Break-Even Analysis Applications
Sales Volume Required to Produce Desired Operating Profit
One application of a BE analysis is to determine the required sales volume to generate a budgeted amount of profit. The required sales are given by Eq. 8.15.
(Fixed expenses + Desired operating profit) + P/V ratio
In Example, if the desired operating profit of SV Ltd is Rs 14,000, required sales volume (Rs 26,000 + Rs 14,000)/0.40 = Rs 1,00,000.
A variant of the above approach is that the management may be interested in knowing the required sales volume to produce the desired profit after taxes. In this case, the analysis must be expanded slightly. Assume that SV Ltd wants a net income after taxes of Rs 13.500 and that its current tax rate is 35 per cent, the net income after taxes is 65 per cent of the net income before taxes.