ECR Exam Section 2

Paula1987

Hello,

I have to re sit my ECR Exam on monday...... I am still gettting really confused on section 2.
How do you work out break-even sales and margin of safety in units and as a percentage?
Also getting confused at the end of section 2 with working out how to make more profit using machine hours!

Can anyone help please??

Paula :001_unsure:

visha

To work out Break-even in sales value you will need to understand PV ratio or CS ratio. They are both same but called different ratio.

Then take FC and divide it by CS ratio to get BEP in sales Value (£)

CS ratio = CONTRIBUTION DIVIDE BY SALES times 100

therefore if Fixed Costs = £75,000
and Sales = £500,000
and Variable Cost (Cost of sales) = £200,000

to work out contribution = (500,000 - 200,000)= 300,000

therefore CS ratio= contribution divide by sales = 300,000 divide by 500,000 times 100 equals 60%

BEP in sales = 75,000 divide by 60% = £125,000


Your MARGIN OF SAFETY is the difference between your current activity ( current sales) and BEP in sales (or units)

This can be worked either by sales values or production units. the principle is the same.

therefore MARGIN OF SAFETY = £500,000 LESS £125,000 = £ 375,000. You can afford the sales to drop by £375,000 before you start to make a loss.

MARGIN OF SAFETY IN % = £375,000 divide by £500,000 times 100 = 75%
You can afford the sales to drop by 75% before you start to make a loss.