A

SYNOPSIS ON

BREAKEVEN ANALYSIS IN

M/s. MJB INTERNATIONAL, DUBAI

SUMBITTED TO

SIKKIM MANIPAL UNIVERSITY, INDIA

IN PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF

THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION (FINANCE)

BY

NAME: ARUN MOHAN

ROLL NO.: 541110302

MASTER OF BUSINESS ADMINISTRATION (FINANCE)

Under the Guidance of:

Mr. SHIBU G. S - MBA (FINANCE)

FINANCE MANAGER - MARTRADE SULTAN LOGISTICS LLC

ABU DHABI, U.A.E

SUBMITTED TO

Project Coordinator

Wisdom Business School

RAKIA Free Zone

INTRODUCTION

An analysis to determine the point at which revenue received equals the costs

associated with receiving the revenue. Break-even analysis calculates what is known as a

margin of safety, the amount that revenues exceed the break-even point. This is the amount

that revenues can fall while still staying above the break-even point.

Break-even analysis is a supply-side analysis; that is, it only analyzes the costs of the

sales. It does not analyze how demand may be affected at different price levels.

For example, if it costs $50 to produce a widget, and there are fixed costs of $1,000, the

break-even point for selling the widgets would be:

If selling for $100: 20 Widgets (Calculated as 1000/(100-50)=20)

If selling for $200: 7 Widgets (Calculated as 1000/(200-50)=6.7)

In this example, if someone sells the product for a higher price, the break-even point will

come faster. What the analysis does not show is that it may be easier to sell 20 widgets at

$100 each than 7 widgets at $200 each. A demand-side analysis would give the seller that

information.

Cost volume profit (CVP) analysis generally defined as a planning tool by which

manages can evaluate the effect of a changes in price, volume, variable cost or fixed cost on

profit. Additionally, CVP analysis is the basis for understanding contribution margin pricing,

related short-run decisions, target costing and transfer pricing. In the marginal costing varies

directly with the volume of production or output. On the other hand, fixed cost remains

unaltered regardless of the volume of output. In net effects, if volume is changed, variable

cost varies as per the changes in volume. In this case, selling price remains fixed, fixed

remains fixed and then there is a change in profit.

Cost – Volume profit Analysis is a logical extension of Marginal costing. It is based

on the same principles of classifying the operating expenses into fixed and variable. Now-a-

days it has become a powerful instrument in the hands of policy makers to maximum profits.

Earning of maximum profit is the ultimate goal of almost all business undertakings.

The most important factors influencing the earning of profit is the level of production. (i.e.

Volume of production).

Profit depends on a large number of factors, most important of which are the cost of

manufacturing and the volume of sales, volume of sales depends upon the volume of

production and market forces which turns in related to costs.

The study on cost management helps to understand, how to control various cost

incurred in the business operations hence to achieve the goal of the organization.

COMPANY PROFILE:

Masaood John Brown (MJB) and MJB International (MJBI) are based in Dubai and Abu

Dhabi UAE with the main facility incorporating our state of the art workshop located in

Dubai. With our sister company, Turbine Services Limited, we are one of the world's leading

total service companies for industrial gas turbines with particular specialization in the Frame

range of turbines designed by General Electric and their former business and manufacturing

associates. MJB/MJBI are predominately staffed and managed by senior personnel and

engineers from a previous OEM, John Brown Engineering Ltd.

MJB International (MJBI) are total service providers to owners and operators of

industrial gas turbines through the world, offering an employee skill base that equates to over

1,500 man years of OEM experience in industrial turbine maintenance solutions, with

particular specialization in the frame range of turbines designed by GE and their former

business and manufacturing associates. Masaood John Brown International (MJBI) is an Al

Masaood Group Company, in partnership with Turbine Services. Turbine Services Ltd is a

division of the Chromalloy Gas Turbine Corporation. Our business is founded on the strength

of our technical and engineering capability, reinforced by our commitment to quality and

customer satisfaction that is demonstrated by our accreditations ISO 9001:2000, ISO

14001:2004 and OHSAS 18001:1999. Our expanded infrastructure and partnership

arrangements allow us to network and support our services internationally. We are in a

unique position to offer both immediate advice and site assistance to industrial gas turbines

users for all operational needs.

