Detailed Calculations and Formulas
1. Contribution Margin per Unit:
Formula: CM per unit = Selling Price per Unit - Variable Cost per Unit
Example:
- Selling price: $100 per unit
- Variable cost: $60 per unit
- CM per unit = $100 - $60 = $40 per unit
- Each unit sold contributes $40 toward fixed costs and profit
2. Total Contribution Margin:
Formula: Total CM = Total Sales Revenue - Total Variable Costs
Example:
- Sales: 1,000 units × $100 = $100,000
- Variable costs: 1,000 units × $60 = $60,000
- Total CM = $100,000 - $60,000 = $40,000
- Total amount available to cover fixed costs
3. Contribution Margin Ratio:
Formula: CM Ratio = (Sales - Variable Costs) ÷ Sales
Alternative: CM Ratio = CM per Unit ÷ Selling Price per Unit
Example:
- CM per unit: $40
- Selling price: $100
- CM Ratio = $40 ÷ $100 = 40%
- 40% of each sales dollar contributes to fixed costs and profit
4. Break-even Point Calculations:
| Break-even Measure | Formula | Example Calculation |
|---|---|---|
| Break-even Units | Fixed Costs ÷ CM per Unit | $20,000 ÷ $40 = 500 units |
| Break-even Sales $ | Fixed Costs ÷ CM Ratio | $20,000 ÷ 40% = $50,000 |
| Target Profit Units | (Fixed Costs + Target Profit) ÷ CM per Unit | ($20,000 + $10,000) ÷ $40 = 750 units |
| Target Profit Sales $ | (Fixed Costs + Target Profit) ÷ CM Ratio | ($20,000 + $10,000) ÷ 40% = $75,000 |
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