Management Accounting: Budgeted Net Profit, Break Even Analysis, Margin of Safety, and Sales Prioritization

This article covers the budgeted net profit, break-even analysis, margin of safety, and sales prioritization in management accounting. It includes calculations and statements for Shoe A, Shoe B, and Shoe C, along with references.

Management Accounting

TABLE OF CONTENTS
Question 1..................................................................................................................................3
Question 2..................................................................................................................................4
`Question 3.................................................................................................................................4
(a)...........................................................................................................................................4
(b)...........................................................................................................................................5
Question 4..................................................................................................................................5
(a)...........................................................................................................................................5
(b)...........................................................................................................................................6
References..................................................................................................................................7

QUESTION 1
Statement presenting budgeted net profit of DIHL for the
year 2018
(Amount in $)
Particular Shoe A Shoe B Shoe C Total
Sales 540000 630000 1080000 2250000
Variable Cost 360000 405000 660000 1425000
Variable Selling cost 112500 90000 210000 412500
Contribution margin 67500 135000 210000 412500
Fixed manufacturing cost (Note
1) 56850 56850 75800 189500
Fixed selling and administrative
cost (Note 2) 24000 24000 32000 80000
Net Profit before tax -13350.00 54150.00 102200 143000
Tax @ 30% 16245 30660 42900
Profit After Tax -13350.00 37905.00 71540.00 100100
Profit After Tax
-20000
0
20000
40000
60000
80000
100000
120000
-13350
37905
71540
100100
Profit After Tax
Shoe A Shoe B Shoe C Total
Note 1
Fixed Manufacturing cost
Particular Shoe A Shoe B Shoe C
No of shoe 4500 4500 6000
Fixed manufacturing cost
4500/15000*189
500
4500/15000*189
500
6000/15000*189
500
56850 56850 75800

Note 2
Fixed administration and
selling cost
Particular Shoe A Shoe B Shoe C
No of shoes 4500 4500 6000
Fixed administration and
selling cost
4500/15000*800
00
4500/15000*800
00
6000/15000*800
00
24000 24000 32000
QUESTION 2
Statement presenting no. of the pair to be sold in order to break even
Particular Shoe A Shoe B Shoe C
Break Even Unit (56850+24000)/15
(56850+24000)/
30 (75800+32000)/35
(Total Fixed Cost /Contribution per
unit) (Note 3) 5390 2695 3080
Note 3
Contribution Margin Statement
(Amount in $)
Particular Shoe A Shoe B Shoe C
Contribution 67500 135000 210000
Sales 540000 630000 1080000
Contribution Margin 12.50% 21.43% 19.44%
Contribution per unit 15 30 35
(Total Contribution / No. of Units)
`QUESTION 3
(a)
Calculation of Margin of Safety in units
Particular Shoe A Shoe B Shoe C
Sale in unit 4500 4500 6000
Break Even Units 5390 2695 3080

Margin of Safety NA 1805 2920
(Total Sales - Break Even Sales)
The margin of safety is ascertained by deducting break-even units from total budgeted units.
In other words, it can be said that it represents sales above the breakpoint (Noreen, Brewer
and Garrison, 2014). The information is necessary as it represents the sales can be lost before
the company loses money. Management gets to know about the risk of loss to which business
is subject relating to change in sales. Vanderbeck and Mitchell (2015), asserts that the
concept of margin of safety play an important role in order to ascertain a significant
proportion of sales which are at risk of decline or elimination or it might be a case when a
sales contract has met an end. In case a product is having a minimum margin of safety it
means that now organization requires reducing the expenses (Weygandt, Kimmel and Kieso,
2015). Further, as soon as Margin of safety exists operations are profitable, thus it lets an
organization ascertain whether to continue production or not.
(b)
Calculation of Margin of Safety in sales
(Amount in $)
Particular Shoe A Shoe B Shoe C
Total Sales 540000 630000 1080000
Break Even Sales 540000/4500*5390
630000/4500*269
5 1080000/6000*3080
646800 377300 554400
Margin of Safety NA 252700 525600
(Total Sales - Break Even Sales)
Thus, in the case of Shoe A Company is already having lost so firstly, it will have to reach
Break Even sales than it can think about margin of safety. However in the case of Shoe B and
Shoe C even if sales fall to $252700 and $ 525600 Company will have sufficient revenue to
mitigate thier expenses. The company requires to assess the expenses of product Shoe A and
reduce the same to a possible extent.
QUESTION 4
(a)
Break-Even Analysis

Particular Shoe A Shoe B Shoe C
Break Even Unit (56850+24000)/5.4
(56850+24000)/
30 (75800+32000)/30
(Total Fixed Cost /Contribution per
unit) (Note 4) 14972 2695 3593
Note 4
Statement presenting break-even sales in case variable cost changes as per specification
(Amount in $)
Particular Shoe A Shoe B Shoe C
Sales 540000 630000 1080000
Variable Cost 403200 405000 660000
Variable Selling cost 112500 90000 240000
Contribution margin 24300 135000 180000
No. of shoes sold 4500 4500 6000
Contribution per unit 5.4 30 30
(b)
In case the demand of shoe can be increased to 6000 pairs of each type than priority should
be provided to Shoe C and Shoe B as both types of the pair are having equal and higher
contribution of the unit. Further, the remaining amount of shoes, i.e. (17000 -12000) 5000
should be manufactured from Shoe A in order to attain maximum profit for DIHL Ltd.

REFERENCES
Noreen, E.W., Brewer, P.C. and Garrison, R.H., 2014. Managerial accounting for managers.
New York: McGraw-Hill/Irwin.
Vanderbeck, E.J. and Mitchell, M.R., 2015. Principles of cost accounting. Cengage Learning.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting.
John Wiley & Sons.