Total quality performance means understanding the customer's product, understanding

their business requirements, meeting these requirements without reservation on time every

time. We are committed to achieving total quality performance. The policy is to deliver

customer focused gas turbine maintenance service solutions to the oil, gas and power

industries. This is achieved by a continuous drive towards enhancing quality, health and

safety with an emphasis on preventing environmental pollution and taking into account all

legal and regulatory requirements.

Product and Services:

Gas turbine Spares and Replacement Parts

MJB International maintains a substantial computerised inventory of spare parts for the

General Electric design of heavy duty industrial gas turbine equipment, and also other OEM

turbine manufacturers. The parts inventory policy is continually monitored to ensure that the

majority of customers’ spare part requirements are satisfied ex-stock for both scheduled and

unscheduled maintenance. Computer aided engineering analysis techniques allow MJB

International to supply the components necessary to return your equipments to full service.

Components include stationary and rotating blades, shroud blocks, combustion equipment,

exhaust diffusers and most auxiliary spare parts.

Component Repair Service

MJB International offers access to the most comprehensive independent gas turbine repair

service in the world. Backed by state of the art technologies and capabilities of parent

company Chromalloy, MJB International has extensive experience in repairing and

refurbishing all component parts associated with gas turbine and related power equipment.

Specialized Repair and Coating

For more specialized repairs MJB International offers a complete range of high technology

repair processes, including many developed by both parents.

electron beam physical vapor deposition

Platinum aluminize coatings

Low pressure plasma spray coatings

HVOF coatings

CNC machining

Pack cementation coatings

Hot isocratic pressing

Laser powder welding

Induction welding

Chamber welding

Repair Facilities / Services include the refurbishment of all hot gas path components including nozzles, buckets, combustion liners, flow sleeves and transition pieces.

Gas Turbine Rotor Overhaul services

MJB International's customized workshop facility in Dubai, UAE, is fully equipped to perform complete gas turbine compressor rotor and power section overhauls for Frame type engines. Staffed and resourced by customer focused engineers with over 1500 – man years OEM experience, clients can benefit from a comprehensive quality service.

All rotors are returned to a zero – hour rated condition with minimal turnaround time.

Pre–strip down balance and inspection

Rotor disassembly NDT facilities Individual blade and wheel coating Latest coating technologies Individual wheel balancing Rotor re-blade Rotor reassembly Rotor balance and run-outs Rotor storage containers Comprehensive customer report

Situated in modern air-conditioned premises with a floor space of over 3900 m2, and with recently installed multiple rotor balancing equipment, MJB International offers a competitive alternative for gas turbine owners and operators.

Field Support and Engineering Services

MJB International employs a wide range of experienced gas turbine field engineers, technical advisors, construction and logistics managers.

MJB International provides our clients with expert personnel to undertake and deliver both on-site and remote engineering services, meeting their needs for planned and unplanned plant maintenance.

Gas turbine Refurbishment

MJB International's customized workshop facility in Dubai, UAE, is fully equipped to perform a complete gas turbine refurbishment service for GE type Frame 3, Frame 5, Frame 6, Frame 7 and Frame 9 gas turbines.

Our single-source facility, offering over 1500 man years of OEM Engineering experience, offers services which include turbine engineering, component repair and replacement, new spare parts, rotor overhaul, gear-box replacement, generator inspection, turbine rewiring, instrumentation and control system upgrade, auxiliaries replacement, and procurement of prefabricated inlet and exhaust systems.

Training Courses for Gas Turbine Technology

Customer training is an important element within MJB International's range of integrated turbo machinery products and services.

Together with our joint venture companies we have delivered training to over 1000 engineering, personnel, educating and enhancing the technical skills of our clients’ plant operators.

Panel Manufacturing Facility

Opened in 2007 MJBI operates a panel manufacturing facility for the assembly and testing of control panels. Our technicians are fully skilled in control panel manufacture and are complimented by a design team with many years of experience in this industry.

All panels are built to the highest British and European standards and quality is assured through our ISO 9001:2000 quality procedures. We provide solutions to your panel requirements over a range of industries including power generation, process plants, water treatment and many others and can range from assembly only, to complete turnkey package of design, manufacture, installation and commissioning.

Turbine Control Panel:Our turbine control panel (Sentinel) is designed using PLC technology at its core, and with a built in conditioning monitoring package (Tiger) it offers great value for money as a replacement gas turbine control system for old and outdated controllers.

Sentinel is offered in a range of options either as a single processor simplex design or as a dual redundant hot standby system with a choice of PLC's from Allen Bradley, Siemens S7 or Fanuc. All configuration software is designed and written by our own engineers and no third party contract resources are used.

Motor Control Center

We offer a range of MCC designs to suit our individual customer's requirements from modular (column) design with either fixed or with draw able drawers suitable for AC or DC use, to back to back type where space is a prime consideration.

All panels are ASTA and KEMA tested, and the enclosures are designed and tested to the latest standards, from BS5486 to BS EN 60439-1 and now BS EN 61439-2 (IEC 61439-2)

General panel construction for the column design is extendible fully welded IP54 outer frame unit columns manufactured from 2.5mm Zintec prime quality sheet steel, providing exceptional strength and rigidity.

All bus bars are manufactured from hard drawn high conductivity copper, fully supported in insulated support system. Bus bars are optionally tinned and/or insulated (sleeve wrapped). Standard Bus bar design clearance is 25mm with minimum accepted 20mm (Phase to Phase and Phase to Earth).

Connections to bus bars on with draw able units are via substantially rated plugs and sockets. The socket part is connected directly to the bus bars. A high level of segregation between different parts of the enclosure is a standard feature of all systems, especially where with draw able units are connected to bus bars through a high integrity shutter system which is mechanically activated and can also be padlocked.

Control and indication units are located on the front of with draw able starter trays, mounted on a removable instrument plate. Various combinations of control/indication units can be accommodated depending on compartment size.

Generator Control Panel/ Protection /Auxiliary panel

Generator control and protection panels are manufactured to suit a wide range of generator application ranging from 1MW to several hundred MW and house automatic voltage regulators (AVR) and generator protection relays. Control and indication of generator output is via switches and indication mounted on the front door.

Auxiliary panels are built to house a variety of sub-systems such as fire and gas and vibration monitoring and protection systems such as Bently Nevada.

OBJECTIVES:

The project study has been undertake with the following objectives;

OBJECTIVES OF THE STUDY

o To analysis of the Cost Volume Profit and its impacts at MJB

INTERNATIONAL.

o To identify the effect of breakeven point for multiple products and ascertain

which product has advantages.

o To study the level of sales need to achieve a desired target profit and identify

Margin of safety and its significance.

o To measure the degree of leverages.

o To analyze the trend with regards to income, expenditure and profits.

SCOPE:

This study is to be performed by using the cost sheet and balance sheet of MJB

INTERNATIONAL. The analysis to be done in the cost sheet are Breakeven analysis, profit

volume, etc., these calculations cover the major areas like contribution margin, profit. This

would be useful for company to make new strategy to compete in the market by adopting

various controlling techniques in the process of manufacturing.

This study will be conducted only on overall cost volume profit analysis and not on

each and every variables. This study will help to forecast profit fairly and accurately as it is

essential to know the relationship between profits and costs.

This study will assist in evaluation of performance for the purpose of control and also

assists in formulating policies by showing the effect of different price structure on costs and

profits.

This study will have predetermined overheads rates are related to a selected volume of

production.

RESEARCH METHODOLOGY

TOOLS USED FOR ANALYSIS

Break even analysis and Cost- Volume- Profit Analysis are the main tools I have selected in

order to analyze the profits, cost variations, sales volume and such other variables in a certain

period of time.

The data I receive will be used in equations and the tools related to Break even analysis and

cost sheet analysis. The equations which will be used are given below. The contribution

(sales and costs), Profit volume ratio, break even point, margin of safety are the tools that will

be mainly used in this project for analysis and interpretation. The data required will be the

sales volume, costs of the products (2 products I chose), profit derived from the products and

losses incurred, if any, in the said period of time. The products I have chosen are the

mainstream products of the firm which will portrait the place of the company in the industry.

