What is contribution margin? Why do we care?

CM is the money we take home at the end of the day for paying rent (and
other FC) and making a profit. It's what keeps us in business from day to
day!

Emma's GMAT book business

Costs: Revenue
Booth rental 2000 GMAT packs 200
GMAT packs 120 ea

Contribution Margin = Total Revenues - Total Variable Costs

CM = R - VC

Packs (units): 0 5 10
R 0 1000 2000
VC 0 -600 -1200
CM 0 400 800

CM/u R/u-VC/u
CM/u 80 80

Contribution Margin Ratio = Contribution Margin / Rev

CM% 0.4 0.4

Operating Income = Contribution Margin - Total Fixed Costs

OI = R - VC/u*U -FC
Packs (units): 0 5 10 15 20 25
R 0 1000 2000 3000 4000 5000
VC 0 600 1200 1800 2400 3000
CM 0 400 800 1200 1600 2000
FC 2000 2000 2000 2000 2000 2000
OI -2000 -1600 -1200 -800 -400 0

Operating Income = CM Ratio X Revenue - FC

Packs 0 5 10 15 20 25
Revenues 0 1000 2000 3000 4000 5000
CM% 0.4 0.4 0.4 0.4 0.4 0.4
CM 0 400 800 1200 1600 2000
FC 2000 2000 2000 2000 2000 2000
OI -2000 -1600 -1200 -800 -400 0

OI = CM - FC
OI = R - VC - FC
OI = UxR/u - UxVC/u - FC

Best Windows:
R/u 700
VC/u 600
FC 160000

Units 0 1000 2000 3000 4000 1600

Rev 0 700000 1400000 2100000 2800000 1120000
VC 0 600000 1200000 1800000 2400000 960000
CM 0 100000 200000 300000 400000 160000
FC 160000 160000 160000 160000 160000 160000
TC 160000 760000 1360000 1960000 2560000 1120000
OI -160000 -60000 40000 140000 240000 0

Slope of the TC line = VC/u

Slope of the R line = R/u

This all allows us to answer one key question:

How much business do we need ot do to stay open?
This is the breakeven point
To find it we:
can take any one of the formulas for OI
set equal to zero
solve for what we want

Often interested in U or R

BE Units = FC/(R/u-VC/u) = FC/(CM/u)

To get BE revenue just mult by price:

R/u*U= R/u(FC/(R/u-VC/u)) = FC/(CM/R) = FC/CM%

BE units for GMAT
FC 2000
CM/u 80
BE units= 25

BE units for Best Windows:

FC 160000
CM/u 100
BE units for Best Win 1600

Revenue needed for taget operating income:

(CM/u X U) - FC = Target OI
U = (FC + TOI)/ CM/u

To earn 1,200
with FC 2000
and CM/u 80
Emma must sell: 40

R = (FC + TOI) / CM%

To earn 1,200
with fc 2000
and CM% 0.4
Emma must sell: 8000
 OI
12000

10000

e Costs 8000

6000

4000

2000

0
0 5 10 15 20 25 30

d Costs -2000

30 35 40 45 50
6000 7000 8000 -4000
9000 10000
3600 4200 4800 5400 6000
R VC CM FC
2400 2800 3200 3600 4000
2000 2000 2000 2000 2000
400 800 1200 1600 2000

3000000

30 35 40 45 50
6000 7000 8000 9000 10000
0.4 2500000 0.4 0.4 0.4 0.4

2000000
 2500000
2400 2800 3200 3600 4000
2000 2000 2000 2000 2000
400 800 1200 1600 2000
2000000

1500000

1000000

500000

0
0 1000 2000 3000

-500000
 OI

15 20 25 30 35 40 45 50

R VC CM FC OI
3000 4000
What is contribution margin? Why do we care?
CM is the money we take home at the end of the day for paying rent (and
other FC) and making a profit. It's what keeps us in business from day to
day!

Emma's GMAT book business:

Costs: Revenue
Booth rental 2000 GMAT packs 200 R/u
VC/u 120 ea.

Contribution Margin = Total Revenues - Total Variable Costs

Packs: 5 40
R 1000 8000
VC 600 4800
CM 400 3200
CM/u R/u-VC/u
CM/u 80 80

Contribution Margin Ratio = Contribution Margin / Rev

CM% 0.4

Operating Income = Contribution Margin - Total Fixed Costs

Packs: 0 5 10 15 20 25
R 0 1000 2000 3000 4000 5000
VC 0 600 1200 1800 2400 3000
CM 0 400 800 1200 1600 2000
FC 2000 2000 2000 2000 2000 2000
OI -2000 -1600 -1200 -800 -400 0

Operating Income = CM Ratio X Revenue - FC

Packs 0 5 10 15 20 25
R 0 1000 2000 3000 4000 5000
CM% 0.4 0.4 0.4 0.4 0.4 0.4
CM 0 400 800 1200 1600 2000
FC 2000 2000 2000 2000 2000 2000
OI -2000 -1600 -1200 -800 -400 0
OI = CM - FC
OI = R - VC - FC 3000000

