Question

Step out the contribution margin and break-even costs for a unique company. Be as realistic as possible and think of reasonable materials costs, unit selling price, variable costs, and fixed costs for the hypothetical business. Describe the company’s projected sales and calculate a margin of safety that is 20%. Finally, calculate how much of the company’s product would need to be sold to make a $10,000 profit in one month.

Answer 1

Ans:

Suppose the company is into making Soap with the following cost structure:-
	Amount in $
Selling Price Per unit	6
Variable Costs per unit
Direct Material	2
Direct Labour	0.5
Direct Expenses	0.5
Total Variable Costs	3
Fixed Costs per month	30000
1. Calculation of Company's Projected sales if Margin of safety is 20%
	Amount in $
Selling Price	6
Less Variable Costs	3
Contribution per Unit	3
Profit Volume Ratio (Contribution/Sales * 100)	50%
Break Even Sales (Fixed Costs/P/V Ratio)=30000/50%	60000
Total Sales= Break Even Sales + Margin of Safety Sales
If Margin Of Safety is 20% it means Break Even Sales are (100-20) 80% of Total Sales
So Total Sales=60000/80%	75000
So total Projected Sales are $ 75000 or 12500 Units per month
2. Sales required to Earn Profit of $10000 per month	(Fixed Costs + Desired Profit) / Contribution per Unit
	(30000 + 10000)/3
Number of Units required to be sold	13333.33333	Or Say 13334 Units per month
Total Sales Required(13333.33 * 6)	$ 80,000
Calculation Check for above
Sales	80000
Contribution(50% of Sales)	40000
Less Fixed Costs / Month	30000
Profit	10000