Corporate Finance: Cost Estimating and Investment Assessment Methodologies

Project 1

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................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.............................................................................................4
Preparation of memo suggesting the finance manager the importance of contribution..............5
Calculation of profit using marginal and absorption costing and reconciliation between them. 5
PART B...........................................................................................................................................7
Importance of Standard Costing and Variance Analysis.............................................................7
Calculation of material and labour variance along with comment on them................................8
Preparation of budget for controlling the operations...................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Simply explained, corporate finance is the act of successfully managing a company's finances to
prevent money from being misused. In order to carry out optimal utilisation, the organisation
must hire sophisticated financial professionals that have a thorough grasp of money and its
handling (Young, 2018). Two case studies relating to cost estimating and investment assessment
methodologies used to analyse the project's viability are included in this article. To further
explain the discrepancy in those places, the material and labour variables were calculated.
MAIN BODY
Calculation of contribution per unit
It's also known as profit on a single unit sale after all variable costs have been subtracted;
the amount left is referred to as contribution. This information is helpful in finding the most cost-
effective selling price for the item.
Contribution per unit = sales per unit – variable cost per unit
Sales per unit – variable cost per unit = £120 – £50 = £70 per unit
Revenues per unit are now £120, variable expenditures are £50 per unit, and the Lobelia
Ltd company contributes £70 per unit.
Calculation of breakeven point in units and breakeven sales
This is the most important concept to grasp since it compares the expenses, commodities, and
services of a new firm to the unit of the selling price to calculate when it will break even. It's the
time in the sales process when the sum of fixed and variable costs equals total sales revenue. The
break-even point, on the other hand, is the point at which the company earns neither a profit nor
a loss (Triantis, 2018). Simply said, the break-even point is the amount of profit needed to cover
all fixed and variable expenses. The break-even threshold will be lower if a company's revenues
are lower than planned.
If the company's revenue is significant, however, the break-even threshold is reached, and profit
is made, but only after all expenses are deducted.
Break-even point simplification:
The break-even point is a calculation of the firm's sustenance, and the smaller the break-even
quantity, the better.
Here's how to calculate out your sales and break-even point:

Break-even point = Fixed cost / (sales per unit – variable cost per unit)
Break-even point
= £700000 / (£120 - £50)
= £700000 / £70
= £10000 units
When the fixed per unit cost is divided by the contribution per unit, the break-even
threshold is calculated, as shown above, with 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 shows that the break-even sales are 25%, and when
calculated in units, the same breakeven point unit of £70 is displayed.
Calculation of margin of safety
This concept of margin of safety depicts the difference between current sales and break-even
sales (Farag, and Johan, 2021). It represents the company's degree of safety before losses occur,
signifying a decrease below the break-even threshold.
Margin of Safety Clarification: It assesses the firm's risk and analyses if a larger margin of
safety is advantageous to the company.
A formula for estimating the margin of safety is as follows:
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 margin of safety is determined to be 75%, and the company's expected sales are
already £40,000, but the break-even barrier is calculated to be £10,000.
Calculation of number of units sold
This idea is being asked in order to calculate how many units must be sold in order to
generate £700,000 per year, meaning that sales units are required. One formula for estimating the
firm's target profit is as follows: