One of the products that Jackson Ltd manufactures is known as Product (B). Unit cost and revenue data for the product is provided below. 

                                 £

Selling price         30.00

Variable costs      12.00

Contribution         18.00

Fixed costs are £66,000 per month.

Last month the business produced and sold 6,400 units. This activity level represents 80% of current production capacity.

Calculate the:

1.  The contribution / sales ratio (C/S %)
2. The product break-even point (in units and £s sales)
3.   The level of sales (in units and £s) required to produced profits of £42,000
4.   The current production capacity (in units)
5.   The margin of safety (in units and £s)
6.   The total business profits if all spare capacity were to be sold for £20.00 per unit

 

1.Contribution/sales ratio(C/S %)=60%

2.Breakeven units= 3,667 units

Breakeven in £ of sales=£110,000

3.Sales in units to make the £42,000 profits=6,000 units

Sales in £s to make the profits=£180,000

4.Current production capacity is 8,000 units

5.Margin of safety units= 4,333 units

Margin of safety in £s=£ 129,990

6.Total business profit on spare capacity (sold at £20 a unit ) =£34,664

Step-by-step explanation

1.Contribution/sales ratio(C/S %)=contribution margin per unit/selling price

=18/30

=0.6*100

=60%

2.Breakeven units=Fixed costs/contribution margin

=66,000/18

=3,667 units

Breakeven in £ of sales=Fixed costs/Contribution margin ratio

=66,000/60%

=£110,000

3.Sales in units to make the profits=(Fixed costs+profits)/contribution margin

=(66,000+42,000 )/18

=6,000 units

Sales in £s to make the profits=6000*30

=£180,000

4.Production capacity last month 6,400 units

Capacity % for current production 80%

current production capacity=6400/80%

=8,000 units

5.Margin of safety units=actual production capacity-breakeven production units

=8,000-3,667

=4,333 units

Margin of safety in £s=4,333*30

=£ 129,990

6.Spare capacity is the margin of safety 4,333 units

Fixed costs already covered before the breakeven level was reached.

Profits from sale of spare capacity=units (selling price-variable costs)

=4,333*(20-12)

=£34,664