Help with Unit 6 - please

I've been doing practice simulations for about 4 weeks now, and I'm still struggling :-(

I'm fine with Part 1 - but as soon as I get to Part 2 I lose the plot!

Please can someone explain to me about the following:

calculating break even points?
Margin of Safety?
Target Profits?

Is the formula always the same? Because in Simulation D1939 I have t0 use the PV Ratio (confused) and I'm sure we've never used that before...

Please help if you can, I've got to do the real thing on Tuesday and at this rate I will deffo not pass :-(

Thanks

Comments

  • MargaMarga Experienced Mentor Posts: 981Registered
    Hi there

    The way for me to remember this was by using ALGEBRA

    I am sorry if that is not your cup of tea but actually it helped me a lot

    I named everything and then used formulae

    like for example

    Sales would be S
    Contribution would be C, contribution per unit c
    Fixed costs FC

    etc and then you put together the forumulas


    SALES - VARIABLE COSTS = CONTRIBUTION so S - VC = C


    cant remember all the formulas and i am at work but when i get home i can have a look

    maybe someone else here can help you until then
  • RinskeRinske Font Of All Knowledge Posts: 2,453Registered
    The easiest way for me to explain break even point is fixed cost/ contribution per unit.
    All the break even point calculates is the contribution needed to cover all the fixed costs.
    (This is calculated and used in marginal costing only, as the fixed costs are related to period there, rather than to relate it to the products made)

    The margin of safety is a follow up on this. The margin of safety is basically the difference between the budgeted sales and the sales needed to break even.
    Everything above the break even point is the margin of safety.

    If you want it in units it is budgeted sales volume minus break even sales.
    For the margin you express this in a percentage: (budgeted sales volume minus break even sales) and the result divided by the budgeted sales volume.

    The target profits is the profit the company wants to make in the next period. You calculate it by adding up the target profit and the fixed costs and divide this by the contribution per unit to find out how many units the company has to sell to get to the target profit.

    Does that help?
    Thanks,
    Rinske
  • RinskeRinske Font Of All Knowledge Posts: 2,453Registered
    Oh Marga, I didn't see your reply until I posted mine! :)

    Do you think we should work together more often?
  • MargaMarga Experienced Mentor Posts: 981Registered
    thats alright ...i did ECR back in December and cant remember all the definitions and formula so your post probably helped more than mine!
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