Business Finance Case Study 1: Contribution, Break Even, Margin of Safety, Profit, Costing Methods, Variance Analysis, Budgeting

Business Finance CASE
STUDY 1

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Calculating the contribution per unit...........................................................................................3
Calculating Break Even Point in units and sales volume............................................................3
Calculating Margin of Safety.......................................................................................................4
Calculation of the number of units to be sold for reaching desired profit of £700,000..............4
Memo for the Financial Manager................................................................................................4
Marginal and absorption costing methods of profit determination..............................................5
PART B............................................................................................................................................7
Importance of standard costing system and variance analysis.....................................................7
Calculating variances...................................................................................................................8
Preparation of budgets for the target of 10000 units...................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................11

INTRODUCTION
Business finance is that term of business world which is concerned with raising or
acquiring the required funds for the short and long term objective fulfillment of an organization.
The report, for Lobelia Ltd., will calculate contribution per unit along with break even units and
sales. The margin of safety and units requirement for production in order to earn desired profits
by Lobelia Ltd. will be highlighted. Further the will draft a memo to financial manager.
Calculation of profits as per marginal and absorption costing with the reconciliation of difference
in profits will be done. In addition differed variances will be find out and varied budgets will be
prepared for Apparel Plc.
PART A
Calculating the contribution per unit
Details Formula Calculation Result
Selling price per unit 120
Variable cost per unit 50
Contribution per unit
Selling price per unit -
variable cost per unit 120 - 70 70
Contribution is the savings made by the firm. For calculating the amount of contribution
per unit the selling price of firm’s product per unit is taken and the amount of total of all the
expenses incurred in production of the product, that are variable is deducted, the amount at the
firm is left with is the firm’s contribution per unit (Maheshwari, Maheshwari and Maheshwari,
2021). As per the above shown calculation the contribution per unit earned by Lobelia Ltd. is 70
pounds.
Calculating Break Even Point in units and sales volume
Details Formula Calculation Result
Fixed cost 700000
Contribution per unit 70
Break Even Point (in units)
Fixed cost / contribution per
unit 700000 / 70 10000
Break Even Point (Sales) Break Even Point (in units) * 10000 * 120 1200000

selling price per unit
Break Even point for a firm can be calculated in the number of units or sales revenue.
Lobelia Ltd’s break even units are 10000 units and break even sales is 1200000 pounds. It means
that for reaching the situation of no profit and no loss the firm must sell 10000 units earning a
sales revenue of 1200000 pounds.
Calculating Margin of Safety
Details Formula Calculation Result
Margin of safety Budgeted sales – break even sales
4800000 -
1200000 3600000
Budgeted Sales Budgeted units * Selling price per unit 40000 * 120 4800000
Margin of safety as percentage of
budgeted sales (Marking of Safety/Budgeted Sales)*100
(3600000 /
4800000) *
100 75
Margin of safety like break even point can be calculated both in number of units and sales
revenue. Margin of safety is the excess of unit sold or sales revenue earned by the firm over its
break even sales or break even units (Vagner, 2020). The budgeted or targeted sales volume by
Lobelia Ltd is £4800000 aiming to achieve by selling 40000 units by firm at £120 per unit.And
the break even sales for the firm is 1200000. It means that the firm is planning to maintain a
margin of 75% as safety.
Calculation of the number of units to be sold for reaching desired profit of £700,000
Details Formula Calculation Result
Fixed Cost 700000
Desired profit 700000
Contribution per unit 70
Number of units required to sell
Fixed cost + desired profit
margin / contribution per
unit
(700000 +
700000) /
70 20000
Every firm targets to achieve a certain level of profit. This targeted profit is known as
desired profit by the company. Lobelia Ltd. desires to earn a profit of £700000. For reaching the
position in which the firm could earn the desired amount of profit it must sell 20000 units
provided that the contribution per unit is £70.