Business Finance: Breakeven Analysis, Costing Systems, and Budgeting Practices

Business Finance

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................2
PART A...........................................................................................................................................3
Computation of contribution per unit..........................................................................................3
Assessment of Breakeven Point in units and sales......................................................................3
Calculating margin of safety as a percentage of budgeted sales.................................................4
Assessing the number of units to be sold for gaining £700,000 profit........................................4
Explaining the importance of Contribution and its significance in business decision making...4
Preparing profitability statement using absorption and marginal costing system.......................5
PART B...........................................................................................................................................7
Demonstrating the importance of standard costing system and variance analysis......................7
Calculating and commenting on each variance...........................................................................8
Preparing the different types of the budgets..............................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
In the dynamic business arena, with the motive to make optimum utilization of resources
organization lays high level of emphasis on employing budgeting practices. By this, finance
manager can ensure effectual resource allocation and thereby fulfill organizational goals. The
present report is based on different case scenario which provides deeper insight about the
concept of breakeven analysis. Further, report will also highlight the extent to which standard
costing and variance analysis method need to be applied within an organization. Along with this,
report will also develop understanding about the concept of absorption and marginal costing.
Report also depicts how budgeting as well as variance analysis technique aid in business decision
making and aid in organizational success.
PART A
Given that:
Particulars Figures
Selling price per
unit (in £) 120
Variable cost per
unit (in £) 50
Fixed cost (in £) 700,000
Budgeted sales
(units) 40,000
Computation of contribution per unit
Particulars Formula
Figures
(in £)
Selling price per unit (SPU) 120
Variable cost per unit (VCPU) 50
Contribution per unit SPU - VCPU 70
Assessment of Breakeven Point in units and sales
Particulars Formula Figures
Contribution per unit (in £) 70

Fixed cost (in £) 700,000
BEP (in units)
Fixed cost / contribution
per unit 10000
Breakeven Sales (in £) Breakeven units * SPU 1200000
Calculating margin of safety as a percentage of budgeted sales
Particulars Formula Figures
BEP (in units)
Fixed cost / contribution per
unit 10000
Budgeted sales 40,000
Margin of Safety
Budgeted sales – Breakeven
sales 30,000
Assessing the number of units to be sold for gaining £700,000 profit
Particulars Formula Figures
Contribution per unit (in £) 70
Fixed cost (in £) 700,000
Desired profit (in £) 700000
Units need to sell for getting desired
profit
(Fixed cost + desired
profit) / CPU 20000
By doing analysis, it has found that Lobelia Ltd is required to sell 10000 units for
attaining the situation of neither profit nor loss. Accordingly, at the sales level of £1200000
business unit would become able to recover amount invested for production purpose. As per the
cited case situation, in order to get profit of £700000, Lobelia Ltd needs to sell 20000 units. By
following all the above aspects company can get desired level of outcome or success.
Explaining the importance of Contribution and its significance in business decision making
With the analysis it is clear that contribution is being defined as the amount of earning
which remains after deducting all the direct cost from the revenue generated. The reason behind
calculating the contribution is to identify the cross profit with the company has earned from the
total revenue after the deduction of the direct expenses levied over the production (Hernández-
Julio and et.al., 2020). The calculation of contribution is very important for the companies as it
assist in evaluating how much the revenue relating to the product is available for covering up the
cost levied with the production. Also the use of contribution is very assistive in decision making
of the business as well. The reason behind this fact is that the contribution provides the gross