Business Finance: Cost Estimation and Investment Assessment Approaches

Business Finance
ASSESSMENT 1

Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Calculation of contribution per unit.............................................................................................3
Calculation of breakeven point in units and breakeven sales......................................................3
Calculation of margin of safety...................................................................................................4
Calculation of number of units sold.............................................................................................5
Preparation of memo suggesting the finance manager the importance of contribution:.............5
Calculation of profit using marginal and absorption costing and reconciliation between them. 6
PART B...........................................................................................................................................8
Importance of Standard Costing and Variance Analysis.............................................................8
Calculation of material and labour variance along with comment on them................................8
Preparation of budget for controlling the operations.................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Simply put, company finance is the process of effectively managing an organization's
finances so that its cash are not misappropriated. It is critical for the organisation to engage
clever financial experts with proper understanding of money and their treatment in order to carry
out optimal utilisation (Jiang, and et.al., 2020). This paper contains two case studies pertaining to
cost estimation and investment assessment approaches used to assess the project's feasibility. The
material and labour variations were estimated in order to better understand the disparity in those
areas.
PART A
Calculation of contribution per unit
It may also be described as profit on a single unit's sale, after all variable expenditures have
been deducted, the amount remaining is referred to as contribution. This information is useful in
determining the cheapest price at which to sell the item.
Contribution per unit = sales per unit – variable cost per unit
= £120 – £50
= £70 per unit
It can now be seen that revenues per unit are £120, variable expenses are £50 per unit, and
the Lobelia Ltd firm contributes £70 per unit.
Calculation of breakeven point in units and breakeven sales
This is the most crucial idea to understand since it weighs a new company's costs, goods,
and services against the unit of the selling price to determine when it will break even.
Essentially, it is the point in the sales process when the total of fixed and variable costs equals
total sales revenue (Ross, and et.al., 2019). On the other hand, the break-even point is a point at
which the firm makes neither a profit nor a loss. Simply said, the break-even point is the amount
of income required to cover all fixed and variable costs. If a company's sales are lower than
expected, the break-even point will be lower. However, if the company's income is substantial,
the break-even point is reached, and profit is generated, but only after all expenditures are taken
into account.
Simplification of Break- even point:

The break-even point is a computation of sustenance, and the lower the break-even
quantity, the better for the firm.
Here's how to figure out your break-even point and sales:
Break-even point = Fixed cost / (sales per unit – variable cost per unit)
Break-even point
= £700000 / (£120 - £50)
= £700000 / £70
= £10000 units
It is evident that the above method calculates the break-even threshold when the fixed per
unit cost is divided by the contribution per unit, with the value of the fixed cost being £700000
and the contribution per unit being £70.
Break- even sales in % = Fixed cost / Contribution margin
Break- even sales
= £700000 / £2800000 *100
= 25 %
The above calculation clearly reveals that the break-even sales is 25%, and if it is
calculated in units, it displays the same breakeven point unit of £70.
Calculation of margin of safety
The difference between current sales and break-even sales is depicted in this idea of
margin of safety (Kong and Xin, 2019). It depicts the level of safety that the company achieves
before losses arise, implying a drop below the break-even point.
Clarification of Margin of Safety: It evaluates the company's risk and determines if a
bigger margin of safety is beneficial to the business.
The following is a formula for calculating the margin of safety:
Margin of safety (MOS) = Budgeted sales – Break-even point / budgeted sales * 100
= £40000 units - £10000 units / £40000 units *100
= £30000 units / £40000 units *100
= 75%
The foregoing calculation shows that the margin of safety is 75%, and the company's
planned sales are already £40,000, but the break-even threshold is calculated at £10,000.