Marginal Costing Contribution Margin Cost / Volume / Profit Formulae

This article focuses on the basic and important formulae used in Contribution margin - cost/ volume/ profit in
marginal costing: Marginal cost, missing factor, contribution, units sold, break even point, break even sales,
calculation of sales for desired profit, profit/volume ratio, contibution/sales ratio, margin of safety, quantity, target
income etc.
Basic Equation:
ariable Cost ! "irect Materials # "irect $abor # "irect %&penses
ariable cost per unit ! "ifference in cost
"ifference in 'ctivity level
ariable Cost is also called as Marginal Cost.

Marginal Cost Equation:
(ales )(* ! ariable Cost )* # +i&ed %&penses )+* # or , -rofit )-* / $oss )$*
( ! (ales
! ariable Cost
+ ! +i&ed %&penses
#- ! -rofit
-- ! $oss
(ales - ariable Cost ! +i&ed %&penses # or , -rofit / $oss
( - ! + # or , -

Contribution:
(ales , ariable Cost ! Contribution ! ( -
+i&ed %&penses # or , -rofit / $oss ! Contribution ! + # or , -
.n simple form, ( , ! + # or , -

Missing Factor:
.n the above four factors, if any three factors are kno/n, the remaining one can be easily found out.
Sales ! ariable Cost # +i&ed %&penses # -rofit
Variable Cost ! (ales , )+i&ed %&penses # -rofit*
Fixed Expenses ! (ales , ariable Cost , -rofit
Profit ! (ales , ariable Cost , +i&ed %&penses

Units sold:
0nits sold ! Contribution margin / Contribution margin per unit

Break Even Point:
' business is said to break even /hen its total sales are equal to its total costs.
.t is a point /here
There is no profit or no loss.
Contribution is equal to +i&ed %&penses.
Break Even Point ! Total +i&ed %&penses
in Units! )(elling -rice per 0nit , Marginal Cost per 0nit*
The ans/er /ill be in units and not in value because break even point is based on unit cost.

Break Even Sales:
( , ! + # -
't 1reak %ven -oint -rofit equals 2ero.
3ence, ( , ! +
+or 1reak %ven -oint, the equation is ( , ! +
"ividing both sides by ( , ,
( , ! +
)( , * )( , *
i.e. 4 ! +
)( , *
Multiplying both sides by (,
( & 4 ! + & (
)( , *
"#erefore$ t#e for%ula for t#e calculation of break even sales is:
F x S
S & V!

Calculation of Sales for a desired or expected Profit:
)+i&ed %&penses # -rofit*
)(elling -rice per 0nit , Marginal Cost per 0nit*
5r
)+i&ed %&penses # -rofit*
Contribution per 0nit
"#e for%ula for t#e calculation of Sales to earn an expected or desired profit is:
F ' P! x S
S & V

Profit ( Volu%e )atio or Contribution ( Sales )atio
P(V )atio! or C(S )atio!
P(V )atio
Contribution i.e. C
(ales (
5r
)(ales , ariable Cost* i.e. ( ,
(ales (
5r
)+i&ed %&penses # -rofit* i.e. + # -
(ales (
5r
Changes in contribution in t/o periods
Changes in (ales in t/o periods
5r
Changes in -rofit in t/o periods
Changes in (ales in t/o periods
The ratio can be sho/n in the form of percentage if the formula is multiplied by 466.
This ratio can be used for the calculation of
Break Even Point is Fixed Costs ! +
P(V )atio -/ 7atio

For t#e calculation of sales to earn a desired or expected profit is
Fixed Costs ' Profit ! + # -
P(V )atio -/ 7atio
Contribution
P(V )atio
Variable Costs ! (ales )4 , -/ 7atio*
Contribution is (ales & -/ 7atio

Margin of Safet* M(S!
.t is the difference bet/een the actual sales and the sales at break even point.
(ales or 5utput beyond break even point is kno/n as margin of safety.
Margin of Safet* M(S! ! -resent (ales , 1reak %ven (ales
5r
! -rofit
-/ 7atio

Break+Even and "arget ,nco%e
Sales - "otal Variable Costs ' "otal Fixed Costs ' "arget ,nco%e
8here Target .ncome is 2ero, then
(ales ! Total ariable Costs # Total +i&ed Costs
.#ic# is t#e Break even sales/
Break+Even Point in Units ! Total +i&ed Costs / Contribution Margin -er 0nit
Break+Even Point in Sales ! Total +i&ed Costs / Contribution Margin 7atio
Units to 0c#ieve a "arget ,nco%e ! )Total +i&ed Costs # Target .ncome*
Contribution Margin per 0nit
Sales to 0c#ieve a "arget ,nco%e ! )Total +i&ed Costs # Target .ncome*
Contribution Margin 7atio
Break+even quantit* ! Total fi&ed costs
)selling price - average variable costs*.
%&planation - in the denominator :
9-rice minus average variable cost9 is the variable profit per unit, or contribution margin of each unit that is sold.
This relationship is derived from the profit equation:
-rofit ! 7evenues - Costs
8here,
7evenues ! )selling price : quantity of product* and
Costs ! )average variable costs : quantity* # total fi&ed costs.
Therefore,
-rofit ! )selling price : quantity* - )average variable costs : quantity # total fi&ed costs*.
(olving for ;uantity of product at the breakeven point /hen -rofit equals 2ero,
the quantity of product at breakeven is
Break+even quantit* ! Total fi&ed costs
)selling price - average variable costs*