Profitability of Projects

Profitability projections are essential to judge the financial desirability of a project. Profitability analysis focuses on:

Cost of Production
Working Results
Break even level

The major components of cost of production are:

Material Cost
Utilities Cost
Labour cost
Factory Overhead Cost

The most single element of cost,material cost consists of price paid to suppliers, freight expenses and insurance charges. Utilities costs consists of cost of power,water and fuel. Labour costs includes the cost of manpower employed in the factory. Factory overhead cost represents expenses on repairs and maintenance ,light ,rent and taxes, insurance and miscellaneous factory expenses.

The statement of working results may reflect the following:

Cost of Production
Total Administrative Expenses
Total Sales Expenses
royalty and know-how payable
Total Cost of Production
Expected Sales
Gross Profit before Interest
Total financial expenses
Depreciation
Operating Profit
Other Income
Preliminary Expenses Written Off
Profit /Loss before taxation
Provision for taxation
Profit after Tax
Dividend Payment
Retained Earnings
Net Cash Accrual

BREAK EVEN ANALYSIS

The Break Even point is the point at which total revenues equal total costs.

Break Even Analysis is a tool for studying the relationship between volume, costs ,revenues and profit. It is helpful in profit planning.

As a preliminary to break even analysis,cost behavior needs to be studied. Typically costs are divided into three categories: fixed costs ,variable costs and semi variable costs. Fixed Costs remain constant irrespective of changes in the volume of output.Variable costs vary proportionality with output. Semi Variable costs are partly fixed and partly variable.

Break even analysis may be carried out graphically or algebraically . In Graphic analysis , costs revenues and profits are plotted against volume.In Algebraic analysis volume-cost-profit relationship is studied with the help of the following equation:

PI= Q(P--V)--F

This equation can be used to calculate the break even quantity,profit for a given quantity, quantity for a given profit, and break even sales in rupees/dollars.

Break Even analysis can be done for Multi-product case also.

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