Marginal Costing McBride Ltd - Leaving Cert Accounting - Question 8 - 2008

The Break Even Point (BEP) in units can be calculated using:

$ext{BEP (units)} = \frac{\text{Fixed Costs}}{\text{Contribution Per Unit}}$

Where Fixed Costs is £35,000 and Contribution Per Unit is £5:

$ext{BEP (units)} = \frac{35,000}{5} = 7,000 \text{ units}$

To find the sales value at the BEP:

$ext{Sales Value} = \text{BEP (units)} \times \text{Selling Price} = 7,000 \times 15 = £105,000$

Thus, the Break Even Point is 7,000 units and the sales value is £105,000.

The Margin of Safety (MOS) can be calculated using the formula:

$ext{MOS (units)} = \text{Budgeted Sales} - \text{Break Even Sales}$

Here, Budgeted Sales is 12,000 units and BEP is 7,000 units:

$\text{MOS (units)} = 12,000 - 7,000 = 5,000 \text{ units}$

To find the sales value of the margin of safety:

$ext{MOS (Sales Value)} = \text{MOS (units)} \times \text{Selling Price} = 5,000 \times 15 = £75,000$

Thus, the Margin of Safety is 5,000 units and the sales value is £75,000.

For each production level, we compute the following:

• Sales Revenue = Production Level × Selling Price
• Variable Costs = Production Level × Variable Cost
• Contribution = Sales Revenue - Variable Costs
• Profit/Loss = Contribution - Fixed Costs

1. For 6,600 units:

• Sales Revenue = 6,600 × 15 = £99,000
• Variable Costs = 6,600 × 10 = £66,000
• Contribution = 99,000 - 66,000 = £33,000
• Profit = 33,000 - 35,000 = £2,000 Loss

2. For 7,700 units:

• Sales Revenue = 7,700 × 15 = £115,500
• Variable Costs = 7,700 × 10 = £77,000
• Contribution = 115,500 - 77,000 = £38,500
• Profit = 38,500 - 35,000 = £3,500 Profit

3. For 8,300 units:

• Sales Revenue = 8,300 × 15 = £124,500
• Variable Costs = 8,300 × 10 = £83,000
• Contribution = 124,500 - 83,000 = £41,500
• Profit = 41,500 - 35,000 = £6,500 Profit

Thus, the statement shows that at 6,600 units, there is a loss of £2,000, at 7,700 units a profit of £3,500, and at 8,300 units a profit of £6,500.

To find the level of sales for a desired profit, we use:

$\text{Required Sales} = \frac{\text{Fixed Costs} + \text{Target Profit}}{\text{Contribution Per Unit}}$

Where Fixed Costs = £35,000 and Target Profit = £30,000:

$\text{Required Sales} = \frac{35,000 + 30,000}{5} = 13,000 \text{ units}$

Now, to find the sales revenue:

$\text{Sales Revenue} = \text{Required Sales} \times \text{Selling Price} = 13,000 \times 15 = £195,000$

Thus, the level of production required is 13,000 units and the sales revenue will be £195,000.