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Chapter 3

Example 1

Murray Ltd produces and sells two types of sports equipment items for
children, balls (in batches) and miniature racquets.

A batch of balls sells for $8 and has a variable cost of $5. Racquets sell for
$4 per unit and have a unit variable cost of $2.60.

For every 2 batches of balls sold, one racquet is sold. Murray budgeted fixed
costs are $407,000 per period. Budgeted sales revenue for next period is
$1,250,000 in the standard mix.

To calculate the margin of safety, the following steps must be followed:

Step 1 – Calculate contribution per unit:

Balls Racquets
$ per batch $ per unit

Selling price $8 $4
Variable cost $5 $2.60

–––– –––––
Contribution $3 $1.40

Step 2 – Calculate contribution per mix:

($3 × 2 batches) + ($1.40 × 1 racquet) = $7.40

Step 3 – Calculate the breakeven point in terms of the number of mixes:

Breakeven point = Fixed costs/Contribution per mix

Breakeven point = $407,000/$7.40 = 55,000 mixes

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