Question

Greive is a sole trader business which only manufactures and sells a set of garden equipment which comprises a spade, a hose pipe and a trowel.

Given below are the sales revenue and profit for 2017.

Year	Sales	Profit
2017	£873,620	£165,820

In 2017 the business manufactured and sold 22,000 sets of garden equipment and had fixed costs of £124,000. All other costs were variable.

Required:

a.Calculate the average selling price, variable cost and contribution for a set of garden equipment for 2017.

b.Calculate the average sales revenue level, both in numbers of sets of garden equipment and in money terms, at which the business broke even in 2017. (Your calculation should be rounded up to the nearest whole number.)

c.Why does it make more sense for a break-even calculation to round up to the nearest whole number and not just to the nearest number?

d.Calculate the number of sets of garden equipment needed to be sold to earn a profit of £200,000.

e.Calculate the margin of safety for Greive for 2017.

Answer 1

a) average selling price = 873620/22000= $ 39.71 per set

Variable cost = sales- Fixed cost- profit

             = 873620- 124000-165820

             = 583800

variable cost per unit = 583800/22000 = $ 26.54 per unit

contribution per unit =selling price -variable cost

                   = 39.71 -26.54

                   = $ 13.17 per set

b)contribution margin ratio =contribution /price

             = 13.17 /39.71

                = .33165 or 33.165%

BEP(sets) =Fixed cost /contribution per set

          = 124000/13.17

             = 9415 sets

BEP($) =Fixed cost /CM ratio

       = 124000/.33165

         = $ 373888

c)Rounding off to nearest whole number provides more accurate results since the value after decimal place if greater than 5 ,it is rounded to next whole digit and if less than 5 ,it is remained at digit.

d)Number of garden sets to earn target profit =[Fixed cost+ target profit ]/contribution per set

              =[124000+200000]/13.17

             = 324000/13.17

              = 24601 sets

e)Margin of safety = actual salses -BEP sales

                      = 22000-9415

                        = 12585 sets

MOS(%) = 12585/22000

          = 57.20%