Accounting for Business: Sales, Cost of Sales, Expenses, and Financial Ratios

Sales 1100
Cost of sales
Opening inventory 1000
Purchases 650
Closing inventory [90] [660]
GP 440
Expenses
Rent & rates [4-5 + 1] 36
Selling expenses [50 – 4] 36
Advertising 20
Gas and electricity (25+2) 27
Staff salary 100
Audit fee [10 + 1] 11
Depreciation on equipment 20
Depreciation on furniture 8
Bad debt 4
Interest on bank loan 7
Debenture interest [10 + 2] 10
PBT 127
CT [25]
PAT 102
Dividends – interim
-- final [350 x £0.08]
20
28 [48]
Retained profit for the year 54
Retained profit b/f 16
Retained profit c/f 70
Non-current assets Amount
Premises 600
Equipment 80
Fixtures & fittings 32
712
Current assets

Inventory 90
Receivables 87
Prepayments [4 +5] 9
Bank 9
Cash 4
Total assets 911
Share capital
£1 Ordinary shares 350
Reserves 70
Share premium 120
Retained profits 54
Shareholders’ funds 594
Non-current liabilities
11% Long term bank loan 100
11% Debentures 100
Current liabilities
Accruals [ 1 + 2 + 1] 4
Payables 70
CT 25
Proposed dividends 28
Shareholders’ funds & liabilities 911
Question 2
a) Contribution per unit = £ [220 – 120] = £100
BEP [units] = Total fixed costs / Contribution per unit
= £1200000 / £100 = 12,000 units
C/S ratio = £100 / £220*100 = 45.45%
BEP [£] = Total fixed costs / C/S ratio = £1200,000 / 45.45% = £2640264
Budgeted profit = Budgeted contribution – Total fixed costs
= £100 x 25,000 units - £12,00, 000
= £25,00,000 - £220,000 = £1200,000
Margin of safety = 35,000 – 12,000 = 13,000 units

b) Profit required = £1500,000
Contribution required = Fixed costs + profit
= £1200,000 + £1500,000 = £3700,000
Sales volume required to make this profit and contribution
= Contribution required / Contribution per unit
= £3700,000 / £100 per unit = 37,000 units
Sales revenue required to make a profit of £100,000
= Total contribution required / C/S ratio
= £3700,000 / 45.45% = £813920
c)
Revised variable costs per unit = £109
Revised fixed costs = £1224000
Revised selling price per unit = £200
Revised contribution per unit = £ [200 – 108] = £92 per unit
Profit = £92 x 26,000 units - £1224,000
= £1168000
BEP [units] = £1168000 / £92 per unit = 12695 units
Margin of safety = 26,000 units – 12695,000 units = 13,305units
Comments: The revised contribution has increased to £92 per unit; this has
produced a higher profit from the higher sales volume of 2600,000 units. In
addition, the BEP has reduced and there has increased the margin of safety. This
strategy has better results compared to the original budget.
e)
The limitations of the above analysis are:
 All costs can be analysed into variable and fixed costs.
 Selling price per unit, variable cost per unit and the total fixed costs are
assumed to constant within the relevant range [ i.e. the maximum capacity]
 All other factors affecting the production and sales are expected to remain
constant within the maximum capacity e.g. production methods,
advertising and promotion etc
 All production is expected to be sold [or production volume = sales volume]