Question

A business supplies the following figures about its activities.

Fixed                                        $300,000
Variable Cost                         $ 20 per unit
Forecast output (sales)      20,000 Units
Selling Price                           $ 50 per unit

Required
Illustrate by means of breakeven chart

I. The breakeven point
ii. The profit at full capacity
iii. The margin of safety

Answer 1

Data table to be made as under:

No. of units	Fixed cost	Total Variable cost	Total cost (Fixed + Variable)	Total Revenue
-	$        300,000	$                   -	$        300,000	$                       -
5,000	$        300,000	$        100,000	$        400,000	$            250,000
10,000	$        300,000	$        200,000	$        500,000	$            500,000
15,000	$        300,000	$        300,000	$        600,000	$            750,000
20,000	$        300,000	$        400,000	$        700,000	$        1,000,000
25,000	$        300,000	$        500,000	$        800,000	$        1,250,000
30,000	$        300,000	$        600,000	$        900,000	$        1,500,000

Breakeven chart is pasted below:

$1,600,000 $1,400,000 $1,200,000 $1,000,000 S800,000 S600,000 $400,000 $200,000 S- 10,000 30,000 5,000 15,000 20,000 25,000 No. of units sold Fixed cost Total Variable cost Total Revenue Total cost (Fixed + Variable)

i) The breakeven point

breakeven point in units = Fixed cost / Contribution margin per unit

breakeven point in sales = Fixed cost / Contribution margin ratio

Contribution margin per unit = Sales price per unit - Variable cost per unit

=$ 50 - 20 = $ 30

Contribution margin ratio = Contribution margin per unit / Sales price per unit * 100

= 30 / 50 * 100 = 60%

breakeven point in units = $ 300,000 / 30 = 10,000 units

breakeven point in sales = $ 300,000 / 60% = $ 500,000

ii) The profit at full capacity is $ 300,000

Calculations to be made as under:

	Per unit	For 20,000 units
Sales	50	1,000,000
Variable cost	20	400,000
Contribution margin	30	600,000
Fixed cost		300,000
Profit		300,000

iii) The margin of safety

Margin of safety = (Current sales level - Breakeven sales) / Current sales level * 100

= ($ 1,000,000 - 500,000) / 1,000,000 * 100

= 50%

Margin of safety = 50%