Calculate contribution and break-even measures
Use marginal costing relationships to calculate contribution, break-even point, target output and margin of safety, and interpret break-even charts without drawing one.
Section 2.2 · Traditional costing methods
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover Topic 2.2.1–2.2.4: unit, job and batch costing; absorption costing and overheads; marginal costing, contribution and break-even analysis; and cost–volume–profit decisions. Practice is self-checked, not an official Cambridge grade; full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Know the difference between direct and indirect costs and between fixed and variable cost behaviour. Keep units, production volume, overhead rates and relevant ranges visible in calculations.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
If contribution is $8 per unit and fixed costs are $24,000, what output breaks even?
What you will learn
- Calculate contribution per unit and contribution-to-sales ratio
- Calculate break-even point, target sales and margin of safety
- Interpret a break-even chart and explain assumptions and limitations
Contribution covers fixed costs before profit
Contribution per unit = selling price per unit − variable cost per unit. Total contribution = total revenue − total variable cost. Contribution first covers fixed costs; any excess is profit, while a shortfall is a loss under the stated model.
Contribution-to-sales ratio (C/S ratio) = contribution ÷ sales revenue × 100. Break-even output = fixed costs ÷ contribution per unit. Break-even sales revenue = fixed costs ÷ C/S ratio expressed as a decimal. Use consistent periods and units.
Measure a target and the safety margin
Target output for a target profit = (fixed costs + target profit) ÷ contribution per unit. Margin of safety = budgeted or actual output − break-even output; as a percentage it is margin of safety ÷ budgeted or actual output × 100. State which output basis you use.
A break-even chart shows revenue and total cost against activity; interpret the break-even point, profit or loss area and margin of safety. Candidates are not required to prepare the chart. The calculations assume a relevant range and simplified relationships; actual prices, unit costs, capacity and sales mix can change.
Pause and explain
A plan has break-even output of 4,000 units and budgeted output of 5,000. What is the margin of safety as a percentage of budgeted output?
Worked example
A product sells for $30 and has variable cost of $18 per unit. Fixed costs are $60,000. Calculate contribution per unit, C/S ratio, break-even output and sales, output for a target profit of $18,000, and margin of safety if planned output is 8,000 units.
Show the worked solution
- Contribution = $30 − $18 = $12 per unit; C/S ratio = 12 ÷ 30 = 40%.
- Break-even output = 60,000 ÷ 12 = 5,000 units; break-even revenue = 5,000 × $30 = $150,000.
- Target output = (60,000 + 18,000) ÷ 12 = 6,500 units. Margin of safety = 8,000 − 5,000 = 3,000 units, or 37.5% of planned output.
Answer Contribution $12 per unit; C/S ratio 40%; break-even 5,000 units or $150,000 revenue; target-profit output 6,500 units; margin of safety 3,000 units or 37.5%.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A service charges $80 per job. Variable cost is $50 per job and fixed costs are $45,000. Calculate the break-even number of jobs and target jobs for a $15,000 profit.
Give me a hint
Find contribution per job, then divide fixed costs plus target profit by that contribution.
Compare my reasoning
- Contribution = $80 − $50 = $30 per job.
- Break-even jobs = 45,000 ÷ 30 = 1,500.
- Target jobs = (45,000 + 15,000) ÷ 30 = 2,000.
Break-even 1,500 jobs; 2,000 jobs are required for a $15,000 target profit under the model.
Look for these in your work
- Contribution correct
- Break-even quantity correct
- Target profit added to fixed costs
A business has sales revenue of $240,000, variable costs of $144,000 and fixed costs of $72,000. Calculate its C/S ratio, break-even sales revenue, profit and margin of safety in revenue if sales remain at $240,000.
Give me a hint
Calculate contribution first and keep revenue and percentage measures in consistent units.
Compare my reasoning
- Contribution = 240,000 − 144,000 = $96,000; C/S ratio = 96,000 ÷ 240,000 = 40%.
- Break-even revenue = 72,000 ÷ 0.40 = $180,000; profit = 96,000 − 72,000 = $24,000.
- Margin of safety = 240,000 − 180,000 = $60,000, or 25% of planned revenue.
C/S ratio 40%; break-even revenue $180,000; profit $24,000; margin of safety $60,000 or 25%.
Look for these in your work
- Contribution and C/S ratio correct
- Decimal used for break-even sales
- Margin of safety denominator stated
An owner says a break-even point of 5,000 units proves that selling 5,001 units will make a profit. Explain the assumptions behind this claim and identify two factors that could invalidate it.
Give me a hint
Break-even is a model result under supplied relationships, not an unconditional forecast.
Compare my reasoning
- The claim assumes fixed costs remain fixed and selling price and variable cost per unit stay as modelled within the relevant range.
- A change in product mix, selling price, input costs, capacity or demand can shift the result.
- Sales may not equal production, and non-financial constraints such as quality or delivery capacity can affect achievable sales.
The model predicts a small profit only if the stated cost, price and sales assumptions hold. Price changes, cost inflation, product mix, capacity limits or demand shortfalls can move the break-even point; it is not a guarantee.
Look for these in your work
- Relevant-range assumptions stated
- At least two changing factors identified
- Forecast limitation explained
Common mistakes
- Dividing fixed costs by selling price instead of contribution per unit
- Using a percentage rather than a decimal in a break-even revenue calculation
- Treating a positive margin of safety as a guarantee that demand will not fall
What can you explain now?
Selling price is $25 and variable cost is $15. What is contribution per unit?
Compare with the explanation
$10
Contribution is the amount remaining from each sale after variable cost.
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Make it stick
Write the formulas for contribution per unit, break-even output and margin of safety percentage.
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