Question

The sheet metal factory is a supplier of simple sheet metal cabinets for industry. You only have one customer who buys the entire company's production. The sheet metal factory has fixed costs per year of SEK 1,200,000. The variable cost is SEK 120 per sheet metal cabinet. Today, the customer pays SEK 400 per sheet metal cabinet. In 2019, 4,600 cabinets were purchased by the customer. Before 2020, the Sheet Metal Factory expects that the fixed costs are the same as in 2019, but that the variable cost will increase by SEK 10 per sheet metal cabinet. They therefore want to increase the price to SEK 410 per sheet metal cabinet. The answer they received from the customer's buyers is that they will order significantly more sheet metal cabinets in 2020 from Plåtfabriken. The increased volume means that the customer thinks that Plåtfabriken should instead reduce the price to SEK 390 per sheet metal cabinet. The sheet metal factory has the capacity to make significantly more cabinets without raising fixed costs.

Calculate critical sales for 2020
Calculate safety margin for 2020
What volume is required for the 2019 result to be maintained even in 2020 if the variable cost increases by SEK 10 per sheet metal cabinet at the same time as the price is reduced to SEK 390 per sheet metal cabinet.

Answer 1

Workings    (IN SEK)

Calculation of 2019 Result	Calculation	Amount
Sales	4600*400	1,840,000
Variable Cost	4600*120	552,000
Contribution		1,288,000
Fixed Costs		1,200,000
Profit		88,000

Calculation of 2020	Amount
Sales	390	per unit
Variable Cost	130	per unit
Contribution	260	per unit
Contribution margin Ratio	66.67
Fixed Costs	1200000

Main Answers

Part A
Critical Sales for 2020	1,800,000
(Fixed Costs/Contribution Margin Ratio)
(1200000/66.67%)
Part B
Safety Margin	(6,000)
Total Sales-Critical Sales
(4600*390)-1800000
NO Safety Margin Available for 2020 at current level sales i.e. sales =2019 Sales
Part C
Sales Required	1,931,903
(Fixed Expense+Target Profit)/Contribution Ratio
(1200000+88000)/66.67%