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

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