Business Finance: Calculation of Break-Even Point, Margins, and Profit

This report explains the calculation of contribution per unit, break-even point in units and monetary terms, margin of safety in percentage, and number of units to be sold for gaining desired profit. It also covers the significance of standard costing system and variance analysis. Additionally, it provides budgeting tips for direct material, direct labour, variable overhead, and fixed overhead expenditure.

Business Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Calculation of contribution per unit, break-even point in units and monetary terms, margin of
safety in percentage......................................................................................................................3
Calculating number of units to be sold for gaining desired profit...............................................4
Preparing memo for the Financial Manager................................................................................4
Using Marginal and absorption costing for profit calculation.....................................................5
PART B............................................................................................................................................6
Demonstrating the understanding of standard costing system and variance analysis.................6
Calculating variances...................................................................................................................7
Preparing budget for 10000 units.................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1

INTRODUCTION
Business Finance refers to the process by which companies raise and manages the funds
for the business enterprise operations. The report will calculate the contribution per unit for
Lobelia Ltd. Break even point both in units and sales will be calculated in the report for the firm.
Further the report will calculate the margin of safety in percentage to budgeted sales of the
enterprise. The firm desires to earn a profit of £700,000, the will do the required calculation to
find out the number of units the firm need to sale for attaining desired profit. In addition, the
report will prepare a memo for the financial manager of Lobelia Ltd. The report will highlight
the profit calculation based on marginal and absorption costing methodologies. Through the
report significance of standard costing system and variance analysis will be outlined.
PART A
Calculation of contribution per unit, break-even point in units and monetary terms, margin of
safety in percentage
Break-Even analysis
Particulars Formula Figures
Selling price per unit 120
Variable cost per unit 50
Contribution per unit
Selling price per unit - variable
cost per unit 70
Fixed cost 700000
BEP (in units) Fixed cost / contribution per unit 10000
BEP (in value or monetary terms)
BEP (in units) * selling price per
unit 1200000
Margin of safety Budgeted sales – break even sales 3600000
Budgeted Sales 4800000
Margin of safety as percentage of budgeted (Marking of Safety/Budgeted 75

sales Sales)*100
Breakeven Analysis is used for calculating the number of unit a firm must sell in order to
recover all the costs it has incurred on production process. It is a situation of no profit and no
loss. After attaining the breakeven point the firm starts earning profits. Breakeven point can be
calculated in number of units and in monetary terms. Monetary terms gives the amount for sales.
From the above calculation it is interpreted that Lobelia Ltd's breakeven point in units is 10000.
It means that the firm has to sell 10000 units for reaching the position of no profit and no profit
loss (Haloho, 2021). The firm on selling 10000 units will earn £1200000 as its sales revenue.
After selling the breakeven units the firm will start earning the profits as all its fixed and variable
costs will be covered. Margin of safety is calculated by subtracting the break even sales from the
budgeted sales. The margin of safety for Lobelia ltd is 3600000. The margin of safety as the
percentage of budgeted sales is 75%. Margin of safety in percentage is calculated by dividing the
margin of safety value with budget sales of Lobelia Ltd. multiplied by 100.
Calculating number of units to be sold for gaining desired profit
Units need to sell for attaining desired profit margin
Particulars Formula Figures
Fixed cost or expenses 700000
Desired profit 700000
Contribution per unit 70
Number of units required to sell
Fixed cost + desired profit margin
/ contribution per unit 20000
The number of units that Lobelia Ltd must sell in order to earn the desired profit of the
company are 20000. Selling 20000 units will help Lobelia Ltd to make the profits of £700000 at
the fixed costs of the firm being £700000.
Preparing memo for the Financial Manager
It is reported to the Financial Manager of Lobelia Ltd. that the contribution is important
to be calculated for the organization to reach at the minimum price at which the product must be
sold in order to cover the fixed and variable cost incurred in the production on the product. In the
situation where the excessive inventory requires to be sold by the company at lower price for the

