Question

QUESTION 1

A company manufactures and sells a single product which has the following cost and selling price structure: £/unit £/unit Selling price 120 Direct material 22 Direct labour 36 Variable overhead 14 Fixed overhead 12 84 Profit per unit 36 The fixed overhead absorption rate is based on the normal capacity of 2,000 units per month. Assume that the same amount is spent each month on fixed overheads. Budgeted sales for next month are 2,200 units.

You are required to calculate: (i) the breakeven point, in sales units per month; (ii) the margin of safety for next month; (iii) the budgeted profit for next month; (iv) the sales required to achieve a profit of £96,000 in a month.   

Answer 1

Selling price	120
Less: Variable costs
Direct materials	22
Direct labour	36
Variable overhead	14
Total Variable costs	72
Contribution margin	48
Fixed costs total	24000	=12*2000
(i)
Breakeven point = Fixed costs/Unit contribution margin
Breakeven point = 24000/48 = 500 units
(ii)
Margin of safety = Budgeted sales-Break even sales
Margin of safety = 2200-500 = 1700 units
Margin of safety in £ = 1700*120= £204000
(iii)
Contribution margin	105600	=2200*48
Less: Fixed costs	24000
Budgeted profit	81600
(iv)
Sales required in units =(96000+24000)/48= 2500 units
Sales required in £ = 2500*120= £300000