Page 75 - PM Integrated Workbook 2018-19

Cost Volume Profit Analysis

(ii) the margin of safety for next month

Margin of safety = Budgeted level of sales – breakeven level of sales

Margin of safety = 2,200 units – 500 units

Margin of safety = 1,700 units

Or

Budgeted sales – breakeven sales
Margin of safety expressed as a % = × 100
Budgeted sales

Margin of safety expressed as a % = Budgeted sales 2,200 units – breakeven sales 500 units × 100
Budgeted sales 2,200 units
Margin of safety expressed as a % = 77.27%

(iii) the budgeted profit for next month

Once breakeven point has been reached, all of the contribution goes
towards profits because all of the fixed costs have been covered.

Budgeted profit = 1,700 units (margin of safety) × $48

Budgeted profit = $81,600

(iv) the sales required to achieve a profit of $96,000 in a month.

To achieve the desired level of profit, sufficient units must be sold to earn
a contribution that covers the fixed costs and leaves the desired profit for
the month.

Sales revenue required to earn target profit = Required profit $96,000 + Fixed costs $24,000
CS ratio ($48/$120)

Sales revenue required to earn target profit = $300,000

With a unit selling price of $120, this represents 2,500 units.

Illustrations and further practice

Now try TYU 1 ‘Breakeven Analysis’.

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