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A company produces and sales single product. Budget sales are $2.4m, budget fixed costs are $36000 and the margin of safety is $40000. What are budgeted Variable cost?
You must have an answer in the same book in which you found the question, so in future ask about whatever it is in the answer that you are not clear about and then I will help you. Do not simply type out test questions and expect an answer 🙂
Since the margin of safety is 40,000, the breakeven sales must be 2.4M – 40,000 = 2,360,000.
Therefore, at breakeven the variable costs must be 2,360,000 – 36,000 = 2,324,000.Therefore the budget variable costs for budgeted sales of 2.4M, must be:
2,400,000/2,360,000 x 2,324,000 = 2,363,390.(I am assuming you have copied all the figures correctly, and that (for example) the margin of safety is 40,000 and not 400,000 🙂 )
Sorry sir, i was so nervous by the time i was posting for this question and so you mention it’s good to post questions with their answers and i think typing error has happened during when i post the question .
Let me repeat it again. A company produces and sales single product. Budget sales are $2.4m, budget fixed costs are $360,000 and the margin of safety is $400,000. What are budgeted Variable cost?
The answer i have is $ 1.968M.
Way of calculation which i didn’t understand :
Breakeven sales = $2.4m-400,000= $2,000,000
Contribution at this level of sales $360,000. Therefore C/S ratio = $360,000/2,000,000= 18%
Variable cost = 82% of sales . At sales level of $2.4M, Variable cost= 82%*2.4M=$1.968.So, sir i didn’t understand this compicated way, can you solve it in a meaningful way which i can understand quickly .
Another question which i would like to post here is this :
A company has fixed cost of $1.3M . Variable cost are 55% of sales up to sales level of $1.5M , but higher volumes of production and sales, the variable cost for incremental production units falls to 52% of sales.
What is the breakeven point in sales revenue , to the nearest point $1000?
Answer: 2802,000Way of calculation :
When sales revenue is $ 1.5M , total Contribution is 45%*1.5M=$675,000.
This leaves a further $ 625000 of fixed costs to cover. To achieve breakeven , sales in excess of $1.5M need to be $ 625000/0.48=$1.302M.Total sales to achieve breakeven =$1.5M+1.302M=$2.802M.
For your first question, the answer you have typed out is fine (and I do go through this in my free lectures – have you watched the lectures?)
An alternative way of getting the same answer is to do exactly as I did in my previous post, but using the correct figures 🙂
Since the margin of safety is 400,000, the breakeven sales must be 2.4M – 400,000 = 2,000,000.
Therefore, at breakeven the variable costs must be 2,000,000 – 360,000 = 1,640,000.Therefore the budget variable costs for budgeted sales of 2.4M, must be:
2,400,000/2,000,000 x 1,640,000 = 1,968,000For your second question:
For sales of 1.5M, since the variable costs are 55%, the contribution must be 45% x 1.5M = 675,000.
For breakeven we need the contribution to be equal to the fixed costs of 1,300,000.
So they need an extra contribution of 1,300,000 – 675,000 = 625,000 (and therefore need extra sales).
For the extra sales over 1.5M, the variable costs are 52% and therefore the contribution is 48%. So for extra contribution of 625,000 they need extra sales of 625,000/48% = 1,302,080
Therefore the total sales must be 1,500,000 + 1,302,080 = 2,802,080
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