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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:
  1. Cost of Production
  2. Total Administrative Expenses
  3. Total Sales Expenses
  4. royalty and know-how payable
  5. Total Cost of Production
  6. Expected Sales
  7. Gross Profit before Interest
  8. Total financial expenses
  9. Depreciation
  10. Operating Profit
  11. Other Income
  12. Preliminary Expenses Written Off
  13. Profit /Loss before taxation
  14. Provision for taxation
  15. Profit after Tax
  16. Dividend Payment
  17. Retained Earnings
  18. 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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