- April 8, 2021 at 3:38 pm #616469nimmyannaMember
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Firstly, I would like to express my genuine thanks for producing high quality CIMA tuition videos and study resources that are profoundly beneficial to CIMA students as it provides in-depth and comprehensive insights on the component learning outcomes that facilitates the learning process.
I am a CIMA Operational Level student who is currently studying for CIMA P1 Management Accounting. My query is based on Kaplan Exam Practice kit for P1: Management Accounting.
Q190 R Company provides a single service to its customers. An analysis of its budget for the year ending 31 December 20X5 shows that in period 3, when the budgeted activity was 6,570 service units with a sales value of $72 each, the margin of safety was 21.015%.
The budgeted contribution to sales ratio of the service is 35%.
Budgeted fixed costs in period 3 were nearest to:
SOLUTION SPECIFIED IN THE EXAM PRACTICE KIT :
If the margin of safety budgeted in period 3 is 21.015%, then the breakeven number of units in the period is:
6,570 – (6,570 × 21.015%) = 5,189 units
At this level, contribution is equal to the level of fixed costs.
Contribution at this volume is:
5,189 × 35% × $72 = $130,763.
So fixed costs are $130,763 (which is nearest to B, i.e. $131,000).
Can I kindly request for a brief explanation pertaining to the above question as the solution suggests that in order to find the contribution, breakeven (units) is multiplied with C/S ratio and sales value? Margin of safety computation is fairly clear but I am unable to decipher the rationale behind the calculation of contribution.
Look forward to hearing from you.
Nimmy AnnaMay 10, 2021 at 7:29 pm #620254CathMember
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Hi Nimmy Anna,
Thanks so much for your kind words & support for Open Tuition.
Ok so you are happy with finding the breakeven sales (budgeted sales less the margin-of-safety leaves us with breakeven figure of 5189 units
Also Im thinking you are happy how they then used that figure to calculate total contribution
eg 5189 breakeven units * $72 sales price * c/s ratio 35% = total contribution…
How you get fixed costs equal to total contribution…
Breakeven Sales Revenue exactly covers Fixed Costs + Variable Costs.
So BE Sales Revenue = FC + total variable cost
So BE Sales Revenue less variable costs = Fixed costs
And Sales revenue less variable costs is the definition of ‘total contribution’
Hope that explains ok…
Which is why at breakeven point total contribution = total fixed costs.
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