AAT Level 3 MMAC Margin of Safety Calculations

GJM

Hi

I have my Management Accounting: Costing exam on Tuesday and am hoping someone can help me out with margin of safety calculations.

I have shown my workings below and then written what the answers are meant to be. If someone is able to explain to me where I am going wrong it would be greatly appreciated.

The part where I have clearly gone wrong is part c, however, I have left a, b and d below in in case I am misusing values in part c.

Thank you in advance
Grace


The question - Kaplan MMAC textbook mock assessment Task 7 on page 394

Product ZYQ has a selling price of £52 per unit with a total variable cost of £38 per unit.
Icon Ltd estimates that the fixed costs per quarter associated with this product are £84,000.

a) Calculate the budgeted breakeven, in units, for product ZYQ

b) Calculate the budgeted breakeven, in £s, for product ZYQ

c) Calculate the budgeted margin of safety in units and the margin of safety percentage if Icon Ltd sells 8,000 units and 9,000 units of product ZYQ

d) If Icon Ltd wishes to make a profit of £21,000, how many units of ZYQ must it sell?

My answers

a) Budgeted breakeven = fixed costs / (selling price - variable cost) = £84,000 / (£52-£38) = 6,000 units

b) Budgeted breakeven = total fixed costs / P/V ratio

P/V ratio = contribution / revenue

contribution = selling price - variable costs = £ (52-38) = £14

So P/V ratio = 14/52 (I prefer fractions to multiple decimal places so to have left this as a fraction)

Then budgeted breakeven = £84,000 / (14/52) = £312,000


c) Margin of safety in units = budgeted sales - breakeven point

budgeted sales units = contribution x number of units = £14 x 8,000 = £112,000

So margin of safety in units for 8,000 units = £ (112,000 - 84,000*) = 28,000 units
*I have used fixed costs as the breakeven as this is the cost which must be covered, perhaps that is where I am incorrect?

Margin of safety in units for 9,000 units = (9,000 x £14) - £84,000 = 42,000 units

Margin of safety in % = [ (budgeted sales units - breakeven sales units) / budgeted sales units ] x100

Putting in the values above, for 8,000 units I get: 350 and for 9,000 units I get 467.

So I am clearly going really wrong somewhere with part c because even without looking at the answers, these do not look right!


d) Number of units to sell to reach target profit = ( breakeven value + target profit) / contribution

So, number of units to sell to reach target profit = (£84,000 + 21,000) / 14 = 7500 units


Answers provided in the textbook without workings

a) 6,000 units

b) £312,000

c) For 8,000 units: Margin of safety in units = 2,000 and margin of safety percentage = 25%
For 9,000 units: Margin of safety in units = 3,000 and margin of safety percentage = 33%

d) 7,500 units

PeterC

I think you've been over-thinking this

You correctly say: Margin of safety in units = budgeted sales - breakeven point

But then why go: budgeted sales units = contribution x number of units = £14 x 8,000 = £112,000
because they have told you the sales units will be 8,000 or 9,000

So
budgeted sales - breakeven point
is 8,000 - 6,000
or 9,000 - 6,000


Incidentally, a quicker answer to (b) is:
Breakeven in £ = Breakeven in units x selling price = 6,000 x £52 = £312,000

GJM

Hello again, Peter

Thank you, again!! I knew it had to be something simple

I have 3 of the exams across Monday and Tuesday next week and think I am starting to lose my marbles!

PeterC

Good luck with the exams!

PeterC

When you are revising breakeven/margin of safety, you might find this short video helpful:
https://youtube.com/watch?v=4qL8faD5UOI&t=57s

GJM

Thank you, Peter, I will take a look!