Question

A friend came to you for financial advice. He is about to set up a business manufacturing and selling handbags for children. He provides you with the following budgeted information concerning his total costs.

Material Cost $ 280,000
Labour Cost 300,000
Production Overhead 150,000
Selling & Distribution Overhead 140,000
Administrative Overhead 60,000

The above figures are based on budgeted production of 3,500 handbags. The budgeted price per bag is $300

You ascertain that $125,000 of labour costs, 100% of administrative overheads, 30% of production overheads and 50% of selling & distribution overheads are fixed in nature. All other costs are variable with the level of production.

c) Construct a break-even chart clearly showing the breakeven point in units and sales revenues as well as the margin of safety in units and dollars at the budgeted level of production.
d) Prepare a marginal costing statement to prove breakeven in units & dollars
e) Set yourself a targeted net income and calculate the targeted sales units & dollars.

Answer 1

ANSWER

(c)

Calculation of Variable Cost out of total cost given

Material Cost $280,000

Labour Cost $175,000

Production Overhead $105,000

Selling & Distribution Overhead $70,000

Total Variable Cost $630,000

Total Fixed Cost = $930,000 - $630,000

= $300,000

Contribution = Total Revenue - Total Variable Cost

= $1,050,000 - $ 630,000

= $420,000 or $120 per unit

Break even point (unit) = Fixed Cost / Contribuiton per unit

= $300,000 / $120

= 2500 unit.

Break even point (sales) = 2500 x 300

= $750,000

Margin of Safety = (Total Sales - Breakeven sales) / Total Sales x 100

= ($1,050,000 - $750,000) / $1,050,000 x 100

= $300,000 / $1,050,000 x 100

= 28.57 %

(d) MARGINAL COST STATEMENT

Sales $1,050,000

Less: Variable Cost $630,000

Contribution $420,000

Less: Fixed Cost $300,000

Profit / Loss $120,000