Calculate the break-even point and margin of safety » Full Grade
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Question – Sams Ltd is specialized in producing and selling washing machines. In 2018, the manufacturing cost per unit included:
£ Direct material 125
Direct labor (20 minutes per unit) 45/hour Variable manufacturing overhead 20 Variable selling expenses 15 Variable administrative expenses 10
Fixed costs for the year ended 31 December 2018 were: £000
Fixed manufacturing 1,100 Fixed selling and distribution 1,450 Fixed administrative 675
The company produced and sold 220,000 units at £225 per unit.
In 2019, management has decided to increase the selling price by 25% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2019. The company has produced and sold the same quantity in 2019 as last year.
Required – Calculate the break-even point and margin of safety in both units and revenue for the two years, 2018 and 2019, and briefly comment upon the results.
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