Break Even point & margin of saftey HELP!!!

cyber_jules

I need some help with Margin of saftey and break even points:

How do I calculate

Break even sales
Margin of saftey
Margin of saftey in %

I am very confused about the way it is calculated so please could I have a break down of each step to show what is calculated and how!

System

Break Even= Fixed Cost/ Contribution

Margin of safety is the total - break even

visha

To work out Break-even in sales value you will need to understand PV ratio or CS ratio. They are both same but called different ratio.

Then take FC and divide it by CS ratio to get BEP in sales Value (£)

CS ratio = CONTRIBUTION DIVIDE BY SALES times 100

therefore if Fixed Costs = £75,000
and Sales = £500,000
and Variable Cost (Cost of sales) = £200,000

to work out contribution = (500,000 - 200,000)= 300,000

therefore CS ratio= contribution divide by sales = 300,000 divide by 500,000 times 100 equals 60%

BEP in sales = 75,000 divide by 60% = £125,000


Your MARGIN OF SAFETY is the difference between your current activity ( current sales) and BEP in sales

therefore MARGIN OF SAFETY = £500,000 LESS £125,000 = £ 375,000. You can afford the sales to drop by £375,000 before you start to make a loss.

MARGIN OF SAFETY IN % = £375,000 divide by £500,000 times 100 = 75%
You can afford the sales to drop by 75% before you start to make a loss.

cyber_jules

Thankyou for that - it all makes sense now :001_smile: