Finance and the Economy · Seminar 4 · Cost-volume-profit analysis

Breakeven point and margin of safety

Each jacket contributes its selling price minus its variable cost (production cost plus sales commission) towards fixed costs. Breakeven is where total contribution just covers fixed costs. Move the inputs and watch the breakeven point, the margin of safety and operating income change. Questions 3 and 4 (Lee’s Leathers, part 1).

Pick a question, or set your own inputs. Revenue is green, total cost purple; they cross at the breakeven point.

Selling price per unit

lowhigh

Variable cost per unit

lowhigh

Sales commission (% of price)

0%15%

Fixed costs (thousands)

lowhigh

Expected sales (thousand units)

fewmany

Unit contribution

Breakeven point

Margin of safety

Operating income

Two ways to read the margin of safety. In units it is expected sales minus breakeven sales; in money it is the same gap valued at the selling price. Both give the same percentage of expected sales. The bigger the margin, the further sales can fall before the firm makes a loss.

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