2. Costs and Revenues The webinar will cover: Calculating contribution
Calculating break-even in units and sales revenue
Break-even and target profit
Calculating and using the contribution to sales ratio
Margin of safety and margin of safety percentage
Making decisions using break-even analysis.

3. Calculating contribution
Contribution is a key element of short-term decision making
Selling price – Variable costs = Contribution
Contribution per unit is required for break-even calculations.

4. Example - Calculating contribution
Product DTX has a selling price of £38.40 per unit.
Each unit requires 1.25 kg of material at £7.20 per kg and 1.4 hours at £12 per hour. Fixed costs are £100,800.
Contribution per unit is:
Selling price
38.40
Less:
Material (1.25 kg x £7.20)
9.00
Labour (1.4 hrs x £12)
16.80
Contribution per unit
12.60

5. Example - Calculating contribution
Product DTX has a selling price of £38.40 per unit.
Each unit requires 1.25 kg of material at £7.20 per kg and 1.4 hours at £12 per hour. Fixed costs are £100,800.
Contribution per unit is:
Selling price
38.40
Less:
Material (1.25 kg x £7.20)
9.00
Labour (1.4 hrs x £12)
16.80
Contribution per unit
12.60

6. Example - Calculating contribution
Product DTX has a selling price of £38.40 per unit.
Each unit requires 1.25 kg of material at £7.20 per kg and 1.4 hours at £12 per hour. Fixed costs are £100,800.
Contribution per unit is:
Selling price
38.40
Less:
Material (1.25 kg x £7.20)
9.00
Labour (1.4 hrs x £12)
16.80
Contribution per unit
12.60

7. Example - Calculating contribution
Product DTX has a selling price of £38.40 per unit.
Each unit requires 1.25 kg of material at £7.20 per kg and 1.4 hours at £12 per hour. Fixed costs are £100,800.
Contribution per unit is:
Selling price
38.40
Less:
Material (1.25 kg x £7.20)
9.00
Labour (1.4 hrs x £12)
16.80
Contribution per unit
12.60

8. Total contribution £ Selling price (£38.40 x 10,000 units) 384,000
Selling price (£38.40 x 10,000 units)
384,000
Less:
Material (£9 x 10,000 units)
90,000
Labour (£16.80 x 10,000 units)
168,000
Total contribution
126,000
Or: £12.60 x 10,000 units = £126,000
Total contribution
126,000
Less:
Fixed costs
100,800
Total profit
25,200

9. Example – High low method
Semi-variable production costs have been calculated as £64,800 at an activity level of 150,000 units and £59,300 at an activity level of 128,000 units.
Units
High
64,800
150,000
Low
59,300
128,000
Difference
5,500
22,000
Variable element:
Fixed element:
£5,500
= £0.25 per unit
22,000 units
£64,800 – (150,000 x £0.25) = £27,300

10. Student Example 1
A company has identified that the cost of labour is semi-variable. When 12,000 units are manufactured the labour cost is £94,000 and when 18,000 units are manufactured the labour cost is £121,000.
Calculate the variable and fixed cost of labour.
Units
High
121,000
18,000
Low
94,000
12,000
Difference
27,000
6,000

11. Student Example 1 - Answer
A company has identified that the cost of labour is semi-variable. When 12,000 units are manufactured the labour cost is £94,000 and when 18,000 units are manufactured the labour cost is £121,000.
Calculate the variable and fixed cost of labour.
Units
High
121,000
18,000
Low
94,000
12,000
Difference
27,000
6,000
Variable element:
Fixed element:
£121,000 – (18,000 x £4.50) = £40,000
£27,000
= £4.50 per unit
6,000 units

12. Identifying cost behaviour
When the cost divided by the units gives the same answer at both activity levels then the cost is variable
When the cost is identical at both activity levels then the cost is fixed
When the cost divided by the units gives a different figure at each activity level then the cost is semi-variable.

13. Poll Question 1
Calculate the variable cost per unit (to the nearest penny) for the following product:
4,000 units
6,500 units
Material
22,400
36,400
Labour
30,200
39,700
Production expenses
26,000
78,600
102,100
A. £13.15
B. £11.71
C. £9.40
D. £19.65
E. £15.71

14. Poll Question 1 - Answer
Calculate the variable cost per unit (to the nearest penny) for the following product:
4,000 units
6,500 units
Material
22,400
36,400
Labour
30,200
39,700
Production expenses
26,000
78,600
102,100
A. £13.15
B. £11.71
C. £9.40
D. £19.65
E. £15.71

15. Break-even Sales revenue > Costs = Profit
Sales revenue < Costs = Loss
Break-even point: Sales revenue = Costs

16. Calculating break-even
The calculation of break-even uses the total fixed costs and the contribution per unit
Break-even in units:
Fixed costs (£)
= Break-even in units
Contribution per unit (£)

17. Example – Break-even in units
Product DTX has a selling price of £38.40 per unit and total variable costs of £25.80 per unit. Fixed costs are £100,800.
The break-even point in units is:
£100,800
= 8,000 units
(£ £25.80)

18. Break-even in sales revenue
Break-even is: Units x Selling Price per unit
Using the previous example where break-even has been calculated as 8,000 units and the selling price is £38.40 per unit.
8,000 units x £38.40 = £307,200

19. Student Example 2
The following information relates to a single product:
8,125 units
Sales
422,500
Variable costs:
Material
87,750
Labour
125,125
Expenses
30,875
Fixed costs:
Overheads
143,000
Profit
35,750
Calculate:
(a) Contribution per unit
(b) Break-even point in units
(c) Break-even point in revenue.

