Contribution Margin Income Statement

Sales (50,000 units) $1,000,000

The contribution
Variable costs 600,000 margin is
Contribution margin $ 400,000 available to cover
Fixed costs 300,000
Income from operations $ 100,000 the fixed costs
and income from
Contribution operations.
margin

Income from
FIXED Operations
COSTS
 Contribution Margin Income Statement

Sales (50,000 units) $1,000,000

Variable costs 600,000
Contribution margin $ 400,000
Fixed costs 300,000
Income from operations $ 100,000

Income
Sales Variable Fixed
= + + from
costs costs
operations

Variable Contribution
Sales – =
costs margin
 Contribution Margin Ratio

Sales (50,000 units) $1,000,000 100%

Variable costs 600,000 60%
Contribution margin $ 400,000 40%
Fixed costs 300,000 30%
Income from operations $ 100,000 10%

Sales – Variable costs

Contribution margin ratio =
Sales
$1,000,000 – $600,000
Contribution margin ratio =
$1,000,000
Contribution margin ratio = 40%
 Contribution Margin Ratio

Sales (50,000 units) $1,000,000 100% $20

Variable costs 600,000 60% 12
Contribution margin $ 400,000 40% $ 8
Fixed costs 300,000 30%
Income from operations $ 100,000 10%

The contribution margin can be expressed three ways:

1. Total contribution margin in dollars.
2. Contribution margin ratio (percentage).
3. Unit contribution margin (dollars per unit).
What is the
break-even
point?

Revenues = Costs

Break-even
 Calculating the Break-Even Point

Sales (? units) $ ? $25

Variable costs ? 15
Contribution margin $ 90,000 $10
Fixed costs 90,000
Income from operations $ 0

At the break-even point, fixed

costs and the contribution
margin are equal.
 Calculating the Break-Even Point
In Units

Sales($25
Sales ($25xx?9,000)
units) $ $225,000
? $25
Variablecosts
Variable costs($15
($15xx?9,000)
units) 135,000
? 15
Contributionmargin
Contribution margin $ $ 90,000
90,000 $10
Fixedcosts
Fixed costs 90,000
90,000
Incomefrom
Income fromoperations
operations $ $ 00

$90,000
Fixed costs
Break-even sales (units) = 9,000 units
$10 margin
Unit contribution

PROOF!
 Calculating the Break-Even Point
In Units

Sales ($250 x ? units) $ ? $250

Variable costs ($145 x ? units) ? 145
Contribution margin $ ? $105
Fixed costs 840,000
Income from operations $ 0

$840,000
Fixed costs
Break-even sales (units) = 8,000 units
$105 margin
Unit contribution
The unit selling price is $250 and unit variable
cost is $145. Fixed costs are $840,000.
 Calculating the Break-Even Point
In Units

Sales ($25 x ?Next,

units) assume$ ? $250
$250
variable
Variable costs ($15 x ?costs
units) is ? 145
150
Contribution margin by $5.
increased $ ? $105
$100
Fixed costs 840,000
Income from operations $ 0

$840,000
Fixed costs
Break-even sales (units) = 8,400 units
$100 margin
Unit contribution
The unit selling price is $250 and unit variable
cost is $145. Fixed costs are $840,000.
 Calculating the Break-Even Point
In Units

Sales $ ? $50
Variable costs ? 30
Contribution margin $ ? $20
Fixed costs $600,000
Income from operations $ 0

$600,000
Fixed costs
Break-even sales (units) = 30,000 units
$20 margin
Unit contribution
A firm currently sells their product at $50 per
unit and it has a related unit variable cost of
$30. The fixed costs are $600,000.
 Calculating the Break-Even Point
In Units
Management increases
Salesthe selling price from
$ ? $60
$50
Variable costs
$50 to $60. ? 30
30
Contribution margin $ ? $30
$20
Fixed costs $600,000
Income from operations $ 0

$600,000
Fixed costs
Break-even sales (units) = 20,000 units
$30 margin
Unit contribution
Summary of Effects of Changes on
Break-Even Point
 Target Profit In
Units

Sales (? units) $ ? $75

Variable costs ? 45
Contribution margin $ ? $35
Fixed costs 200,000
Income from operations $ 0

Fixed costs are estimated at $200,000, and the

desired profit is $100,000. The unit selling
price is $75 and the unit variable cost is $45.
The firm wishes to make a $100,000 profit.
 Target Profit In
Units

Target profit is
Sales (? units) $ ? used
$75 here to refer
Variable costs ?
to45“Income from
Contribution margin $ ? $35
Fixed costs 200,000 operations.”
Income from operations $ 0

Fixed costs ++desired

$200,000 profit
$100,000
Sales (units) = 10,000 units
Unit contribution
$30 margin
 Target Profit

Sales (10,000 units x $75) $750,000 $75

Variable costs (10,000 x $45) 450,000 45
Contribution margin $300,000 $30
Fixed costs 200,000
Income from operations $100,000

Proof that sales of 10,000 units

will provide a profit of $100,000.
Graphic Approach to
Cost-Volume-Profit
Analysis
 Cost-Volume-Profit Chart
$500 Total Sales
Sales and Costs ($000)

$450
$400
$350
$300
$250
$200
$150 Variable
$100 60% Costs
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50

Unit variable cost 30
Unit contribution margin $ 20
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500
Sales and Costs ($000)

