Managerial Accounting

Fallon Frodsham manufactures and installs small prefabricated building structures that are sold to people who want to establish a home office using part of their gardens. Each prefabricated building sells at €13 000, including installation costs. The variable costs of manufacture are €7300 per building. The company’s directors have set a sales target of 150 buildings for the 2008 accounting year.

i) Using a break-even chart, estimate the maximum level of fixed costs the company can incur in 2008 without making a loss, on the assumption that the sales target is met.

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ii) Apply the break-even formula to calculate the maximum level of fixed costs. Tutorial note: This question may require some thought. Known factors are total revenues (sales revenue per unit  number of units sold), and total variable costs (variable costs per unit  number of units sold). The point on the horizontal (x) axis at which break-even point is reached is also known (150 units). The line must be drawn from that point upwards to the point where it intersects with the total revenue line.

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