Question

18,600 40 $ 93.00 35.70 Number of batches sold Pints produced with each batch Selling price per batch Variable materials per batch Variable labor per batch Variable Overhead per Batch Variable selling expenses per batch Variable administrative expenses per batch Total fixed selling expenses Executive Salaries Office Staff Salary Office Occupancy Fixed Factory Overhead 27.75 10.75 3.00 $ 2.50 $ 40,000 110,000 40,000 10,000 $ 30,000 Calculate the contribution margin ratio for LPIC. What does it tell you, and why is that information important? Calculate break-even in dollars and sales for LPIC. Why should management know what their break-even point is? Dollars Batches At the current sales volume, what is the margin of safety in batches and dollars? What is the significance of this? Dollars Batches

Answer 1

Contribution Margin is the excess of unit sale price over unit variable cost.

Computation of contribution margin ratio for LPIC-

Contribution margin ratio = (Selling price per batch - variable cost per batch)/selling price per batch*100

variable cost per batch = variable material cost + variable labor cost + variable overhead + variable selling expense + variable administrative expense

= 35.70+27.75+10.75+3+2.5

= 79.7

so contribution margin ratio = (93 -79.7)/93

= 13.3/93

= 14.30%

It tells us the excess of batch sale price over batch variable cost. it is important because it tells us that how much cost per unit/batch available to cover fixed expenses after covering variable cost.

Break-even point is the sales volume at which revenue equals cost (i.e no profit no loss).

Calculation of Break-even Point

BEP (in $ sales) = Total fixed cost/Contrbution margin ratio

Total fixed cost =fixed selling expense + executive salary + office staff salary + office occupancy + fixed factory overhead

= 40000 +110000 + 40000 + 10000 + 30000

= 230000

BEP = 230000/14.30%

= 1608270

Sale of LPIC = No. of batches sold * selling price per batch

= 18600*93

= 1729800

It is important to know for management because it helps them to make various decision for eg. investment decision, decision on fixing the selling price. management should know about about the BEP because it provide the information of number of units which must be sold to recover the fixed cost & variable cost of company. if revenue >= variable cost + fixed cost, accepted otherwise rejected.

Margin of safety is the excess of actual sales revenue over the break-even sales revenue.

Margin of safety(in $) = Actual sales - BEP sales

= 1729800 - 1608270

= $ 121530

margin of safety(MOS) (in units) = Actual sales in batches - BEP in batches

Actual sales in batches = 18600

BEP (in batch) = Toatl fixed cost/(Selling price per batch - variable cost per batch)

= 230000/(93-79.7)

= 230000/13.3

= 17293.23 or 17294 batch

Margin of safety = 18600 - 17294

= 1306 Units

It is important that there should be a reasonable margin of safety, lest a desuced level of activity should prove disastrous. The higher the margin the MOS, the better it is from the point of view of the company as it indicates that a "sizeable" sales volume can fall before the BEP is reached. This measures acquires special significance in depression/recession.

Please check with your answer and let me know.