# 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: DeGrooteSchool.ca 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. DeGrooteSchool.ca Contribution Margin - Example Every DVD sold above 1,000 units will generate a contribution margin of \$200 DeGrooteSchool.ca 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 DeGrooteSchool.ca 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) DeGrooteSchool.ca 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 DeGrooteSchool.ca 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) DeGrooteSchool.ca 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  #### You've reached the end of your free preview.

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