Question 19.8: The use of the marginal cost formulae The following informat...
The use of the marginal cost formulae
The following information relates to Happy Limited for the year to 30 June 2001:
| Number of units sold: 10 000 | ||
| Per unit | Total | |
| £ | £000 | |
| Sales | 30 | 300 |
| Less: Variable costs | \underline{18} | \underline{180} |
| Contribution | \underline{\underline{12}} | 120 |
| Less: Fixed costs | \underline{24} | |
| Profit | \underline{\underline{96}} | |
Required:
In value and unit terms, calculate the following:
(a) the break-even position; and
(b) the margin of safety.
(a) Break-even position in value terms:
\frac{F\times S}{C}= \frac{£24 00\times 300 000}{120 000} = \underline{\underline{£60 000}}Break-even in units:
\frac{F}{\text{C per unit}} = \frac{£24 000}{12} = \underline{\underline{2000 \text{units}}}(b) Margin of safety in value terms:
\frac{P\times S}{C}= \frac{£96 000\times 300 000}{120 000} = \underline{\underline{240 000}}Margin of safety in units:
\frac{P}{\text{C per unit}} = \frac{£96 000}{12} = \underline{\underline{8000 \text{units}}}Tutorial note
Note the relationship between the sales revenue and the margin of safety. The sales revenue is £300 000 and £60 000 of sales revenue is required to break even. The margin of safety is, therefore, £240 000 (£300 000 – 60 000).
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