Calculate break-even output and margin of safety
Use Version 2 formulas for contribution, break-even output and margin of safety with clear units.
Cambridge IGCSE (9–1) Business 0774, 2027–2029 Version 2, Topic 4. Show working for calculations and state the assumptions behind production or cost decisions. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous operations study is assumed. Read the time period, output unit, cost data and operating constraints before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is contribution per unit calculated?
What you will learn
- Calculate contribution per unit
- Calculate break-even output
- Calculate and interpret margin of safety
Calculate the number of units needed
Contribution per unit = selling price per unit − variable cost per unit. Break-even output = fixed costs ÷ contribution per unit. The syllabus formula requires positive contribution for a meaningful break-even output.
If the result is fractional and the business sells whole units, round up to the next whole unit needed to cover fixed costs. State units and use compatible currency and per-unit figures.
Measure the safety margin
Cambridge Version 2 defines margin of safety = actual number of sales − break-even number of sales, measured in units. It shows how far actual sales are above break-even; a small or negative margin may indicate higher risk under the model.
Example: fixed costs $12,000; price $35; variable cost $20. Contribution is $15, break-even output is 800 units. At actual sales of 1,050 units, margin of safety is 250 units.
Pause and explain
Break-even output is 600 units and actual sales are 720 units. What is margin of safety?
Worked example
Fixed costs are $9,600, price is $28 per unit and variable cost is $16 per unit. Calculate contribution and break-even output. If actual sales are 900 units, find margin of safety.
Show the worked solution
- Contribution = 28 − 16 = $12 per unit.
- Break-even output = 9,600 ÷ 12 = 800 units.
- Margin of safety = 900 − 800 = 100 units.
Answer Contribution = $12 per unit; break-even output = 800 units; margin of safety = 100 units.
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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.
Fixed costs are $15,000, selling price is $50 and variable cost is $35. Calculate contribution per unit and break-even output.
Give me a hint
Subtract unit variable cost from price before dividing fixed costs.
Compare my reasoning
- Contribution: 50 − 35 = $15.
- Break-even: 15,000 ÷ 15.
- State the output in units.
Contribution = $15 per unit; break-even output = 1,000 units.
Look for these in your work
- Contribution correct
- Division correct
- Unit stated
A product has fixed costs of $7,500, price of $30 and variable cost of $18. Actual sales are 700 units. Calculate break-even output and margin of safety.
Give me a hint
Find contribution first; use the Version 2 unit margin formula.
Compare my reasoning
- Contribution is 30 − 18 = $12 per unit.
- Break-even output is 7,500 ÷ 12 = 625 units.
- Margin of safety is 700 − 625.
Break-even output = 625 units. Margin of safety = 75 units.
Look for these in your work
- Contribution used
- Break-even calculated
- Margin uses actual minus break-even
A business sells 500 units at $24 each. Variable cost is $16 per unit and fixed costs are $4,100. Calculate contribution, break-even output and margin of safety. State whether the business is above break-even.
Give me a hint
Use the same contribution and unit formulas as the Version 2 syllabus.
Compare my reasoning
- Contribution is $8 per unit.
- Break-even output is 4,100 ÷ 8 = 512.5, so 513 whole units are needed.
- Margin is 500 − 512.5 = −12.5 units, or 500 − 513 = −13 whole units using the rounded output.
Contribution = $8 per unit. Exact break-even is 512.5 units, so at least 513 whole units are needed. Actual sales of 500 are below break-even; using the exact calculation, margin of safety is −12.5 units (about −13 whole units).
Look for these in your work
- Contribution correct
- Whole-unit requirement rounded up
- Negative margin interpreted
Common mistakes
- Dividing fixed costs by selling price instead of contribution
- Subtracting break-even sales from actual sales in reverse
- Using a percentage instead of the syllabus's unit margin of safety
What can you explain now?
How is contribution per unit calculated?
Compare with the explanation
Selling price per unit − variable cost per unit
Contribution is the amount available toward fixed costs.
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Make it stick
What is the Version 2 margin-of-safety formula, and how do you interpret a negative result?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.