BREAKDOWN OF BREAK-EVEN SALES:

Product A Product B Product C Total

Total BE sales x Sales mix ratio 16.95 40.68% 42.37%

%
162,720 169,480 P400,000
67,800
2. Breakeven point in units
BEP u = FxC / WaUCM = 101,680/18.75 =5,423 units

Computation of weighted average unit contribution margin (WaUCM)

WaUCM = Total CM / Total Units = 150,000 / 8,000 =P18.75

Breakdown of the break-even sales:

Product A Product B Product C Total

Total BE sales x Sales mix ratio 12.5% 25% 62.5%

677.87 1,355.73 3,389.33 5,422.93

Margin of Safety

Margin of safety – the amount of peso-sales or the number of units by which actual or budgeted
sales may be decreased without resulting into a loss
Formulas:

MS p= Sp – BEPp

MSu= Su – BEPu or MSp / SP

MSR = MSp / Sp or MSu / Su

Where MSp=margin of safety in pesos

MSu= margin of safety in units

MSR= margin of safety ratio

Sp=sales in pesos
Su=sales in units

BEPp=break-even point in pesos

BEPu=break-even point in units

SP=selling price
Example:

If a company’s present sales is 100,000 units or P500,000 and the break-even point is 60,000 units:

a. MSp = P500,000 – P300,000 = P200,000

b. MSu = 100,000 – 60,000 = 40,000 units or MSu = P200,000/P5 = 40,000 units

c. MSR = P200,000/P500,000 = 40%

The company can reduce its present sales of P500,000 by P200,000 or by 40,000 units, or by 40%
without incurring a loss

OPERATING LEVERAGE
A Company has an operating leverage if it has a very high contribution margin despite its having
high fixed costs

Operating leverage factor (OLF) or degree of operating leverage – used to measure the extent of
the change in profit before tax resulting from change in sales
DOL or OLF = Total CM / Profit before tax or %change in profit before tax / % change in sales
% change in profit = % change in sales x DOL
Illustrative example

Following is the company ‘s result of operations from its present sales level of 10,000 units:

Sales (10,000 units x P5) 50,000

Variable costs (10,000 x P3) 30,000

Contribution Margin 20,000

Fixed Costs 12,000

Profit before tax 8,000

Based on the above data: