HELP CBT 4 FNPF 2.3 (d)

WAD2001

Hi

Ive totally lost the plot :huh: with this question and am going around in circles could anyone help with a breakdown of how to get 26% for the answer. Thanks x

SandyHood

Try this approach:

Sales needed = Fixed Cost + sales needed x £15
sales needed = contribution per unit

Contribution per unit x Sales needed = Fixed Cost + sales needed x £15

Contribution per unit x Sales needed - sales needed x £15 = Fixed cost

(Contribution per unit - £15) x Sales needed = Fixed cost

Sales needed = Fixed cost
sales needed = Contribution per unit - £15

This will give you the sales needed

Sales needed - Break even sales x 100% = margin of safety %
sales needed = Sales needed

sgafo

:huh::ohmy::glare:

liveprincess

Hi Sandy

I'm stuck on this question myself. In your explanation you say sales needed=fixed cost + sales needed... if this is the figure we are looking for, how do we know what to input there?

SandyHood

LivePrincess My answer to the 26% was effectively algebra - using words rather than letters This answer is from my phone so I don't have access to the question at the moment. But I think I can remind you about key points about contribution. As total contribution can be found as: Total Revenue - Total Variable Cost or Contribution per unit. X Sales Volume or Fixed Costs + Profit Is that a help?

SandyHood

I used this question in class this week and found a useful short cut. Everything is the same for both the original scenario and the new scenario with the exception of the fixed overhead cost.
Fixed overheads in the target costing question (part c) is £270,000
The extra information then tells you that the fixed overheads are £200,000

So think for a minute... if the fixed overheads cost £270,000 the product will generate 30% profit. Absolutely, because you did the sums for (a) (b) and (c) on this basis.
Now, everything else remains the same..........except that the fixed overheads have just dropped by £70,000

And what happens when the fixed cost falls but price, variable cost per unit, and volume remain the same - yes the profit increases (by £70,000)

And what is margin of safety in revenue? The revenue over the revenue needed to achieve the 30% margin.
This means that £70,000 extra profit divided by the £270,000 is the percentage by which revenue can fall to bring the profit that the scenario with the £200,000 fixed costs before it is in line with the £270,000 fixed cost needed to achieve the 30% profit margin.

So: £70,000 = 26%
.....£270,000

An interesting way and not a bit of (obvious) algebra in site!