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Dear tutor,
Regarding the calculation of margin of safety, we need to get the breakeven sales. Based on the answers for “Cheerful”, the breakeven sales is calculated by dividing the fixed costs with the contribution per unit (120m/145=0.83m).
Why doesn’t the calculation of breakeven sales include variable costs? Is it wrong for me to calculate it by dividing the total cost (variable+fixed cost) with the average SP per unit? My answer would be :
Total costs: (255×1.12)+120=405.6m
Average sales price per unit= 400
Breakeven sales= 405.6/400= 1.014mThis means that by selling 1.014m units, the company is able to cover the total costs.
Is my answer acceptable?
Your method would not,work because your calculation using (fixed costs plus variable costs) implies you know what the variable costs are. You know the variable costs per unit, but you do not know the total variable costs until you know the sales volume – which, of course, you are trying to work out.
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