Marginal Costing Mango Ltd manufactures a single product - Leaving Cert Accounting - Question 8 - 2014

The variable cost per unit is calculated by dividing the total variable costs by the number of units sold:

$$VC = \frac{Variable\ Costs}{Units\ Sold} = \frac{400{,}000}{80{,}000} = €5\ per\ unit.$$

Contribution per unit is calculated by subtracting the variable cost from the selling price:

$$Contribution\ per\ unit = SP - VC = €12 - €5 = €7\ per\ unit.$$

To find the break-even point (B.E.P.), we use the formula:

$$B.E.P. = \frac{Fixed\ Costs}{Contribution\ per\ unit} = \frac{73{,}000}{7} = 10{,}429\ units.$$

Margin of safety can be calculated as:

$$Margin\ of\ Safety = Budgeted\ Sales - B.E.P. = 30{,}000 - 10{,}429 = 19{,}571\ units.$$

To calculate the sales value of the margin of safety:

$$Sales\ Value = Margin\ of\ Safety\ in\ units \times SP = 19{,}571 \times €12 = €234{,}852.$$

To achieve a target profit, we use the following formula:

$$Profit = (Contribution\ per\ unit \times Units\ Sold) - Fixed\ Costs\ - Total\ Variable\ Costs.$$

In this case:

$$(€7 \times Units\ Sold) - 73{,}000 - (5 \times Units\ Sold) = 300{,}000.$$

This simplifies to:

$$2U - 73{,}000 = 300{,}000\ \Rightarrow\ 2U = 373{,}000\ \Rightarrow\ U = 186{,}500\ units.$$

For revenue:

$$Sales\ Value = 186{,}500 \times €12 = €2{,}238{,}000.$$

'Fixed Costs' are expenses that do not change with the level of production or sales volume. They remain constant within a certain range of activity, such as rent, salaries, and equipment depreciation. These costs are essential to running the business and are incurred regardless of the production output.

An example of a 'Fixed Cost' that Mango Ltd might incur is rent for their manufacturing facility.