OI = UxR/u - UxVC/u - FC
2500000

Best Windows:
R/u 700 2000000
VC/u 600
FC: 160000
1500000

Units 0 1000 2000 3000 4000 1600

Rev 0 700000 1400000 2100000 2800000 1120000
1000000
TC 160000 760000 1360000 1960000 2560000 1120000
OI -160000 -60000 40000 140000 240000 0
500000
Slope of the TC line = VC/u
Slope of the R line = Price + R/u
0
0

This all allows us to answer one key question:

-500000
How much business do we need to do to stay open?
This is the breakeven point
To find it we:
can take any one of the formulas for OI
set equal to zero
solve for what we want
Often interested in U or R

BE Units = FC/(R/u-VC/u) = FC/(CM/u)

BE Rev = R/u(BE Units) = R/u(FC/(R/u-VC/u)) FC/(CM/R) = FC/CM%

BE Units for GMAT:

FC 2000
CM/u 80
BE Units for GMAT: 25

BE rev for GMAT

FC 2000
CM% 0.4
BE rev for GMAT 5000
Revenue needed for target operating income:
TOI = CM - FC
U_be = (FC + TOI)/ CM/u
R_be = (FC + TOI)/ CM%

TO Get 1200
FC 2000
CM/u 80
TO GET 1,200: 40

TO Get 1200 OI
FC 2000
CM% 0.4
TO GET 1,200: 8000
 Chart Title
10000

8000

6000

4000

2000

0
0 5 10 15 20 25 30 35 40

30 35 40
6000 -2000 7000 8000
3600 4200 4800
2400 2800 3200
2000 -4000 2000 2000
400 800 1200
R VC CM FC OI

30 35 40
6000 7000 8000
0.4 0.4 0.4
2400 2800 3200
2000 2000 2000
400 800 1200
 Chart Title

0 1000 2000 3000 4000

Rev TC OI
4000
What is contribution margin? Why do we care?
CM is the money we take home at the end of the day for paying rent (and
other FC) and making a profit. It's what keeps us in business from day to day!

Emma's GMAT book business:

Costs: Revenue:
Booth (FC) 2000 Price (R/u) 200
Packets (VC/u) 120 ea.

Contribution Margin = Total Revenues - Total Variable Costs

CM=R-VC

Packs: 5 40
R 1000 8000
VC 600 4800
CM 400 3200

CM/u R/u-VC/u
CM/u 80 80

Contribution Margin Ratio = Contribution Margin / Rev

CM% 0.4

Operating Income = Contribution Margin - Total Fixed Costs

Packs: 0 5 10 15 20
R 0 1000 2000 3000 4000
VC 0 600 1200 1800 2400
CM 0 400 800 1200 1600
FC 2000 2000 2000 2000 2000
OI -2000 -1600 -1200 -800 -400

Operating Income = CM Ratio X Revenue - FC

Packs: 0 5 10 15 20
R 0 1000 2000 3000 4000
CM% 0.4 0.4 0.4 0.4 0.4
CM 0 400 800 1200 1600
FC 2000 2000 2000 2000 2000
OI -2000 -1600 -1200 -800 -400

OI = CM - FC
OI = R - VC - FC
OI = UxR/u - UxVC/u - FC

Best Windows:
R/u 700
VC/u 600
FC: 160000

Units 0 1000 2000 3000 4000

Rev 0 700000 1400000 2100000 2800000
TC 160000 760000 1360000 1960000 2560000
OI -160000 -60000 40000 140000 240000

Slope of the TC line = VC/u

Slope of the R line = Price = R/u

This all allows us to answer one key question:

How much business do we need to do to stay open?
This is the breakeven point
To find it we:
can take any one of the formulas for OI
set equal to zero
solve for what we want
Often interested in U or R

BE Units = FC/(R/u-VC/u) = FC/(CM/u)

BE units for GMAT

FC 2000
CM/u 80
BE units for GMAT 25
BE Rev = R/u(BE Units) = R/u(FC/(R/u-VC/u))
BE rev for GMAT
FC 2000
CM% 0.4
BE rev for GMAT 5000

Revenue needed for target operating income:

TOI = CM - FC
U_t = (FC + TOI)/ CM/u
R_t = (FC + TOI)/ CM%

Target units for GMAT

TOI 1200
FC 2000
CM/u 80
Target units for GMAT 40

Target revenue for GMAT

TOI 1200
FC 2000
CM% 0.4
Target rev for GMAT 8000
 Chart Title
ariable Costs 10000

8000

6000

4000

n / Rev
2000

Fixed Costs
0
0 5 10 15 20 25 30 3
25 30 35 40
5000 6000 7000 8000
3000 3600 4200 4800 -2000
2000 2400 2800 3200
2000 2000 2000 2000
0 400 800 1200 -4000

R VC CM FC OI

25 30 35 40 Chart Title
5000 6000 7000 8000
3000000
0.4 0.4 0.4 0.4

2500000
 Chart Title
3000000

2000 2400 2800 3200

2000 2000 2000 2000
2500000
0 400 800 1200

2000000

1500000

1000000

500000

1600
0
1120000 1 2 3 4 5
1120000
0
-500000

Rev TC OI
FC/(CM/R) = FC/CM%
 Chart Title

15 20 25 30 35 40

VC CM FC OI
 4 5

OI