1 / 17

Contribution Margin Ratio

Contribution Margin Ratio. Sales $ 1,000,000. CM Ratio =. Variable Costs 600,000. Contribution Margin 400,000. = 40%. Sales = $1. $1,000,000 – $600,000. $1,000,000. Variable costs = ¢60.

indiya
Télécharger la présentation

Contribution Margin Ratio

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Contribution Margin Ratio Sales $ 1,000,000 CM Ratio = Variable Costs 600,000 Contribution Margin 400,000 = 40% Sales = $1 $1,000,000 – $600,000 $1,000,000 Variable costs = ¢60 Contribution margin = ¢40 or 40% of every dollar in sales An $80,000 increase in sales volume would increase income from operations by $32,000 ($80,000 × 40%).

  2. Contribution Margin Ratio • 60% of $80,000 increase in sales will go to variable costs and the remaining 40% will go to contribution margin. • The increase in contribution margin will flow to income from operations as fixed costs do not change with increase in sales.

  3. Unit Contribution Margin • Useful when an increase/decrease in sales volume is measured in units (not dollars). Unit Contribution Margin = Sales Price per Unit – Variable Cost per Unit

  4. Unit Contribution Margin • If sales increases by 15,000 units, from 50,000 units to 65,000 units: Sales Price/Unit $20 Unit Variable Cost 12 Unit Contribution Margin $ 8

  5. Learning Objective 3 Determine the break-even point and sales necessary to achieve a target profit

  6. Break-Even Point • Level of operations where revenues and costs are the same. • Useful in business planning, especially when increasing or decreasing operations.

  7. Fixed Costs = $90,000 Selling price per unit Variable cost per unit $25 $15 Contribution Margin per unit $10 Break-Even Point Fixed Costs UCM $90,000 $10 = 9,000 units = Break-Even Sales (Units) =

  8. Break-Even Point $90,000/$10 = 9,000 units needed to break even

  9. Effect of Changes in Fixed Costs There is a direct relationship between total fixed costs and break-even units.

  10. Effect of Changes in Fixed Costs How would a $100,000 increase in fixed costs affect the break-even sales units? Now: $600,000/$20 UCM = 30,000 break-even Proposed: $700,000/$20 UCM = 35,000 break-even

  11. Effect of Changes in Unit Variable Costs There is a direct relationship between unit variable costs and break-even units.

  12. Effect of Changes in Unit Variable Costs How would an extra 2% commission (increase in variable cost per unit) affect the break-even sales units? Now: $840,000/$105 UCM = 8,000 break-even Proposed: $840,000/$100 UCM = 8,400 break-even

  13. Effect of Changes in Unit Selling Price There is an inverse relationship between unit selling price and break-even units.

  14. Effect of Changes in Unit Selling Price How would a $10 price increase affect the break-even sales units? Now: $600,000/$20 UCM = 30,000 break-even Proposed: $600,000/$30 UCM = 20,000 break-even

  15. Target Profit • To find units needed to attain a certain target profit, add the target profit to the fixed costs in the break-even formula. Fixed Costs + Target Profit UCM Break-Even Sales (Units) =

  16. Fixed Costs = $200,000 Target Profit = $100,000 Selling price Per unit Variable Cost Per unit $75 $45 Contribution Margin per unit $30 Calculating Sales (units) Fixed Costs + Target Profit UCM $200,000 + $100,000 $30 = 10,000 units =

  17. Verification of Units Required to Achieve Target Profit Target Profit

More Related