Page 45 - MA - May 2017

The concept of Break Even Point of Bank Branches and Customer’s business were also in vogue in branches in
1990s and it is still being used. The following case of a collection account of bills and cheques of a customer is
analyzed at the bank to find out whether the customer’s account is profitable or not.

Profitability of a Collection Account in a Bank*

Profit in the Collection Account: Income – Expenses
= Sales* Price per Unit of Sales – Sales* Cost per unit of Sales - Overheads
= Q*P – Q*V – F
Where Q = No of Units (Quantity)
P = Price per Unit
V = Cost per Unit (Variable Cost)
F = Overheads (Fixed Costs)
Break-even point means where profit is Zero:
B.E.P. = P = 0 = Q’*P – Q’*V – F
Where Q’ is Quantity of Units sold at Break Even Point Level
0 = Q’(P – V) – F
or F = Q’ (P – V)
or Q’ = F/ (P – V)
Fixed Cost of handling this account for the last one Year, i.e. F
F = Salaries + Overheads = 24.24 + 7.31 = 31.61
V for Current Deposits = 0 (as no interest is paid on Current deposits)
V for Term Deposits = (Interest paid on TD/ Total Average Term Deposits) * 100
= 78.24/978*100 = 8%
P is income on Funds Deployed Notionally = (11.23 * 12)/(304.83 + 978) * 100
= 134.76/1283 * 100
= 10.50%
Notional income on Current Deposits = 10.50 – 0 = 10.50
Notional Income on Term Deposits = 10.50 – 8.00 = 2.50
Break Even Point in case only Current deposits are taken = 31.61/0.105 = 301 lakhs (Average Current
Account balances for the Year)
Break Even Point in case Term Deposits are taken = 31.61/ 0.025 = 1264 lakhs (Average Term Deposits
balances for the year)
Break Even Point in case Current deposits and Term deposits are taken [The ratio of Current deposits (305
lakhs) and Term Deposits (978 lakhs) are 1:3 ] = P – V = 10.50 * 0.25 + 2.5 * 0.75 = 4.5.
Therefore B.E.P. = 31.61/0.045 = 702 lakhs [Current deposits 176 lakhs and Term Deposits 526 Lakhs]
Margin of Safety = [(1283 – 702)/ 1283] * 100 = 45%
B. E. P. is at 55% of last year Sales [Current Deposits and Term Deposits]
A Competitor had entered at this stage and offered the Customer 50% of Sales (Current and Term Deposits).
Alternatives available for ABC Bank are:
Reducing F [which may be possible]
Say “NO” [i.e. Driving out the Customer]
Say “Yes” – and Explore Better Deployment of Funds
alternate scope of income like Service Charges (Fixed Quotation and Floating Quotation) per bill and collect
it every quarter
Increase Current Deposit Balance and keep it as near the BEP 301 lakhs
Source: Dr. K Satyanarayana, Ex-Professor, National Institute of Bank Management, Pune.
The figures are actuals of a real account from a Bank.

www.icmai.in May 2017 l The Management Accountant 45