Breakeven Analysis - the Margin of Safety

What is breakeven output:

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

Revenues and costs:

• Revenues:

  • Value of sales made by a business

  • Selling price x units sold

• 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)

Profit of a business equation:

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

How to 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