114 ACCOUNTING FOR MANAGERS
£’000
Revenue 17,000 @ £30 510
3,000 @ £12 36
546
Variable costs 20,000 @ £10 200
Contribution 346
Fixed costs 200
Net profit 146
Consequently, provided that the business can sell at a price that at least covers
variable costs, in the short term the business will be better off. This argument does
not follow through into the long term, over which the business must cover all its
costs in order to be profitable. However, a business will also minimize its losses
by selling at a price that covers variable costs but not full costs. If in the above
example volume falls below the breakeven point:
£’000
Revenue 8,000 @ £30 240
Variable costs 8,000 @ £10 80
Contribution 160
Fixed costs 200
Net loss 40
If an order of 3,000 units at £12 is accepted, the loss will be reduced by £6,000:
£’000
Revenue 8,000 @ £30 240
3,000 @ £12 36
276
Variable costs 11,000 @ £10 110
Contribution 166
Fixed costs 200
Net loss 34
However, consideration needs to be given to the long-term marketing implications
of accepting orders at less than normal selling price: