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-adays 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. Prestrip 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) Sales (s) ......(4)

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 P/V ratio ......(6)

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 = Sales

Contribution Sales

= Change in Contribution Change in sales

Change in profit 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 P/v ratio c) Using Contribution per unit Breakeven point = Fixed cost Contribution per unit = Fixed cost P/V ratio

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 priceit 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. financial overview of the planning process In a general sense, it provides a sweeping

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