Marginal Cost Break-Even Analysis

January 2021

Philip Dunn sets the questions on marginal costing break-even analysis.

This test bank issue will be most appropriate to the Accounting Apprenticeship Assistant Accountant Level 3.

Batcraft Limited produces high-quality cricket bats, some of which are used by both Test and county cricketers. It plans to produce and sell 6,000 units per year at a selling price of £250.

The following is an abstract of the cost structure per unit, together with its fixed
overhead. Variable cost per unit £180, semi-variable costs: fixed element £15,000 and £2 per unit variable, fixed overhead £175,000. Also, in addition to the plan the management wants to consider the effect on profit at differing levels of output.

Q1. Calculate the total contribution at a production and sales volume of 6,000 units.

Q2. Calculate the total contribution at a production and sales volume of 4,000 units.

Q3. Calculate the total contribution at a production and sales volume of 8,000 units.

Q4. Calculate the profit from a production and sales volume of 6,000 units.

Q5. Calculate the profit from a production and sales volume of 4,000 units.

Q6. Calculate the profit from a production and sales volume of 8,000 units.

Q7. Calculate the contribution per unit of output.

Q8. Calculate the company’s break-even point in units (to the next whole unit).

Q9. If the management decided that it had a target profit of £252,000 how many units must it produce and sell?

Recently there has been a shortage of highgrade willow, the main direct material used in the product. This has had the effect of increasing the total variable costs per unit to £200 (and includes the variable element in the semi-variable cost).

Q10. Calculate the company’s break-even point in units taking into account the recent cost increase.

Q11. Calculate the company’s break-even point in sales value taking into account the recent cost increase.

Q12. Based on your answer to Q10 and assuming the company achieved a volume of 6,500 units, what is the margin of safety in units?

Q13. Express your answer to Q12 as a % margin of safety (to nearest whole number).

Q14. Orders for the following year indicate that the production and sales volume will be 7,500 units. Given the information in the opening scenario and the change in costs calculate the profit achievable from this level of volume.