Difference in breakeven points
Contract A has a higher fixed cost and a lower variable cost per sales euro. In contrast, Contract B has a lower fixed cost and a higher variable cost per sales euro. In Contract B, there is risk sharing between Espasso and Vieira, Moura and Rebello that lowers the breakeven point, but results in Espasso receiving less operating income if Tornado 2 is a mega-success.
2
Revenues, 0.625 × €300,000,000
€187,500,000 Variable costs, 0.40 × €187,500,000 75,000,000
Contribution margin
112,500,000 Fixed costs
24,000,000 Operating income
€ 88,500,000
Tornado 2
has a higher breakeven point than Tornado due to having a higher level of fixed costs and a lower unit contribution margin.
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