Bond SA – a marginal costing example

Case Study

Bond SA is planning to manufacture a new product with an initial sales forecast of 3,600 units in
the first year at a selling price of €800 each. The finance department has calculated that the
variable cost for each truck will be €300. The fixed costs for the manufacturing facility for the
year are €1,500,000. Using the information provided by the sales forecast and the finance
department it is now possible to calculate the planned profit, the contribution and the break-
even point for this venture by leveraging the nature of fixed and variable costs.

If Bond plc achieves its sales forecast of 3,600 units then the company will make a planned
profit before tax of €300,000. Crucially the company’s break-even point is 3,000 units, at which
point Bond plc makes no profit but also no loss, because sales revenue (€2,400,000) equals all
the variable costs (€900,000) and all the total fixed costs associated with production process
(€1,500,000). Any additional unit sold after this point will provide Bond with profitable sales
revenue. The difference between the planned profit and the break-even point is called the
margin of safety. In the case of Bond SA, this equates to 600 units.