Breakeven Analysis - the Margin of Safety

What is breakeven output?

Breakeven (output) is reached when total revenues = total costs

What are revenues?

• Value of sales made by a business

• Selling price x units sold

What are costs?

• Variable costs: vary in relation to output

• Fixed costs: do not vary in relation to output

• Total costs - variable costs + fixed costs

What is the margin of safety?

The margin of safety is the difference between: Actual Output (units) and breakeven output (units)

What is the equation for profit of a business?

Profit = Margin of safety (units) x Contribution per unit (£)

How do you improve the margin of safety?

• Increasing contribution per unit:

  • Raise selling prices

  • Reduce variable costs per unit

• Lower the breakeven output:

  • Lower fixed costs

  • Turn fixed costs into variable costs

• Increase actual output:

  • Sell more