Break even point and Margin of safety

emma2009

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

crispy

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

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

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

Oh i see, thank you.