budgets and make appropriate decisions
1.analyse budgets and make appropriate decisions
2.explain the calculation of unit costs and make pricing decisions using relevant
information
3.discuss the main financial statements
4.compare appropriate formats of financial statements for different types of
business
Introduction
The method of contribution for calculating breakeven is often based on the principle of Cost
Volume Analysis also referred to as the contribution margin/ratio. This is the total difference
between the revenue sales and the total variable costs. When it applies to a single unit it’s known
to as the unit contribution margin. The ratio of contribution margin to total sales is known as the
contribution margin ratio. The formula in this principle is calculated or derived from the
principle CVP analysis equation by simply rearranging and replacing some parts of the equation
with contribution margin formulas. (Hermanson, Edwards, & Invacevich, 2011)
Magic by Q Ltd
$
Selling Price 15
Variable production
cost
1.2
variable selling cost 0.4
2 Selling and Cost Price
Fixed Production cost 40,000
Fixed Selling cost 20,000
Full capacity 10,000 units
Current capacity 8000 units
CM (per unit) 13.4
Breakeven units 4477.61194
Breakeven sales in $ 67164.1791
For 1500 units
The unit costs is 44.7761194
Selling price should be more than 44.8 per unit
If a profit margin of 20% is desired then the price
should be 53.73134328
The minimum selling price per unit cost is 44.8
However should the company decide to make
more purchases for instance more than 5000 units
Then the cost per unit would be 13.43284
The higher the order the more favourable the selling
Price.
To conclude, the 1500 units of product Q that has been ordered is below the breakeven units
needed to sustain the business and which equals to the total cost of production. To meet all the
expenses and cost of production Magic Company needs to make sales worth 67165 in order to
pay the fixed expenses of the production processes. To manufacture 1500 units only the
company has to sell each unit for $45 (breakeven) however if the companies decides to order
5000 units the minimum selling price would be $13.5 (Breakeven)
3 Selling and Cost Price
3
References
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011). Accounting Principles: A Business
Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.
