Skip to main content

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.

Comments

Popular posts from this blog

RISK in Investments

Investment decisions are a trade off between Risk and Return. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. Most investors are concerned about the actual outcome being less than the expected outcome. The wider the range of possible outcomes,the greater the risk. SOURCES OF RISK The three major sources of risk are: Business Risk Interest Rate Risk Market Risk   Business Risk As a holder of corporate securities (equity shares and debentures) you are exposed to risk of poor business performance. This may be caused by a variety of factors like heightened competition, emergence of new technologies, development of substitute products , shifts in consumer preferences, inadequate supply of essential inputs,changes in governmental policies and so on. The principal reason might be inept and incompetent management. Interest Rate Risk The changes in interest rate have a bearing  on the welfare of investo...

Money Markets Instruments

Money Market Securities in India The money market includes instruments for raising and investing funds for periods ranging from one day up to one year. Money market securities consist of repos/reverse repos, CBLOs ( collateralized borrowing and lending obligations),certificates of deposits, treasury bills, and commercial paper. All these securities are issued at a discount and redeemed at par, and are zero coupon in structure.  Money markets also include inter-bank call markets that are overnight lending transactions between banks, inter- bank terms markets that  are long term deposits between banks, and interoperate deposits, which are short term lending between companies. These transactions do not involve creation of a debt security and are therefore not included here. The Participants in the money market include banks, primary dealers, financial institutions, mutual funds, provident and pension funds, companies and the government. The purpose of the money market is to e...

Financial Glossary 1

Financial Resources Resources which have a monetary value Financial Management is planning, organizing and controlling the acquisition and use of financial resources for the purposes of achieving organisational goals. Financing is the process of determining the appropriate forms and sources of finance Financing strategy is the determination of the type of finance used to purchase assets, and the resulting mix between equity, short term debt and long term debt Investment is the use of finance to acquire an asset which will yield a required return Investment strategy is the determination of the appropriate mix of a business's assets Asset Item of value which is owned by an organisation Accounts receivable (Short term/ current asset) - customer who owes the business money for buying goods/services on credit Inventory stock - Items manufactured or purchased by the business for sale to the customers Financial Intermedia...