Industrial Sickness- Its Causes

 Industrial sickness is defined as an industrial company which has, at the end of any financial year, accumulated losses equal to, or exceeding, it’s entire net

worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year. The main reasons of industrial sickness are-

-    Associated with managerial ineffectiveness, which include poor control on key areas of operations and finance.

-    Improper estimate of demand is another reason.

-    Improper technology, wrong location of Industry, non- flexibility of fixed assets etc.

-    Defective capital Structure and Shortage of working capital

-    High costs of manufacturing compared to Sales revenue, Non-availability of raw material, regular power, fuel etc.

Limitations of Break-Even Analysis

 Although, break-even analysis is a very useful risk assessment technique and a useful device for testing the sensitivities of business performance, the following limitations must be considered:

1. All costs resolved into fixed or variable

2. Variable costs fluctuate in direct proportion to volume.

3. Fixed costs remain constant over the volume range.

4. The selling price per unit is constant over the entire volume range.

5. The company sells only one product, or mix of products tends to remain constant.

6. Volumetric increase is the only factor affecting costs.

7. The efficiency in the use of resources will remain constant over the period.

Assumptions of Break-Even Analysis

        1. All costs are classified as either fixed or variable.

2. Fixed costs remain constant within the relevant range.

3. The behavior of total revenues and total costs will be linear over the relevant range

4. In case of multiple product companies, the selling prices, costs and proportion of units (sales mix) sold will not change.

5. There is no significant change in the inventory levels during the period under review.

6. Other assumptions:

-  Unit selling price will remain constant.

-  Unit variable cost will not change.

-  There will be no change in efficiency and productivity.

-  The design of the product will not change.

Assumptions of Cost-Volume-Profit Analysis

 These cost volume profit analysis assumptions are as follows:

1. Selling price is constant. The price of a product or service will not change as volume changes.

2. Costs are linear and can be accurately divided into variable and fixed

elements. The variable element is constant per unit, and the fixed element is constant in total over the relevant range.

3. In multi-product companies, the sales mix is constant.

4. In manufacturing companies, inventories do not change. The number of units produced equals the number of units sold.

Cost Volume Profit Analysis/ Relationship

 Cost volume profit analysis (CVP analysis) is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship

between cost, volume, and profit in an organization by focusing on interactions

among elements, like level or volume of activity, unit selling prices, variable cost per unit, total fixed costs, sales mix.

It is a powerful tool which furnishes the complete picture of the profit structure

and helps in planning of profits as helps managers understand the interrelationships among cost, volume, and profit it is a vital tool in many business decisions.