Question 11.3: The following are details of planned sales and costs of a bu...
The following are details of planned sales and costs of a business for a period.
| Sales | 10,000 units @ $6 each | $60,000 |
| Variable costs | 10,000 units @ $3.50 each | $35,000 |
| Fixed costs | $15,000 |
From the information above, the break-even point can be calculated as follows:
| Sales price per unit | $6 |
| Variable costs per unit | $3.50 |
| Contribution per unit | $2.50 |
Since the fixed cost were $15,000, the break-even point can be calculated as follows:
\frac{15,000}{2.50} = 6,000 units
As the business plans to sell 10,000 units, the margin of safety is 4,000 units.
It is also easy to calculate the level of sales necessary to make a prescribe level of profit, say $5,000. In order to make such a profit, we have to recover the amount of the fixed costs plus the amount of profit desired. Hence, using the above example, we can obtain the level of sales needed to make a profit of $5,000 as follows:
\frac{Fixed costs + profit}{Contribution per unit} = Level of sales needed to achive the desired profit
that is:
\frac{\$15,000 + \$5,000}{\$2.50} = 8,000 units
If a profit of $15,000 was desired. it would be necessary to sell 12,000 units ([15,000 + 15,000]/2.50).