Break even point and Margin of safety

emma2009
emma2009 Registered Posts: 7 Regular contributor ⭐ ? ⭐
Hi,

Can you tell me how you work out the break even point because i have read the book but its confusing looking at the graph and also how to work out the margin of safety?

Many Thanks

Comments

  • crispy
    crispy Registered Posts: 465 Dedicated contributor ? ? ?
    Hello,

    Breakeven point = Fixed Costs / Contribution per unit

    Eg.

    Selling Price 100.00
    Variable Cost (50.00)
    Contribution 50.00

    Fixed Costs = £ 5,000

    Breakeven point = £ 5,000 / £ 50 = 100 units

    100 units x £ 100.00 = £ 10,000 (breakeven point in £)

    Margin of safety (using above figures):

    If budgeted Value of Sales were for example £ 12,000

    Margin of Safety = £ 2,000 / £ 10,000 * 100 = 20 %
  • emma2009
    emma2009 Registered Posts: 7 Regular contributor ⭐ ? ⭐
    HI,

    Thanks for that, i have just tried to use that method when working out task 2.3 a) in June 2009 paper but it doesnt work.`

    The question is-

    Selling price- 80P
    Marginal cost-30P
    Fixed cost- £312500

    Answer-

    £312,500/(50p/80p)= £500,000

    I though it would be -
    £80p-30p = 50p312,500/0.50p=£625,000

    Can you tell me where i am going wrong???

    Thanks
    Lucy
  • crispy
    crispy Registered Posts: 465 Dedicated contributor ? ? ?
    Your answer is correct.

    625,000 represents the break even point in terms of units

    ie:Fixed Cost / Contribution per unit = breakeven point (in units)

    Therefore to find breakeven point in terms of £ = breakeven point (in units) x selling price (per unit)

    Breakeven point 625,000 units * £ 0.80 = £ 500,000
  • emma2009
    emma2009 Registered Posts: 7 Regular contributor ⭐ ? ⭐
    Oh i see, thank you.
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