The ratio of variable cost to sales is 70%. The B.E. Point occurs at 80% capacity. Find 100% capacity sales when fixed cost is ` 6,00,000. Assume that P/V Ratio, variable cost ratio are complement each other.

The correct answer is - ₹25,00,000

Key Points

• Break-Even Point (B.E. Point)
  • The Break-Even Point is the level of sales at which total revenue equals total costs (fixed + variable costs), resulting in no profit, no loss.
• Given Data
  • Variable cost ratio = 70% → P/V Ratio = 30% (complement of variable cost ratio).
  • B.E. Point occurs at 80% of capacity.
  • Fixed cost = ₹6,00,000.
• Formula for B.E. Sales
  • B.E. Sales = Fixed Cost ÷ P/V Ratio.
  • Substitute the values: B.E. Sales = ₹6,00,000 ÷ 0.3 = ₹20,00,000.
• Relationship Between Capacity and Sales
  • B.E. Sales = 80% of full capacity sales.
  • Let full capacity sales = ₹X.
  • 80% of ₹X = ₹20,00,000 → 0.8X = ₹20,00,000 → X = ₹25,00,000.

Additional Information

• P/V Ratio (Profit/Volume Ratio)
  • P/V Ratio = (Sales - Variable Costs) ÷ Sales.
  • P/V Ratio helps in determining the contribution margin and is crucial for calculating break-even sales.
• Variable Cost Ratio
  • Variable Cost Ratio = Variable Costs ÷ Sales.
  • It represents the percentage of sales that covers variable costs.
  • P/V Ratio and Variable Cost Ratio are complements, i.e., their sum = 100%.
• Break-Even Analysis
  • Break-even analysis is used to determine the sales volume at which the company neither earns a profit nor incurs a loss.
  • It is an essential tool for decision-making in cost-volume-profit (CVP) analysis.
• Application of Capacity
  • Capacity refers to the maximum level of output or sales a company can achieve.
  • In this problem, the relationship between B.E. sales and full capacity sales was used to find the full capacity sales.