# Financial performance : question 2.3 d) CBT 4

Registered Posts: 27 Epic contributor 🐘
Please could you help me with question 2.3 d) CBT 4 on the AAT website?

Here is the question:
The price at which the product will be sold is £50
The company expects to sell 30000 units at a price of £50
The variable material cost is £20 per unit
The labour requirement is 20 minutes at a cost of £18 per hour
The required profit margin is 30%

d) The expected demand, variable costs and target profit margin (30%) all remain the same but the total fixed production costs are now expected to be £200000
The margin of safety in order to achieve the target profit margin (30%) is %

I have seen the following topic regarding the question but I really don’t understand:

Thank you

• Registered Posts: 782
You need to work out the break even amounts for both scenarios.

With fixed costs at £270,000 you need to make 11250 sales just to break even (270000/24) - (24 being the contribution of each unit). So you now know that in order to break even (i.e. just cover the costs, not make any kind of profit), you need to sell 11250 units.

With the fixed costs reducing to £200,000, you now only need to sell 8333.33 units (so 8334 - round up not down as 8333 would not cover the costs but 8334 would) (200000/24).

The margin of safety is therefore the difference of these two figures divided by the original break even figure, so 2916/11250 x 100 = 25.92% (26%)
• Registered Posts: 27 Epic contributor 🐘
Thank you so much Nps: you are the best.:001_smile:
• Registered Posts: 1 New contributor 🐸
Thank you too...you've saved me a massive headache! It had me beaten!
• Registered Posts: 81 Epic contributor 🐘
URGENT can someone help me on this question please:

a) Sales Per unit: £40.00
Profit Margin: £18.00
Total Cost: £22.00
Fixed cost per unit: £12.00
Labour cost per unit: £6.00
Maximum material cost per unit: £4.00
Target cost per kg: £20.00

b) The trade price quoted on the supplier's price list is £25 per kg. The purchasing manager has negotiated a discount of 15%. The discount should be rejected because the £25 reduces to £21.25 which is above the target cost.

C) The minimum percentage discount needed to achive the target cost is 20% ( How do you figure this bit out Someone please help me ASAP)
• Registered, Moderator Posts: 2,034 mod
Salih
a) Sales Per unit: £40.00 specified in the question
Profit Margin: £18.00 specified in the question
Total Cost: £22.00 a subtraction to show the total cost needed to achieve the required profit at the specified selling price
Fixed cost per unit: £12.00 identifiable from the question
Labour cost per unit: £6.00 identifiable from the question
Maximum material cost per unit: £4.00 a subtraction to show the total material cost per unit needed to achieve the required profit at the specified selling price and all the other costs
Target cost per kg: £20.00 a divide sum to show the total material cost per kg after recognising £4 per 200 grammes x 5 (5 lots of 200 g in 1 kg)

b) The trade price quoted on the supplier's price list is £25 per kg. The purchasing manager has negotiated a discount of 15%. The discount should be rejected because the £25 reduces to £21.25 which is above the target cost.

C) The minimum percentage discount needed to achive the target cost is 20% ( How do you figure this bit out Someone please help me ASAP)
To get from the quote of £25 to the target cost of £20 per kg the price must fall by £5/kg. £5/£25 is 20%
Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered Posts: 214 Beyond epic contributor 🧙‍♂️
Hi Nps

I am stuck on this question as well. I got to the point of 2916 units but I was dividing it by 30000 units (original budgeted sales figure) but this was giving me the wrong answer.
The formula for % Margin of safety is
MOS (units)/budgeted sales (units).
I kind of understand where the 11250 came from but can't figure out why do we divide by this figure instead of 30000?
• Registered Posts: 214 Beyond epic contributor 🧙‍♂️
Also I thought we need to include the required profit of 450,000. So I got 200,000 + 450,000/24 = 27084. And then 30,000-27084=2916 That's how I got to this point and then wrong on the final bit.