company
Private Limited Company
Some active partners & others sleeping partnersRestricts the right to transfer shares &avoids
public to take up debenturesMembers in between 2 and 50 Need not file documents with Registrar of Joint
Stock Companies
Private Limited Company
Need not obtain a certificate of commencement of business
Need not circulate Balance sheet, Profit & Loss Account, but to hold annual general meeting
Accounts auditedAnnual return to the Registrar of Joint Stock
Companies
Public Limited Company
Issuing shares – face value of Rs10,20,50Numbers of shareholders should not be less
than 7 & no limit for maximumTo file with the Register of Joint Stock
CompaniesTo issue a prospectus to the publicTo allot shares within 180 days
Public Limited Company
Start only after receipt of the certificate to commence business
To hold Statutory MeetingNo restriction on transfer of sharesDirectors subject to rotationAccount audited every year
Public Limited Company
To send financial statements to all membersTo hold general meeting every yearManaging agent gets a fixed percentage of profit
Advantages of Joint Stock Companies
Huge sum of money raisedAssociates limited liabilityShares transferableCompany’s life not affected by death of
shareholders
Advantages of Joint Stock Companies
Services of specialists obtainedRisk of loss dividedFlexibility of management
Disadvantages of Joint Stock Companies
Legal formalities requiredManaged by big shareholdersHigh paid officials manage the whole showPeople may commit frauds
Disadvantages of Joint Stock Companies
Board of directors & managers may sell or buy shares for their personal profits
Difficult to maintain secrecyLack of team spritDivided responsibility
Applications of stock companies
Steel mills
Fertilizer factories
Engineering concerns etc
Concept of Cooperative Organization
Contains features of large partnership & corporationProvide goods & services Members buy shares & profits redistributed to
them Each member has only one vote
Concept of Cooperative Organization
Shareholders , a board of Directors elected officers
Periodic meetings of shareholdersSpecial democratic ownership formed by some
motivated individuals
Forms of Cooperative Enterprises
Consumer’s cooperative retail tradeProducer cooperatives dairy products, grain
etcCooperative farming farmsCooperative housing providing housesCooperative credit societyloans,
Forms of Cooperative Enterprises
AdvantagesDaily necessities at low ratesdemocratic form of ownershipOverheads reducedSelf helpBlack marketing eliminatedNo one can make huge profitsCommon man benefitedMonetary help secured from governmentGoods sold at lower rates
Forms of Cooperative Enterprises
DisadvantagesMembers may not be competentFinance limitedConflict may arise among the membersMembers in position may take personal
advantageMembers may not be able to devote necessary
attention
Concepts of Public SectorConcepts of Public Sector1) owned by the state1) owned by the state
2) managed by the state 2) managed by the state
3) owned and managed by the state 3) owned and managed by the state
Concepts of Public SectorConcepts of Public Sector
Public enterprises operated either by Public enterprises operated either by government or associations with private government or associations with private enterprisesenterprises
To produce and supply goods and services To produce and supply goods and services required by the society and runs it with required by the society and runs it with service mottoservice motto
No dearth of capital & expansion not difficultNo dearth of capital & expansion not difficult
Concepts of Public SectorConcepts of Public Sector
Accountable in terms of results to Parliament Accountable in terms of results to Parliament and State Legislatureand State Legislature
Seldom as efficient as a private enterprise Seldom as efficient as a private enterprise
Evolution of Public SectorEvolution of Public Sector
Consumers and workers were exploited & the Consumers and workers were exploited & the intervention by the State led to evolutionintervention by the State led to evolution
Prior to 1947, Railways and posts and telegraphs Prior to 1947, Railways and posts and telegraphs etc managed by the Central Governmentetc managed by the Central Government
Evolution of Public SectorEvolution of Public Sector
• Since independence, the following Since independence, the following established by Central &State governmentsestablished by Central &State governments
• The Hindustan ShipyardThe Hindustan Shipyard• Bharat Heavy Electricals LimitedBharat Heavy Electricals Limited• Indian Telephone Industries Indian Telephone Industries • Indian AirlinesIndian Airlines• Life Insurance Corporation of India Life Insurance Corporation of India • etc etc
Objectives of Public SectorObjectives of Public Sector
To provide infrastructure for the growth of To provide infrastructure for the growth of economyeconomy
To promote economic developmentTo promote economic developmentBalanced development throughout the countryBalanced development throughout the countryTo avoid economic power in a few handsTo avoid economic power in a few hands
Objectives of Public SectorObjectives of Public Sector
To create employment opportunities To create employment opportunities To earn foreign exchangeTo earn foreign exchangeTo look after welfare of the peopleTo look after welfare of the peopleTo minimize exploitation of workers and To minimize exploitation of workers and
customers customers
Merits of Public SectorMerits of Public Sector
Helps in growth of private sectorHelps in growth of private sectorHelps in the implementation of the economic Helps in the implementation of the economic
plansplansConsumers benefited by cheaper and better Consumers benefited by cheaper and better
productsproductsPrevents the concentration of wealth in the Prevents the concentration of wealth in the
hands of fewhands of few
Merits of Public SectorMerits of Public Sector
Encourages industrial growth of under Encourages industrial growth of under developed regionsdeveloped regions
Profits earned used for the welfareProfits earned used for the welfareOffers equitable employment opportunities to Offers equitable employment opportunities to
allallRaw material, power, & transport easily made Raw material, power, & transport easily made
available available
Demerits of Public SectorDemerits of Public Sector
Wastages & inefficiency seldom be reduced Wastages & inefficiency seldom be reduced to a minimumto a minimum
Mostly runs at a lossMostly runs at a lossInterference by Government & PoliticiansInterference by Government & PoliticiansDelay in decisions Delay in decisions Incompetence persons may occupy at high Incompetence persons may occupy at high
levelslevelsWorkers shirk workWorkers shirk work
Concept of Private SectorConcept of Private Sector
Non –government sectorNon –government sectorProfit rather serviceProfit rather serviceMainly consumer’s good industriesMainly consumer’s good industriesDoes not undertake risky venturesDoes not undertake risky venturesRun by businessmenRun by businessmen
Merits of Private SectorMerits of Private Sector
Profits incurred highEfficiency – highWastage and labor minimumDecision – making promptNo interference by Government or politicians Competent persons occupy high levels
Demerits of Private SectorDemerits of Private Sector
Exploitation motiveDearth of capital for expansionConcentration of wealth in the hands of fewLead to unbalanced growth of industries
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