$450
$400 Contribution
$350 Margin
$300 40%
$250
$200
$150
$100 60%
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60%
Unit contribution margin $ 20 40%
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500 Total
Sales and Costs ($000)

$450 Costs
$400
$350 Fixed Costs
$300
$250
$200
$150
$100
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60%
Unit contribution margin $ 20 40%
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500
Sales and Costs ($000)

$450
$400
$350 Break-Even Point
$300
$250
$200
$150
$100
$ 50
0
1 2 3 4 5 6 7 8 9 10
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60% $100,000 = 5,000 units
Unit contribution margin $ 20 40%
$20
Total fixed costs $100,000
 Cost-Volume-Profit Chart
$500
Operating Profit Area
Sales and Costs ($000)

$450
$400
$350
$300
$250 Operating Loss Area
$200
$150
$100
$ 50
0
Units of Sales (000)

Unit selling price $ 50 100%

Unit variable cost 30 60%
Unit contribution margin $ 20 40%
Total fixed costs $100,000
 $100
$75
Operating Profit

$50
(Loss) $000’s

$25
$ 0
$(25)
$(50) Relevant
$(75) range is
$(100)
1 2 3 4 5 6 7 8 10,000
9 10 units
Units of Sales (000’s)

Sales (10,000 units x $50) $500,000

Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
 $100
$75 Profit Line
Operating Profit

$50 Operating
(Loss) $000’s

$25 profit
$ 0
$(25) Operating Maximum
$(50) loss profit within
$(75) the relevant
$(100)
1 2 3 4 5 6 7 8 9 10 range.
Units of Sales (000’s)
Maximum loss
is equal
Sales to the
(10,000 units x $50) $500,000
total fixed
Variable costs.
costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
 $100
$75
Operating Profit

$50 Operating
(Loss) $000’s

$25 profit
$ 0
$(25) Operating
$(50) loss Break-Even Point
$(75)
$(100)
1 2 3 4 5 6 7 8 9 10
Units of Sales (000’s)

Sales (10,000 units x $50) $500,000

Variable costs (10,000 units x $30) 300,000
Contribution margin (10,000 units x $20) $200,000
Fixed costs 100,000
Operating profit $100,000
 Sales Mix
Considerations
Cascade Company sold 8,000 units of Product A
and 2,000 units of Product B during the past year.
Cascade Company’s fixed costs are $200,000.
Other relevant data are as follows:
Products
A B
Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Sales Mix Considerations
Products
A B
Sales $ 90 $140
Variable costs 70 95
Contribution margin $ 20 $ 45
Sales mix 80% 20%
Product contribution
margin $16 $ 9

$25
Fixed costs, $200,000
Sales Mix Considerations
Products
Product contribution A B
margin $16 $ 9

$25
Break-even sales units
$200,000
$25

Fixed costs, $200,000

Sales Mix Considerations
Products
Product contribution A B
margin $16 $ 9

$25
Break-even sales units
$200,000
= 8,000 units
$25

Fixed costs, $200,000

Sales Mix Considerations
Products
Product contribution A B
margin $16 $ 9

$25
A: 8,000 units x Sales Mix (80%) = 6,400
B: 8,000 units x Sales Mix (20%) = 1,600
 Product A Product B Total
Sales:
6,400 units x $90 $576,000 $576,000
1,600 units x $140 $224,000 224,000
Total sales $576,000 $224,000 $800,000
Variable costs:
6,400 x $70 $448,000 $448,000
1,600 x $95 $152,000 152,000
Total variable costs $448,000 $152,000 $600,000
Contribution margin $128,000 $ 72,000 $200,000

Fixed costs 200,000

Income from operations Break-even point $ 0

PROOF
 Margin
of Safety
 Sales – Sales at break-even point
Margin of Safety =
Sales
$250,000 – $200,000
Margin of Safety =
$250,000
Margin of Safety = 20%

The margin of safety indicates the

possible decrease in sales that may occur
before an operating loss results.
Operating Leverage
 Operating Leverage
Jones Inc. Wilson Inc.
Sales $400,000 $400,000
Variable costs 300,000 300,000
Contribution margin $100,000 $100,000
Fixed costs 80,000 50,000
Income from operations $ 20,000 $ 50,000
Contribution margin ? ?
Both companies have the same contribution margin.

Contribution margin
Income from operations
 Operating Leverage
Jones Inc. Wilson Inc.
Sales $400,000 $400,000
Variable costs 300,000 300,000
Contribution margin $100,000 $100,000
Fixed costs 80,000 50,000
Income from operations $ 20,000 $ 50,000
Contribution margin 5.0 ?

$100,000margin
Contribution
Jones Inc.: = 5.0
Income $20,000
from operations
 Operating Leverage
Jones Inc. Wilson Inc.
Sales $400,000 $400,000
Variable costs 300,000 300,000
Contribution margin $100,000 $100,000
Fixed costs 80,000 50,000
Income from operations $ 20,000 $ 50,000
Contribution margin 5.0 ?

$100,000margin
Contribution
Jones Inc. = 5.0
Income $20,000
from operations
 Operating Leverage
Jones Inc. Wilson Inc.
Sales $400,000 $400,000
Variable costs 300,000 300,000
Contribution margin $100,000 $100,000
Fixed costs 80,000 50,000
Income from operations $ 20,000 $ 50,000
Contribution margin 5.0 2.0

Wilson Inc.: $100,000

Capital Labor
$50,000 intensive? intensive?

Contribution margin
= 2.0
Income from operations