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Contribution, break-even point and margin of safety

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

Contribution is the key to break-even analysis: each unit sold contributes towards fixed costs and then profit. From it you can find the break-even point, the margin of safety and the output needed for a target profit.

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Contribution

Contribution per unit = selling price - variable cost per unit

Total contribution = contribution per unit x units sold

Profit = total contribution - fixed costs

Contribution/sales (C/S) ratio = contribution per unit / selling price (or total contribution / total revenue).

Break-even point

At break-even, total contribution = fixed costs, so profit is zero.

Examiners report candidates using wrong methods for break-even revenue and, when asked for units after revenue, starting again rather than dividing revenue by the selling price. Round break-even units up to a whole unit if it is not exact (you cannot break even with part of a sale).

Margin of safety and target profit

Margin of safety = actual (or budgeted) sales - break-even sales, in units or £.

As a percentage: margin of safety / actual (budgeted) sales x 100.

It shows how far sales could fall before a loss is made.

Target profit: units needed = (fixed costs + target profit) / contribution per unit.

Worked example

Selling price £25, variable cost £15 per unit, fixed costs £40,000, budgeted sales 6,000 units. Find break-even in units and revenue, and the margin of safety.

  1. Contribution per unit = 25 - 15 = £10
  2. Break-even = 40,000 / 10 = 4,000 units
  3. C/S ratio = 10 / 25 = 0.4; break-even revenue = 40,000 / 0.4 = £100,000
  4. Margin of safety = 6,000 - 4,000 = 2,000 units = £50,000 = 33.3%

Answer: 4,000 units; £100,000; margin of safety 2,000 units (33.3%)

Key idea: Contribution = price - variable cost; break-even units = fixed costs / contribution per unit; break-even revenue = fixed costs / C/S ratio; margin of safety = actual - break-even sales.

Check yourself

  1. Selling price £40, variable cost £24 per unit, fixed costs £72,000. Calculate the break-even point in units.
    Show answer

    4500 units. 72,000 / 16 = 4,500 units.

  2. Fixed costs £54,000 and the C/S ratio is 0.36. Calculate break-even revenue.
    Show answer

    £150000. 54,000 / 0.36 = £150,000.

  3. Break-even revenue is £148,500 and the selling price is £4.95. How many units is that?
    Show answer

    30000 units. 148,500 / 4.95 = 30,000 units.

  4. Budgeted sales are 9,000 units and break-even is 6,300 units. Calculate the margin of safety as a percentage of budgeted sales.
    Show answer

    30.0 %. 2,700 / 9,000 x 100 = 30%.

  5. Selling price £18, variable cost £10 per unit, fixed costs £36,000. How many units must be sold to make a profit of £20,000?
    Show answer

    7000 units. 56,000 / 8 = 7,000 units.

  6. A tour operator charges £45 per passenger with variable costs of £17 per passenger. Fixed costs per tour are £1,500. How many passengers are needed to break even on a tour (whole passengers)?
    Show answer

    54 passengers. 1,500 / 28 = 53.57, so 54 passengers (round up).

  7. What is the contribution/sales ratio used for?
    • Finding break-even in sales revenue directly
    • Calculating depreciation
    • Finding the payback period
    • Measuring liquidity
    Show answer

    Finding break-even in sales revenue directly. Break-even revenue = fixed costs / C/S ratio.

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Last updated 8 November 2026. Spotted a mistake? Tell us.