How do i calculate this question?

Question

Henry plc sells a single product. In the coming month it is budgeted that the product will generate total revenue of £500,000, with a contribution of £300,000. Fixed costs are budgeted at £225,000 for the month. What is the % margin of safety?

Answer 1

First calculate break even. Your contribution margin is 60%. Your fixed cost is $225,000.

You need $225,000 divided by 60% to break even.

At $375,000 you will hit break even.

 

 

 

                                  Now                                   Break even

Revenue                    $500,000     100%          $375,000    100%

Variable Cost              $200,000       40%          $150,000      40%  

Contribution Margin      $300,000       60%          $225,000     60%

 

Fixed Cost                    $225,000     NA               $225,000    NA

 

Profit                            $75,000                          $0

                                  _______                          __

 

Margin of safety      SalesNow - Break even   

                                  Sales  Now

           

                             $500,000  -   $375,000    =    25% 

                                       $500,000