The no. of units produced and sold is the basic data required. The statements including Profit

and Loss accounts, Balance and cost sheets will give in depth details of the products I have

chosen and the various financial variables regarding it. I will also be providing graphical

representations to strengthen my analysis and findings.

Break even analysis

If accurate forecasts can help manage costs and sales, conducting a breakeven analysis is a

matter of simple math. A company has broken even when its total sales or revenues equal its

total expenses. At the breakeven point, no profit has been made, nor have any losses been

incurred. This calculation is critical for any business owner, because the breakeven point is

the lower limit of profit when determining margins.

Defining Costs

There are several types of costs to consider when conducting a breakeven analysis, so here's a

refresher on the most relevant.

Fixed costs: These are costs that are the same regardless of how many items you sell. All

start-up costs, such as rent, insurance and computers, are considered fixed costs since you

have to make these outlays before you sell your first item.

Variable costs: These are recurring costs that you absorb with each unit you sell. For

example, if you were operating a greeting card store where you had to buy greeting cards

from a stationary company for $1 each, then that dollar represents a variable cost. As your

business and sales grow, you can begin appropriating labor and other items as variable

costs if it makes sense for your industry.

Setting a Price

This is critical to your breakeven analysis; you can't calculate likely revenues if you don't

know what the unit price will be. Unit price refers to the amount you plan to charge

customers to buy a single unit of your product.

Psychology of Pricing: Pricing can involve a complicated decision-making process on the

part of the consumer, and there is plenty of research on the marketing and psychology of

how consumers perceive price. Take the time to review articles on pricing strategy and the

psychology of pricing before choosing how to price your product or service.

Pricing Methods: There are several different schools of thought on how to treat price

when conducting a breakeven analysis. It is a mix of quantitative and qualitative factors. If

you've created a brand new, unique product, you should be able to charge a premium price,

but if you're entering a competitive industry, you'll have to keep the price in line with the

going rate or perhaps even offer a discount to get customers to switch to your company.

One common strategy is "cost-based pricing", which calls for figuring out how much it

will cost to produce one unit of an item and setting the price to that amount plus a

predetermined profit margin. This approach is frowned upon since it allows competitors

who can make the product for less than you to easily undercut you on price. Another

method, referred to by David G. Bakken of Harris Interactive as "price-based costing"

encourages business owners to "start with the price that consumers are willing to pay

(when they have competitive alternatives) and whittle down costs to meet that price." That

way if you encounter new competition, you can lower your price and still turn a profit.

Cost sheet analysis.

Cost sheet is a statement, which shows various components of total cost 

of a product. It classifies and analyses the components of cost of a product. 

Previous periods data is given in the cost sheet for comparative study. It 

is a statement which shows per unit cost in addition to Total Cost. Selling 

price is ascertained with the help of cost sheet. The details of total cost 

presented in the form of a statement are termed as Cost sheet. Cost sheet 

is prepared on the basis of :

 

1. Historical Cost 2. Estimated Cost

MARGINAL COSTS, CONTRIBUTION AND PROFIT ANALYSIS

A marginal cost is another term for a variable cost. The term ‘marginal cost’ is

usually applied to the variable cost of a unit of product or service, whereas the term ‘variable

cost’ is more commonly applied to resource costs, such as the cost of materials and labour

hours.

Marginal costing is a form of management accounting based on the distinction between:

a) The marginal costs of making selling goods or services, and

b) Fixed costs, which should be the same for a given period of time, regardless of the

level of activity in the period.

Contribution is a term meaning ‘making a contribution towards covering fixed cost

and making a profit’. Before a firm can make a profit in any period, it must first of all

cover its fixed costs. Breakeven is where total sales revenue for period just covers fixed

costs, leaving neither profit nor loss. For every unit sold in excess of the breakeven point,

profit will increase by the amount of the contribution per unit.

