Question

a company having annual sales of 10 crores is earning 10 crores os earning 12% profit before charging interest and depreciation. Interest and depreciation amount to 60 lakhs and 100 lakhs. if the contribution sales ratio is 0.4, calculatr break even sales

Answer 1

To calculate break-even sales for the company, the fixed costs (interest and depreciation) are divided by the contribution margin ratio. With total fixed costs of 1.6 crores and a contribution margin ratio of 0.4, the break-even sales for the company are calculated to be 4 crores.

Step-by-step explanation:

To calculate the break-even sales for the company, you first need to understand that break-even sales is the point where the company's total sales cover all its fixed and variable costs, resulting in a profit of zero. Here, we need to use the contribution margin ratio (sales contribution ratio) which is given as 0.4 (or 40%).

The profit before interest and depreciation is 12% on sales, which equals 1.2 crore (12% of 10 crores). The interest and depreciation are given as 60 lakhs and 100 lakhs, respectively, summing up to 160 lakhs (1.6 crores).

To calculate the break-even point in sales, we use the formula:

Break-even Sales = Fixed Costs / Contribution Margin Ratio

The fixed costs include the sum of interest and depreciation, which is 1.6 crores. Using the contribution margin ratio of 0.4, the break-even sales calculation is:

Break-even Sales = 1.6 crores / 0.4 = 4 crores.

Therefore, the company needs to achieve sales of 4 crores to break even.