Question

2. Krishna Electronics Pvt. Ltd. is a new venture that manufactures electronic components. The company produced the following income statement results in its first year of operations:

Net Sales	Rs. 10,00,000
Cost of Goods Sold	- Rs. 6,50,000
Gross Profit	Rs. 3,50,000
General and Administrative Expenses	- Rs. 2,40,000
Marketing Expenses	- Rs. 80,000
Depreciation	- Rs. 45,000
EBIT	- Rs. 15,000
Interest Expenses	- Rs. 35,000
Earnings Before Taxes	- Rs. 50,000
Taxes	Rs. 0
Net Earnings (Loss)	- Rs. 50,000

Cost of Goods Sold are expected to vary with sales and are expected to be a constant percentage of sales. The General and Administrative expenses are expected to be a fixed cost. Further Marketing Expenses are also expected to remain fixed because the sales staff are on fixed salaries and no new hiring is planned. The selling price for the electronic component (manufactured by the company) is Rs. 20 per unit. The effective tax rate is expected to be 30% (when the firm is profitable.)

1. Calculate the survival (i.e. EBDAT) breakeven point for Krishna Electronics in terms of survival revenues (Rs.)   
2. Calculate the EBDAT breakeven point in terms of number of units sold.
3. Calculate the NOPAT breakeven point for Krishna Electronics in terms of revenues (in Rupees.)
4. Calculate the NOPAT breakeven point in terms of number of units sold.   

Answer 1

A) Calculation for EBDAT break even point :

Fixed cost = general and administrative expenses + Marketing expenses + Interest expenses = Rs. 2,40,000 + Rs. 80,000 + Rs 35,000 = Rs. 3,55,000

Contribution = sales - variable cost

Contribution = sales - COGS

Contribution = Rs 10,00,000 - Rs 6,50,000 = Rs 3,50,000

PV ratio = [Contribution / sales revenue ] X 100 %

PV ratio = [ Rs 3,50,000 / Rs 10,00,000] X 100 %

PV ratio = 35%

Break even point in terms of Survival revenue = Fixed cost / PV ratio = Rs 355,000 / 35% = Rs 355,000 X 100/35 = 10,14,286 ( rounded up)

B) Break even point in terms of number of units sold = Fixed cost / Contribution per unit

Number of units sold = Rs 10,00,000 / Rs 20 = 50,000 units

Contribution per unit = Contribution / Number of units sold

Contribution per unit = Rs 3,50,000 / 50,000 =Rs7

Break even point in terms of number of units sold = Rs 355,000 / Rs 7 = 50,714 units ( rounded up )

C) Calculation for NOPAT Break even point :

Fixed cost = Administrative expenses + Marketing expenses + Depreciation

Fixed cost = Rs 2,40,000 + Rs 80,000 + Rs 45,000 = Rs 3,65,000

PV ratio = 35 %

Break even point in terms of survival revenue = Rs 3,65,000 / 35% = Rs 3,65,000 X 100 / 35 = Rs 10,42,857 ( rounded up)

D) Break even point in terms of units sold = Rs 365,000 / Contribution per unit

Break even point in terms of units sold = Rs 3,65,000 / Rs 7 = 52,143 units ( rounded up )

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