This type of BEA can be used to calculate the level of sales which most be attained to avoid less or to calculate the margin of safety MS. MS is the difference between the firm’s actual level of sales and sales at the BE point as represented in the above diagram. It is expressed as MS = Actual sales revenue – BE sales. Nevertheless, firms compute the MS in terms of ratio are:

MS  Actual Sales     Ratio =          MS             
                                               Actual Sales     

The MS is an indicator of the strength of a firm. If the margin is large, it represents that the firm can make profit even it has to face difficulties. On the other hand, if the margin is small, a small reduction in sales can lead to loss. MS is nil at the point BE point for the reason that actual sales volume is equal to the cost.

The Equation Method

The same results can be arrived at by the equation method:

                    Profit       =          TR – TVC – TFC

Where         TR           =          Price x Quantity

                    TVC        =          AVC x Quantity

                    TFC is a constant

                    BE point is where profit = 0

                    And 0 = (Price x Quantity) – (AVC x Quantity) – TFC

Rearranging the above equation:

                    BE Quantity        =                      TFC             
                                                                  Price – AVC