20. Student Example 2 - Answer
Contribution per unit
Selling price per unit: £422,500 ÷ 8,125 = £52
Variable cost per unit: (£87,750 + £125,125 + £30,875) ÷ 8,125 = £30
Contribution per unit: £52 - £30 = £22
Break-even point in units
£143,000 ÷ £22 = 6,500 units
Break-even point in revenue
6,500 units x £52 = £338,000

21. Target profit Fixed costs (£) + Target profit (£) = units to be sold
Break-even analysis can be used to identify the number of units that need to be sold for the business to reach their desired or target level of profit
Fixed costs (£) + Target profit (£)
= units to be sold
Contribution per unit (£)

22. Example – Calculating target profit in units
Product DTX has a selling price of £38.40 per unit and total variable costs of £25.80 per unit. Fixed costs are £100,800.
The company requires a target profit of £44,100.
The number of units to be sold to achieve the target profit is:
£100,800 + £44,100
= 11,500 units
(£ £25.80)

23. Example – Calculating target profit in units
Unit price
11,500 units
Sales
38.40
441,600
Variable costs:
Material
9.00
103,500
Labour
16.80
193,200
Fixed costs:
Overheads
100,800
Profit
44,100
Sales revenue required to achieve the target profit is calculated as 11,500 units x £38.40.

24. Student Example 3
The following information relates to a single product:
Selling price per unit £52.00
Contribution per unit £22.00
Fixed overheads £143,000
Target profit £17,600
Calculate:
(a) Sales volume to achieve target profit
(b) Sales revenue to achieve target profit

25. Student Example 3 - Answer
Sales volume to achieve target profit
(b) Sales revenue to achieve target profit
7,300 units x £52 = £379,600
£143,000 + £17,600
= 7,300 units
£22

26. Contributions to sales ratio
The contribution to sales ratio or CS ratio expresses contribution as a proportion of sales It can be calculated using the selling price and contribution per unit or the total sales revenue and total contribution. It is calculated as:
Contribution per unit (£)
= CS ratio
Selling price per unit (£)

27. Example – Calculating CS Ratio
Product DTX has a selling price of £38.40 per unit and contribution of £12.60 per unit
The CS ratio is:
£12.60
= 0.328
£38.40
At a sales volume of 10,000 units product DTX has sales revenue of 384,000 and contribution of £126,000.
The CS ratio is:
£126,000
= 0.328
£384,000

28. Fixed costs (£) + Target profit (£)
Using the CS Ratio
The sales revenue required break-even is calculated as:
Fixed costs (£)
= sales revenue to break-even
CS ratio
The sales revenue required to achieve target profit is calculated as:
Fixed costs (£) + Target profit (£)
= sales revenue to achieve target profit
CS ratio

29. Example – Using the CS ratio
Product DTX has a selling price of £38.40 per unit and contribution of £12.60 per unit. Fixed costs are £100,800.
The company requires a target profit of £44,100. The CS ratio is
The sales revenue required break-even is calculated as:
£100,800
= £307,317
0.328
The sales revenue required to achieve target profit is calculated as:
£100,800 + £44,100
= £441,768
0.328

30. Poll Question 2 The following information relates to a single product
8,125 units
Sales
422,500
Variable costs:
Material
87,750
Labour
125,125
Expenses
30,875
Fixed costs:
Overheads
143,000
Profit
35,750
The CS ratio is: A B C D

31. Poll Question 2 - Answer
The following information relates to a single product
8,125 units
Sales
422,500
Variable costs:
Material
87,750
Labour
125,125
Expenses
30,875
Fixed costs:
Overheads
143,000
Profit
35,750
The CS ratio is: A B C D

32. Margin of safety (MOS)
Margin of safety is the excess of budgeted sales over break-even sales It is calculated as: Budgeted volume – Break-even volume = Margin of safety in units Margin of safety can also be expressed in sales revenue: Margin of safety in units x Selling price per unit

33. Example – Margin of safety
Product DTX has a selling price of £38.40 per unit and total variable costs of £25.80 per unit. Fixed costs are £100,800. Break-even has been calculated as 8,000 units and the company has budgeted to sell 12,000 units. The margin of safety in units is: 12,000 units – 8,000 units = 4,000 units The margin of safety in sales revenue is: 4,000 units x £38.40 = £153,600

34. Budgeted volume – Break-even volume
Margin of Safety %
Margin of safety is often expressed as a percentage. The formula is:
Budgeted volume – Break-even volume
x 100
= MOS %
Budgeted volume

35. Example – Margin of Safety %
Where budgeted volume is 12,000 units, break-even is 8,000 units and margin of safety is 4,000 units, margin of safety percentage is:
12,000 units – 8,000 units
x 100
= 33%
12,000 units
Margin of safety in units
x 100
= MOS %
Budgeted volume

36. Student Example 4
The following information relates to a single product:
Selling price per unit £52.00
Contribution per unit £22.00
Fixed overheads £143,000
Budgeted sales 8,125 units
Calculate:
Margin of safety in units
Margin of safety in sales revenue
(c) Margin of safety %.

37. Student Example 4 - Answer
(a) Margin of safety in units
8,125 units – 6,500 units = 1,625 units
(b) Margin of safety in sales revenue
1,625 units x £52 = £84,500
(c) Margin of safety %
(1,625 units ÷ 8,125 units) x 100 = 20%

38. Making decisions using contribution and break-even
Identifying the sales revenue required for a new project to break- even or to reach a target profit
Evaluating the effect of increases in production volume and the impact on fixed costs
‘What-if’ scenarios
Assessing alternative projects or major changes to production processes
Assessing the viability of a new business
Identifying the expected levels of profit or loss at different activity levels.