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Hi all
I am struggling a bit with this question; I think it should be simple but can’t get my head round the figures – any help would be greatly appreciated.
“A company is budgeting to sell 200,000 units next year at a price of $15 per unit. Fixed costs will be £1232,000 and the variable costs / sales ratio is 44%”
What is the breakeven sales revenue & margin of safety in the budget?
If variable costs to sales is 44%, then for every 100 sales, the variable costs are 44 and therefore the contribution is 56.
So the CS ratio is 56/100 = 56%.Since the fixed costs are 1232000, the breakeven revenue must be 1232000/0.56 = 2,200,000.
The budgeted sales are 200,000 x 15 = 3,000,000, and therefore the margin of safety = (3,000,000 – 2,200,000) / 3,000,000 = 26.67%
If you have not watched our free lectures on CVP then I do suggest that you do.
Our free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.Break-even Sales Revenue ($) = Fixed Costs / Contribution % p.u
= $ 1, 232,000 / (100% – 44%)
= $ 2, 200, 000 <<————–Margin of Safety = (Current Sales – Break-even Sales) / Current Sales * 100%
= [ ( 200,000 * $15) – $ 2,200,000 ] / ( 200,000 * $15) * 100%
= $800 / $3,000,000 * 100%
= 26.67% <<————–N.B :-
Variable Costs/ Sales Ratio = 44%
Therefore, Sales = 100%, and Variable Costs = 44% of Sales
As such, Contribution = 56% of Sales (since Sales = VC + Contribution)ruqayyah: Please do not answer in this forum – it is the Ask the Tutor Forum, and you are not the tutor. (But please do help others in the other F5 Forum 🙂 )
I don’t actually know why you have answered anyway since I had already given the answer!!
Thanks John!
I was getting confused about seeing the vc as a percentage and couldn’t work out how to get the contribution as I haven’t come across it in that format before, but now you have explained that does make sense.
Thanks for your help, really appreciated
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