Breakeven

I assume that you have watched my free lectures on CVP analysis, and therefore you will be happy with the fact the breakeven revenue is equal to the fixed costs divided by the CS ratio. And that the margin of safety is the different between the budgeted sales and the breakeven sales.

Also, of course, the contribution is the sales revenue less the variable costs.

So…at the moment, the contribution is 60% x 1.6M = 0.96M, and therefore the variable costs are 1.6 – 0.96 = 0.64M.
The current breakeven is 840,000 / 0.64 = 1.3125M and the current margin of safety is 1.6M – 1.3125M = 0.2875M.

If variable costs reduce by 10% they would fall to 90% x 0.64M = 0.576M.
Therefore the new contribution will be 1.6M – 0.576M = 1.024M, and the new CS ratio will be 1.024/1.6 = 64%%.

If fixed costs increase by 20%, then they will be 840,000 + 20% = 1.008M

So the new breakeven will be 1.008 / 64% = 1.575M – which is higher than before.
The new margin of safety = 1.6M – 1.575M = 0.025M, which is lower than before.

(If you have not watched the free lectures, then I really do suggest that you do! Our free lectures are a complete course for Paper F5 and cover everything needed to be able to pass the exam well.)