Contribution margin is available to cover fixed costs

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Contribution margin is available to cover fixed costs and to contribute to income Formula for contribution margin per unit:
Image of page 6 Contribution Margin - Example To cover fixed costs of $200,000, Vargo Video must sell 1,000 DVD players ($200,000 ÷ $200) before it earns any net income.
Image of page 7 Contribution Margin - Example Every DVD sold above 1,000 units will generate a contribution margin of $200
Image of page 8 Contribution Margin Ratio $200 $500 40% Example: Calculation for Vargo Video CM Ratio shows the percentage of each sales dollar available to apply toward fixed costs and profits
Image of page 9 Contribution Margin Ratio – F/S ° If Vargo Video’s sales increases by $100,000, net income increases by $40,000. ° CM ratio (40%) x increase in sales ($100,000)
Image of page 10 Break-Even Analysis ° Break-Even Analysis is the process of finding the Break-Even point ° Break-Even point Level of activity at which total revenues equal total costs (both fixed and variable) Can be calculated or derived from a mathematical equation by using contribution margin (UCM, CM ratio) from a cost-volume-profit (CVP) graph Expressed either in sales units or in sales dollars
Image of page 11 Equation Method - Example Using Vargo Video data: Sales = Variable costs + Fixed Costs + Operating income 500Q = 300Q + $200,000 + $0 200Q = $200,000 Therefore, Q (breakeven # of units) = 1000 units Where: Q = sales volume ; $500 = selling price ; $300 = variable cost per unit ; $200,000 total fixed costs To find sales dollars required to break-even: 1,000 units X $500 = $500,000 (break-even sales dollars)
Image of page 12 Contribution Margin Technique At the break-even point, contribution margin must equal total fixed costs (CM = total revenues – variable costs) The break-even point can be calculated using either
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