stock clearance managers can use contribution to decide a price at which the units can be sold for
clearance (Gurley-Calvez and Williams, 2020). Contribution analysis chart enables the manager
who are not from technical background also to understand the concept easily. Profit volume chart
is used for explaining the relationship that exist between the volume and profit. Further it is
reported to the manager that calculation of break even requires the need for the value of
calculation per unit. Looses assessment is made easier by calculation of contribution.
Using Marginal and absorption costing for profit calculation
Calculation for cost per unit
Details Amount (in £) Amount (in £)
Selling price per unit 22 22
Direct Material per unit £ 7 7
Direct labour per unit £ 9 9
Variable overhead per unit £ 3 3
Fixed overhead incurred 2
Unit cost 21 19
Cost of goods sold
Details Units
Absorption
costing (in £)
Marginal
costing (in £)
Opening stock 0 0 0
Add: Purchases 4800
4800 × 21
= 100800
4800 × 19
= 91200
Less: closing
stock 400
400 × 21
= 8400
400 × 19 =
7600
COGS 92400 83600
Income statement using absorption costing technique
Details Amount
(in £)
Sales (4400 × 22) 96800
Less: Cost of goods sold (92400)
ADD: over absorption of fixed cost 600
Net profit 5000
Income statement using marginal costing technique
Details Amount (in £)

Sales revenue 96800
Less: cost of goods sold (83600)
Contribution 13200
Less: Fixed cost (9000)
Net profit 4200
Statement of Reconciliation
Details Figures (in £)
Net profit as per absorption costing 5000
Less: Fixed overhead in closing stock (800)
Add: Fixed overhead in opening stock --
Profit as per marginal costing 4200
The unit cost as per the marginal costing is 19 and absorption costing is 21. COGS under
absorption technique is 92400 and marginal technique is 83600 (Maheshwari, Maheshwari and
Maheshwari, 2021). Net margin is 5000 and 4200 according to absorption and marginal costing
respectively. The statement of reconciliation reconciles the different in NP amount.
PART B
Demonstrating the understanding of standard costing system and variance analysis
Importance of standard costing system Increase in Efficiency: The system is used by the manufacturing firms having high
variable direct costs (Drury, 2018). The determination of rates that are standard
management can predict the future costs by comparing the actual costs with the standard
costs at the end of the project or period. Important for budget making: Standard costing system is important while the budgets
are prepared. Budgets are prepared based on the prediction regarding the future events.
For making the forecast actual figures are compared with the standard figures and
deviations are used to find out the trends and make further prediction. Improved Cost Control: Through effective standard costing system the direct costs can
be controlled.

 Facilitates decision-making by providing information: Standard costing provides useful
information on the basis of which decisions are taken by the management for improving
costs.
Importance of variance analysis Planning: Variance analysis helps manager in formulation of smarter and accurate
budget. Control:Provides assistance in controlling departmental management and budget making
processes (Hansen, Mowen and Heitger, 2021). Responsibility: Helps in propagating trust within the organization. Monitoring:Success and failure can be monitored through variance analysis.
 Sets Expectations: Variance analysis promotes future predictions, helping in setting up of
benchmark.
Calculating variances
Details Formula Standar
d
Sta
nda
rd
Actual
quantity
per unit
Actual £
per
kg/hour
Favour
able/
Advers
e
Quantity
Per Unit
£
per
kg/
hou
r
Direct material (kg) 4 4 5 6
Direct wages / labour
(hours)
3 9 3 10
Variable overheads (kg) 2 3 3 4
Material Price variance (Actual Quantity
Purchased * Actual Unit
(5 * 6) –
(5 * 4)
10 (F)

Cost) - (Actual Quantity
Purchased * Standard
Unit Cost)
Material Usage variance (Standard quantity of
material – Actual
quantity used) × SPU of
material
(4 – 5) *
4
-4 (A)
Labour Rate variance (Actual rate - Standard
rate) x Actual hours
worked
(10 – 9) *
3
3 (F)
Labour Efficiency
variance
(Actual hours - Standard
hours) x Standard rate
(3 * 3) *
9
0
Fixed Overhead
Expenditure variance
Actual fixed overhead -
Budgeted fixed overhead
15000 –
20000
-5000
(F)
The difference between the costs that were planned during the preparation of budget in
the initial of the year and the actual costs that were incurred during the year or period is referred
to as variance. Variance Analysis assists the company in understanding the expenses incurred
and planning for the future estimates. The material price variance is calculated by subtracting the
actual quantity that was purchase into standard cost per unit from the multiplication of the actual
quantity that was purchased and actual cost per unit. The material price various on calculation

