← Management accounting to inform decision-making

Cost–volume–profit: contribution, break-even, margin of safety (every paper)

Show the formula, substitute, round sensibly, then say what the number MEANS.

The four you must be able to write from memory

Contribution margin CM = selling price − variable cost per unit Per unit, per trip, per wedding — match the paper's unit Break-even units BE = fixed costs ÷ CM per unit Round UP to a whole unit Target-profit units Units = (fixed costs + target profit) ÷ CM per unit Break-even with target profit = 0 Margin of safety % MoS % = (expected − break-even) ÷ expected × 100 How far sales can fall before a loss

Units to double-check before you substitute

  • Is fixed cost given annually or monthly — does it match the period the question asks for?
  • Is the price/variable cost per unit, per trip, or per client — and does that match the volume figure you are solving for?
Exam-style Fixed costs $84 000; price $3 500; variable cost
400 per wedding Break-even, and the volume needed for a $29 400 profit. CM = 3 500 − 1 400 = $2 100 per wedding Break-even = 84 000 ÷ 2 100 = 40 weddings Target profit: (84 000 + 29 400) ÷ 2 100 = 113 400 ÷ 2 100 = 54 weddings Interpretation: 40 weddings just covers costs; 54 is needed to match the current profit — 14 more, a 35% increase in volume. ✓ Break-even 40, target 54. The interpretation sentence is what lifts it past the calculation marks. ✕

The unexplained number

Every calculation part is followed by an "explain the meaning" part, and they are marked separately. A margin of safety of 18% is worth almost nothing until you write: sales could fall by 18% before the business starts making a loss.

Fast checks before moving on from a CVP calculation

  • Rounded UP to a whole unit, if the figure is break-even or target-profit volume?
  • Does the per-unit or per-trip figure match the unit the question actually asked for?
  • Have I written the one-sentence interpretation, not just the number?

Practise just this