A company only produces one type of item. For the last fiscal year, the followin

Question

A company only produces one type of item. For the last fiscal year, the following information is available: Variable/moving costs: £468,000 Fixed costs: £936,000 Turnover: £1860,000 Manufactured and sold volume: 52,000 pieces Questions: 1. What is the margin of safety expressed in volume per year? Answer with the amount of units. (Also, 17,333 units is wrong) 2. What is the margin of safety expressed as a percentage of the current volume (current turnover). Reply with %. (Also, 24% is wrong) Calculate how the company's earnings are affected if the price would increade with 20% and also loose 20% of the sales. Answer with £. (Also 177,600 is wrong) 3.

Explanation / Answer

1.Calculation of Margin Of Safety:

Actual sales($)- Break even point($)

Calculation of Break even point($) = Fixed cost/Contribution margin

Contribution margin= Sales-variable cost/sales = 18600000-468000/1860000

=74.84%

Break Even point($)= 936000/74.84% = $1250668

Margin of safety= 1860000-1250668 = $609332

2. As % of sales = $609332/1860000 = 32.76%

3. Present Profit: Sales- Variable cost- Fixed cost= $456000

Current sales price = $1860000/52000units = $35.77/unit

New price= 35.77/unit + 20%= $42.92/unit

New sales units= 52000-20% = 41600 units

New profit shall be computes as follows:

Sales= 41600units * $42.92/unit= 1785472

Variable cost= 468000/52000*41600inits= 374400

Therefore profit= Sales- variable cost- Fixed cost= $1785472-374400-936000 = $475072

Profits gas been increased by $475072-456000/456000 = 4.18%

  

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