Sales price per unit

Variable materials per unit

Variable labor per unit
Variable Production overhead per unit
Total Variable Cost per unit
Fixed productin overhead
Marketing, admin and other fixed costs
Total fixed cost
Last yeat's sales in units
Capacity in units
Total Cost

KC
$
$
$
$
$
$
$
$
$
$
$

1. Contribution margin per unit

Contribution Margin Ratio
Operating Leverage

8.50
2.25
1.25
1.00
4.50
750,000.00
250,000.00
1,000,000.00
350,000.00
500,000.00
2,575,000.00

Benchmark
Competitor
$
$
$
$
$
$
$
$
$
$
$

4.00
47.1%
38.8%

8.00
2.75
2.00
1.25
6.00

250,000.00
150,000.00
400,000.00
400,000.00
450,000.00
2,800,000.00
2.00
25.0%
14.3%

Contribution margin is an incremental profit earned for each unit sold. The total contribution margin g
by an entity represents the total earnings available to pay for fixed expenses and generate a profit. Th
contribution margin formula is useful for determining the proportion of profit earned from a sale. The
contribution margin should be relatively high, since it must be sufficient to also cover fixed costs and
administrative overhead. Also, the measure is useful for determining whether to allow a lower price in
pricing situations. If the contribution margin ratio is excessively low or negative, it would be unwise to
selling a product at that price point, since the company would have considerable difficulty earning a p
the long term.

High operating leverage. A large proportion of the companys costs are fixed costs.
In this case, the firm earns a large profit on each incremental sale, but must attain sufficient sales volu
cover its substantial fixed costs. If it can do so, then the entity will earn a substantial profit on all sales
has paid for its fixed costs.
2. Break-even point
3. Contribution Margin Income Statement
Sales
Less Variable Cost
Contribution Margin
Less Fixed Cost
Net profit (loss)

250,000
$
$
$
$
$

2,975,000.00
(1,575,000.00)
1,400,000.00
(1,000,000.00)
400,000.00

200,000
$
$
$
$
$

3,200,000.00
(2,400,000.00)
800,000.00
(400,000.00)
400,000.00

4. Single graph

5. Demand
Units
200,000
220,000
242,000
266,200
292,820
322,102
354,312
389,743
400,000

Profit
$
(200,000.00)
$
(120,000.00)
$
(32,000.00)
$
64,800.00
$
171,280.00
$
288,408.00
$
417,248.80
$
558,973.68
$
600,000.00

$700,000.00
$600,000.00
$500,000.00
$400,000.00
$300,000.00
$200,000.00
$100,000.00
$$(100,000.00)
$(200,000.00)
$(300,000.00)

Profit

ontribution margin generated

generate a profit. The
ed from a sale. The
ver fixed costs and
llow a lower price in special
would be unwise to continue
difficulty earning a profit over

.
n sufficient sales volume to
tial profit on all sales after it

Profit