basic The components of cost-volume-profit analysis are, volume or level of activity, unit selling price, variable cost per unit, total fixed costs, sales mix. The volume or level of activity is the amount of output or the amount of sales. The unit selling price is the price the company assigns or sets for selling its products. Variable cost per unit are the costs that stay fixed on a per unit basis but will vary on that per unit basis if the level of activity changes. The total fixed cost are those items that are fixed in total but vary on a per unit basis depending on the volume of activity. The Sales mix is the percentage in which each product is sold when the company sells more than just one product. According to the formula: Unit Contribution Margin (UCM) = Unit Sales Price Unit Variable Cost, the UCM increases when the Sales Price increases. If a company is selling toy fish at $10 per unit, and the variable cost per unit is $4, then the contribution margin would be $10- $4=$6. If the sales of the toy fish increase to $12, then the contribution margin would be $12-$4= $8 per unit. If the fixed costs decrease then the breakeven point in unit sales will change. The breakeven sales is defined as the level of the that sales would cover all Variable and Fixed Costs resulting in a zero profit for the company. The Breakeven point in unit sales equals the fixed costs divided by the unit contribution margin. Therefore if the toy fish company has fixed costs of $15,000, and the Unit Contribution Margin is $5, then the Breakeven point would be: $15,000 /$5= 3,000 units. If fixed costs decrease to only $10,000 then the breakeven point in unit sales would be: $10,000/$5=2,000 units. The Contribution Margin Ratio is the Contribution Margin per Unit divided by the Selling Unit price. If the toy fish company originally was selling a product for $100 and the Unit Contribution Margin is $50, then the Contribution Margin Ratio = $50 $100 = 0.5 = 50%. If the selling price of the toy fish product increases to $150, and the Unit Contribution Margin remains at $50, then the Contribution Margin Ratio = $50 $150 = 0.3333 = 33.33%.If the selling price remains at $100, and the Unit Contribution Margin decreases to $20, then the Contribution Margin Ratio = $20 $100 = 0.2 = 20%.
Kieso, D., Kimmel, P., & Weygandt, J. (2003). Essentials of accounting: Tools for business decision making (2nd ed.). Hoboken, NJ: John Wiley & Sons, Inc.