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- May 4, 2020 at 5:02 pm
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%.
Calculate the budgeted fixed costs in period 3.
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.
Can someone please help me understand how contribution is equal to the level of fixed costs?
Thanks in advanceMay 5, 2020 at 9:08 am
Breakeven is when the profit is zero.
Given that the profit is always the contribution less the fixed costs, then for the profit to be zero the contribution must be equal to the fixed costs.
I do suggest that you watch my free lectures on CVP analysis. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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