comes as 10. It means that the variance is favourable for the company. Material usage variance is
calculated by the formula Standard quantity of material less Actual quantity used multiplied by
standard price per unit of material (Choi and et.al., 2019). The calculated value for the material
usage variance is negative four. It means that the variance is adverse for the company and
resulted in excess expense incurred by the firm.
Labour Rate variance means the difference in rate at which the company expected to get
the labour vs the actual rate at which the labour worked for the company. The labour work
variance is calculated by first subtracting the standard rate from the actual rate of labour and then
multiplying the difference amount with the actual hours worked. Labour rate variance is
calculated as positive 3 which means the variance is favourable with regard to the company. The
calculated labour efficiency variance is zero. It means there is no difference in the budgeted and
actual labour efficiency. Hence, the variance is neither favourable nor adverse for the company.
Fixed overhead expenditure variance is given by the difference between the actual fixed
overhead and budgeted fixed overhead. The difference for the company is minus 5000. Fixed
overhead expenditure variance is favourable for the company.
Preparing budget for 10000 units
Budget for Direct Material
Details Amount
Production target (units) 10000
Direct material per unit required (in
kg)
4
Total direct material needed (in kg) 40000
Cost per kg 4
Total raw material budget 160000
The direct material budget is prepared on the basis of the target that the firm sets for the
units it will produce. The firm targets to produce 10000 units. For the production of 10000 units
the direct material needed is calculated by multiplying the direct material requirement per unit
into the targeted units (Railis, 2022). Cost of purchasing direct material is £4 per kg. The
targeted units material requirement in kg multiplied by cost of direct material per kg is £160000.
Hence, the budget for direct material is £160000.
Budget for Direct Labour

Series Number Details Amount
A Planned Production (in Units) 10000
B Direct Labour Hours per Unit
(A × B)
3
C Direct Labour Hours
(Budgeted)
30000
D Cost per Direct Labour Hour 9
E Budgeted Direct Labour Cost
(C × D)
270000
The budgeted direct labour hours is 30000 and cost of direct labour per hour is £9. So, the
budgeted cost of direct labour is £270000.
Budget for Variable Overhead
Series Number Details Amount
A Planned Production (in Units) 10000
B Standard variable overhead 3
C Budgeted value for Direct
variable overhead
30000
D Cost per variable overhead 4
E Direct Labour Cost As per the
budget
(C × D)
120000
The budget of company for variable overhead is £120000. The standard cost for variable
overhead per unit is £3 and the planned or targeted production units is 10000. This give budgeted
value for direct variable overhead as 30000 (Sloman, 2022). Cost per variable over head is £4.
So the direct labour cost that is budgeted is £120000 (30000 × 4).
Budget for Fixed Overhead expenditure
Series Number Details Amount
A Cost as per budget 20000
B Actual cost incurred 15000
C Fixed Overhead expenditure 5000

Fixed overhead expenditure is the cost according to the budget less actual cost incurred.
The cost as per the budget is 20000 and the actual cost if 15000 and the fixed overhead
expenditure being the difference amount is £5000.
CONCLUSION
On the basis of the report the meaning of business finance have been made clear. The
report has calculated the contribution per unit, break even sales and margin of safety for Lobelia
Ltd. Further the report has calculated the number of units that the firm is required to sale for
attaining its desired profit. Memo has been prepared for the financial manager. For Lobelia Ltd.
Profit has been calculated on the basis of marginal and absorption costing and difference in the
profits has been reconciled. Apparel Plc's material price, material usage, labour rate, labour
efficiency and fixed overhead expenditure has been calculated.
REFERENCES
Books and Journals
Haloho, R. D., 2021. Break-even Point Analysis of Cattle Farming Businesses in Semarang
Regency. Agrimor. 6(2). pp.76-81.
Gurley-Calvez, T. and Williams, J. A., 2020. Where Is the Break-even Point for Community
Health Workers? Using National Data and Local Programmatic Costs to Find the Break-
even Point for a Metropolitan Community Health Worker Program. Medical care. 58(4).
pp.314-319.
Maheshwari, S. N., Maheshwari, S. K. and Maheshwari, M. S. K., 2021. Principles of
Management Accounting. Sultan Chand & Sons.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
Hansen, D. R., Mowen, M. M. and Heitger, D. L., 2021. Cost management. Cengage Learning.
Choi, T. M. and et.al., 2019. The mean-variance approach for global supply chain risk analysis
with air logistics in the blockchain technology era. Transportation Research Part E:
Logistics and Transportation Review. 127. pp.178-191.
Railis, H., 2022. BUDGET ANALYSIS AS ONE OF THE PLANNING TOOLS AND
PRODUCTION CONTROL. International Journal of Multidisciplinary Research and
Literature. 1(2). pp.138-149.
Sloman, P., 2022. ‘Better off with Labour’? Fiscal policy, electoral strategy and the road to John
Smith’s shadow budget, 1979–92. Historical Research. 95(267). pp.132-150.