Cost- Volume- Profit Analysis

C-V-P analysis is broadly known as cost- volume- profit analysis. Specifically

speaking, we all are concerned with in depth analysis and application of CVP in practical

world of industry management.

MARGINAL COST EQUATIONS

BREAKEVEN ANALYSIS

Sales – Marginal cost = Contribution...... (1)

Fixed cost + Profit = Contribution...... (2)

By combining these two equations, we get the fundamental marginal cost equation as

follows:

Sales – Marginal cost = Fixed cost + Profit...... (3)

This fundamental marginal cost equation plays a vital role in profit projection and has a wider

application in managerial decision-making problems.

The sales and marginal costs vary directly with the number of units sold or produced. So, the

difference between sales and marginal cost, i.e. contribution, will bear a relation to sales and

the ratio of contribution to sales remains constant at all levels.

This is profit volume or P/V ratio. Thus,

P/V Ratio (or C/S Ratio) = Contribution (c)

......(4)  Sales (s)

It is expressed in terms of percentage, i.e. P/V ratio is equal to (C/S) x 100.

Or, Contribution = Sales x P/V ratio...... (5)

Or, Sales = Contribution

......(6)  P/V ratio

The above mentioned marginal cost equation can be applied to the following heads:

1. Contribution

Contribution is the difference between sales and marginal or variable costs. It contributes

towards fixed cost and profit. The concept of contribution helps in deciding breakeven point,

profitability of products, departments etc. to perform the following activities:

Selecting product mix or sales mix for profit maximization

Fixing selling price under different circumstances such as trade depression, export

sales, price discrimination etc.

2. Profit volume ratio (P/V Ratio), its Improvement and Application

The ratio of contribution to sales is P/V ratio or C/S ratio. It is the contribution per

rupee of sales and since the fixed cost remain constant in short period, P/V ratio will

also measure the rate of change of profit due to change in volume of sales. The P/V

ratio may be expressed as follows:

P/V ratio= Sales – Marginal cost of sales = Contribution

Sales Sales

= Change in Contribution = Change in profit

Change in sales Change in sales

A fundamental property of marginal coasting system is that P/V ratio remains

constant at different levels of activity.

A change in fixed cost does not affect P/V ratio. The concept of P/V ratio helps in

determining the following:

Breakeven point

Profit at any volume of sales

Sales volume required to earn a desired quantum of profit

Profitability of products

Processes or departments

The contribution can be increased by increasing the sales price or by reduction of variable

costs. Thus, P/V ratio can be improved by the following:

Increasing selling price

Reducing marginal costs by effectively utilizing men, machine, materials and other

services.

Selling more profitable products, thereby increasing the overall P/V ratio

3. Breakeven point

Breakeven point is the volume of sales or production where there is neither profit nor

loss. Thus, we can say that:

Contribution = Fixed cost

Now, breakeven point can be easily calculated with the help of fundamental marginal

cost equation, P/V ratio or contribution per unit

a) Using Marginal Costing Equation

S (sales) – V (variable cost) = F (fixed cost) + P (profit)

At BEP P = 0,

BEP S – V = F

By multiplying both the side by S and rearranging them, one gets the

following equation:

SBEP =F.S / S-V

b) Using P/V ratio

Sales SBEP = Contribution at BEP = Fixed cost P/v ratio P/V ratio

c) Using Contribution per unit

Breakeven point = Fixed cost Contribution per unit

4. Margin of safety(MOS)

Every enterprise tries to know how much above they are from the breakeven point.

This technically called margin of safety. It is calculated as the difference between

sales or production units at the selected activity and the breakeven sales or

production.

Margin of safety is the difference between the total sales (actual or projected) and the

breakeven sales. It may express in monetary terms (value) or as number of units

(volume). It can be expressed as profit P/V ratio. A large margin of safety indicates

the soundness and financial strength of business.

Margin of safety can be improved by lowering fixed and variable costs, increasing

sales or selling price and changing product mix, so as to improve contribution and

overall P/V ratio.

