# Dont understand this Financial Performance Question

Registered Posts: 452
I understand part A.

Part B i can see where £9 comes from but it makes no sense to me. Surely the fixed cost per unit is £26?

£20 variable material
£6 labour 18 X (20/60)
£26 - Total

C if i can understand B this will make sense

D - not a scooby

Any help appreciated as always :thumbup1:

• Registered Posts: 23 Regular contributor ⭐
Hi Topcat,

This was a good one for me to work as I am also getting ready for the FP exam. I studied Margin of safety last week-end, and as usual, I looked at your question and drew a blank...

But I now think this is what is needed.

To get a margin of safety you gave to get the Breakeven point first.

BEP is fixed overhead costs over contribution per unit, so you have to calculate the contribution per unit first.

Revenues are 30,000 units x 50 = 1,500,000
Material is £20 x 30,000 = 600,000
Labour is £6.00 X 30,000 = 180,000

You subtract the variable costs of Material and Labour and get £720,000

Divide £720,000 by 30,000 units and you get £24.00 contribution per unit.

You can also just subtract £20 material and £6.00 labour from £50 sales price and get £24.00. (This is my weakness in always over complicating something that can be done more simply)

With the contribution of £24.00 you can calculate BEP which is fixed overhead over contribution per unit.

Fixed overhead is now £200,000, divided by £24.00 is 8334 units to break even.

Margin if safety is budgeted sales units minus breakeven sales units, all divided by budgeted sales units.

So 30,000 units minus 8334 BEP units is 21,666 units, then divide by 30,000 and multiply by 100 = 72 %

Hope I'm right!
• Registered Posts: 452
Hi mhep,

Thank you for taking the time to write all that out with the great explanation.

I thought you was right until i check the answer but it is 26%....

any other ideas :001_smile:

This exam is really hard as i am preparing to, tried first 2013 practice assessment this afternoon and failed
• Registered Posts: 23 Regular contributor ⭐
I have to admit, this exam just stumps me. Every time I think that I understand....I don't, Sorry about that. :-( Maybe someone will jump in and explain.
• Registered Posts: 452
mhep wrote: »
I have to admit, this exam just stumps me. Every time I think that I understand....I don't, Sorry about that. :-( Maybe someone will jump in and explain.

don't worry about it i am in the same boat, it was a good shot!

i have spent days and days revising all day and still getting it wrong , we will get there
• Registered Posts: 782
• Registered Posts: 23 Regular contributor ⭐
Ahhh...thank you Nps. Get the BEP for each fixed cost scenario (£270000 and £200000), take the difference in units and divide by original BEP units x 100 = 25.92%
• Registered Posts: 452
thank you

Why do you do the difference between the two breakeven figures though?

I can see where the answer has come from but been racking my brains for 20 minutes on why you do the difference between the units and divide by breakeven? When the margin of safety formula is

Budgeted sales - breakeven sales
X 100

budgeted sales

Thank you again