Corporate Fin Mgt NDLM.PDF

In break-even analysis, we are interested in determining the level of sales at which the
Profit before Tax (PBT) is zero. We will do this by working our way backwards in the
above table setting the last row (PBT) equal to zero.

We begin with the relationship

PBT = Contribution – Fixed Costs + Non Operating Surplus

When PBT is zero, we get

Contribution – Fixed Costs + Non Operating Surplus = 0

0r

Contribution = Fixed Costs – Non Operating Surplus

In case of Shatabdi Industries, this means that in the break-even situation, the
contribution must be 30184 – 277 = 29907.

The question now is at what level of sales, will Shatabdi contribution be equal to 29907.
From the above table, we see that the variable costs are 39% of sales and that the
contribution is 61 % of sales. If 61% of sales is 29907, the sales must be 29907 X 100/61
= 49028. This is the break-even level of sales.

At break-even, the operations of Shatabdi will look as follows:

Break-even sales 49028
Less Variable expenses 19121
Break-even contribution 29907
Less Fixed costs 30184
Add Non Operating surplus 277
Profit before tax 0

We can also state the break-even computation using a simple formula:

Break-even sales = (Fixed Costs – Non Operating Surplus)
Contribution Margin Percentage X 100

What does all this break-even analysis mean to the investor?

We found that Shatabdi break-even sales are 49028, which is about 80% of the current
sales. This is a measure of the margin of safety for the company; its sales can drop by
20% before it shows a loss.