Margin of safety = Sales at selected activity – Sales at BEP

= Profit at selected activity

P/V ratio

Margin of safety is also presented in ratio percentage as follows:

= Margin of safety (sales) X 100% Sales at selected activity

The size of margin of safety is an extremely valuable guide to strength of a business,

if it is large, there can be substantial falling of sales and yet a profit can be made. On

the other hand, unsatisfactory, if margin is small, any loss of sales may be a serious

matter. If margin of safety is unsatisfactory, possible steps to rectify the causes of

mismanagement of commercial activities as listed below can be undertaken.

a) Increasing the selling price—it may be possible for a company to have higher

margin of safety in order to strengthen the financial health of the business. It

should be able to influence price, provided the demand is elastic. Otherwise, the

same quantity will not be sold.

b) Reducing fixed costs

c) Reducing variable costs

d) Substitution of existing products by more profitable lines

e) Increase in the volume of output

f) Modernization of production facilities and the introduction of the most cost

effective technology.

Breakeven Analysis — Graphical Presentation

Breakeven chart is a device which shows the relationship between sales volume, marginal

costs and fixed costs, and profit or loss at different levels of activity. A breakeven chart

contains, inter alia, total sales line, total cost line and the point of intersection called

breakeven point.

Construction of a Breakeven Chart

The construction of a breakeven chart involves the drawing of fixed cost line, total cost line

and sales line as follows:

1. Select a scale for production on horizontal axis and a scale for costs and sales on

vertical axis.

2. Plot fixed cost on vertical axis and draw fixed cost line passing through this point

parallel to horizontal axis.

3. Plot variable costs for some activity levels starting from the fixed cost line and join

these points. This will give total cost line. Alternatively, obtain total cost at different

levels; plot the points starting from horizontal axis and draw total cost line.

4. Plot the maximum or any other sales volume and draw sales line by joining zero and

the point so obtained.

Uses of Breakeven Chart

Volume of sales

Variable expenses

Fixed expenses

Selling price

DATA COLLECTION

Nature of data: The nature of data is secondary data

Secondary data:

The secondary data is to be collected from the financial statements and reviews of the

company which consists of the cost sheets, profit and loss account statements and balance

sheets. The 2 major products will be chosen for this project and the financial variables of

these products will be analyzed using the break even analysis methods to know the profit

ratios and break even points of the said products. The variation of costs of the products

chosen can be derived from the cost sheet analysis and thus the volume of sales and thereby

provide a clear picture of the profit, sales and cost variations of the products in the industry

for the said period of time. I will choose two most trending products of the company.

Therefore, financial statements including Profit and Loss accounts, Balance and cost sheets

which will be collected and analyzed. I will also be providing graphical representations which

would strengthen my findings in the above context.

PERIOD OF STUDY

The analysis is planned to be done on the basis of the financial statemtns of MJB

International, Dubai for the period of three years from 2007-2009 of two products.

LIMITATIONS OF THE STUDY

Cost-volume-profit (CVP) analysis is used to determine how changes in costs and

volume affect a company's operating income and net income. In performing this analysis,

there are several assumptions made, including:

Sales price per unit is constant.

Variable costs per unit are constant.

Total fixed costs are constant.

Everything produced is sold.

Costs are only affected because activity changes.

If a company sells more than one product, they are sold in the same mix

These turn out to be limitations in providing accurate findings and conclusions.

A BRIEF SUMMARY

The marginal costing, marginal cost varies directly with the volume of production or output.

On the other hand, fixed cost remains unaltered regardless of the volume of output within the

scale of production already fixed by management. In case if cost behavior is related to sales

income, it shows cost- volume- profit relationship. In this case, selling price remains fixed.

Fixed remains fixed and then there is a change in profit.

Being a manger, we constantly strive to relate these elements in order to achieve the

maximum profit. Apart from projection, the concept of cost- volume- profit (CVP) is relevant

to virtually all decision- making areas, particularly in the short run.

The relationship among cost, revenue and profit at different levels may be expressed in

graphs such as breakeven charts, profit volume charts, profit volume graphs, or in various

statement forms.

Cost volume profit analysis is one of the most hallowed, and yet one of the simplest,

analytical tool in management accounting. In a general sense, it provides a sweeping

financial overview of the planning process

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