Marginal Costing Thompson Ltd manufactures a single product - Leaving Cert Accounting - Question 8 - 2012

The variable cost per unit is calculated as follows:

[ \text{Variable Cost per Unit} = \frac{\text{Total Variable Costs}}{\text{Units Sold}} ] [ = \frac{170,000}{50,000} = 3.40 \text{€ per unit} ]

Contribution per unit is calculated using:

[ \text{Contribution} = \text{Selling Price} - \text{Variable Cost} ] [ = 8 - 3.40 = 4.60 \text{€ per unit} ]

The Break-even point in units can be found with:

[ \text{Break-even Point} = \frac{\text{Fixed Costs}}{\text{Contribution per Unit}} ] [ = \frac{36,000}{4.60} \approx 7,827 \text{ units} ]

The margin of safety in units is calculated as:

[ \text{Margin of Safety} = \text{Budgeted Sales} - \text{Break-even Point} ] [ = 50,000 - 7,827 = 42,173 \text{ units} ]

The sales value can be computed as:

[ \text{Sales Value} = \text{Margin of Safety} \times \text{Selling Price} ] [ = 42,173 \times 8 = 337,384 € ]

The marginal costing statement will look like this:

Description	Amount (€)
Sales (55,000 units × €6)	330,000
Less Variable Costs (55,000 units × €3.40)	187,000
Contribution	143,000
Fixed Costs	36,000
Profit	107,000

A variable cost is a cost that varies directly with the level of production or sales volume. This means that as the number of units produced increases, total variable costs will also increase.

Example: An example of a variable cost is raw materials, which are needed in proportion to the number of units produced.