Formula 1

Cost, Volume, Profit Formula

Keyatta Marshall

January 24, 2010

 Formula 2

Cost, Volume, Profit Formula

The basic components of cost-volume-profit analysis are: volume or level of

activity-the amount of output or sales, unit selling price. This is the price the firm assigns

for selling its products), variable cost per unit: Those are costs that stay fixed on a per

unit basis, but change in total with different levels of activity. Total Fixed Costs. Those

are fixed in total, but vary on a per unit basis depending on the level of activity.

Sales Mix: The relative percentage in which each product is sold when a company sells

more than one product.

Unit Contribution Margin = Unit Sales Price – Unit Variable Cost

Based on the above formula, the Unit Contribution Margin (UCM) increases

when the Sales Price increases.

For example: If a company is selling a product at a sales price of $10 per unit, and the

variable cost per unit is $4, then the contribution margin would be ($10 - $4) = $6. If the

sales price increases to $12, then the contribution margin would equal ($12 - $4) - $8 per

unit.

Breakeven Sales is defined as the level of sales that would cover all

Variable and Fixed Costs resulting in a zero profit for the company. The

Fixed Costs
Breakeven point in unit sales = Unit Contribution Margin .

Therefore if the Fixed Costs are $15,000, and the Unit Contribution Margin is $5,

then the Breakeven point = $15,000 ÷ $5 = 3,000 units. If Fixed Costs decrease to

$10,000, then the breakeven point in unit sales = $10,000 ÷ $5 = 2,000 units.
 Formula 3

Contribution Margin Ratio is the margin contributed per unit divided by the unit

selling price. If originally a company is selling a product for $100, and the Unit

Contribution Margin is $50, then the Contribution Margin Ratio = $50 ÷ $100 = 0.5 =

50%. If the selling price is increased to $150, and the Unit Contribution Margin remains

at $50, then the Contribution Margin Ratio = $50 ÷ $150 = 0.3333 = 33.33%. If the

selling price remains at $100, and the Unit Contribution Margin decreases to $20, then

the Contribution Margin Ratio = $20 ÷ $100 = 0.2 = 20%.