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 of EBDAT breakeven point for Krishna Electronics in terms of survival revenues:

Contribution = Net sales - Cost of goods sold

= Rs 10,00,000 - Rs6,50,000

Contribution = Rs3,50,000

Fixed cost will include expenses related to marketing ,interest, general and administrative expenses.

= Rs80,000 + Rs35,000 + Rs2,40,000 = Rs 3,55,000

Profit Volume ratio = (Contribution / sales) * 100

PV ratio = Rs 3,50,000 / Rs 10,00,000 * 100

PV ratio = 35%

Fixed cost / PV ratio = Rs 355,000 / 35%= 10,14,286

b. Calculation of EBDAT breakeven point in terms of number of units sold:

Total Sales =Rs10,00,000

Selling price per unit =Rs.20

= Rs10,00,000 / 20 = 50,000 units

Contribution per unit:

= Contribution / Total number of units sold

= Rs3,50,000 / 50,000 =Rs7

= Rs355,000 / 7 = 50,714 units

c. Calculation of NOPAT breakeven point for Krishna Electronics in terms of revenues:

=Fixed cost /Profit volume ratio

Fixed cost = Marketing expenses + Depreciation + Administrative expenses

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

Fixed cost =Rs3,65,000

PV ratio = 35%

= Rs 3,65,000 / 35% = Rs 10,42,857

d. Calculation of NOPAT breakeven point in terms of number of units sold:

=Fixed cost /Contribution per unit

= Rs 365,000 / 7 = 52,143 units