Contribution Margin Income Statement

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

The
The contribution
contribution
Variable costs 600,000 margin
margin isis
Contribution margin $ 400,000 available
Fixed costs 300,000 available toto cover
cover
Income from operations $ 100,000 the
the fixed
fixed costs
costs
and
and income
income from
from
Contribution operations.
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
Thecontribution
contributionmargin
margincan
canbebeexpressed
expressedthree
threeways:
ways:
1.1.Total
Totalcontribution
contributionmargin
margininindollars.
dollars.
2.2.Contribution
Contributionmargin
marginratio
ratio(percentage).
(percentage).
3.3.Unit
Unitcontribution
contributionmargin
margin(dollars
(dollarsper
perunit).
unit).
What
What isis the
the
break-even
break-even
point?
point?

Revenues = Costs

Break-even
 Calculating
Calculating the
the Break-Even
Break-Even Point
Point

Sales (? units) $ ? $25

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

At
At the
the break-even
break-even point,
point, fixed
fixed
costs
costs and
and the
the contribution
contribution
margin
margin are
are equal.
equal.
 Calculating
Calculating the
the Break-Even
Break-Even Point
Point
In
InUnits
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!
PROOF!
 Calculating
Calculating the
the Break-Even
Break-Even Point
Point
In
InUnits
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
Calculating the
the Break-Even
Break-Even Point
Point
In
InUnits
Units

Sales ($25 x ?Next,

units) assume
Next, assume$ ? $250
variable
Variable costs ($15 x ?costs
variable units)is
costs is ? 145
150
Contribution margin by $5.
increased $ ? $105
$100
Fixed costs
increased by $5. 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
Calculating the
the Break-Even
Break-Even Point
Point
In
InUnits
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 $600,000.
 Calculating
Calculating the
the Break-Even
Break-Even Point
Point
In
InUnits
Units
Management
Management increases
increases
Salesthe
the selling
selling price
price from$
from ? $60
$50
Variable costs
$50 to $60. ? 30
Contribution margin$60.
$50 to $ ? $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
Summary of
of Effects
Effects of
of Changes
Changes on
on
Break-Even
Break-Even Point
Point
 Target
Target Profit
Profit In
In
Units
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
Target Profit
Profit In
In
Units
Units

Target
Target profit
profit isis
Sales (? units) $ ? used
$75 here
used here to
to refer
refer
Variable costs ? 45
to
to “Income
“Income from
from
Contribution margin $ ? $35
Fixed costs 200,000 operations.”
operations.”
Income from operations $ 0

Fixed$200,000
costs ++desired
$100,000profit
Sales (units) = 10,000 units
Unit contribution
$30 margin
 Target
Target Profit
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
Proof that
that sales
sales of
of 10,000
10,000 units
units
will
will provide
provide aa profit
profit of
of $100,000.
$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
Unitselling
sellingprice
price $$50
50
Unit
Unitvariable
variablecost
cost 30
30
Unit
Unitcontribution
contributionmargin
margin $$20 20
Total
Totalfixed
fixedcosts
costs $100,000
$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
Unitselling
sellingprice
price $$50
50 100%
Unit
Unitvariable
variablecost
cost 30
30 60%
Unit
Unitcontribution
contributionmargin
margin $$20 20 40%
Total
Totalfixed
fixedcosts
costs $100,000
$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
Unitselling
sellingprice
price $$50
50 100%
Unit
Unitvariable
variablecost
cost 30
30 60%
Unit
Unitcontribution
contributionmargin
margin $$20 20 40%
Total
Totalfixed
fixedcosts
costs $100,000
$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
Unitselling
sellingprice
price $$50
50 100%
Unit
Unitvariable
variablecost
cost 30
30 60% $100,000 = 5,000 units
Unit
Unitcontribution
contributionmargin
margin $$20 20 40% $20
Total
Totalfixed
fixedcosts
costs $100,000
$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
Unitselling
sellingprice
price $$50
50 100%
Unit
Unitvariable
variablecost
cost 30
30 60%
Unit
Unitcontribution
contributionmargin
margin $$20 20 40%
Total
Totalfixed
fixedcosts
costs $100,000
$100,000
 $100
$75
Operating Profit

$50
(Loss) $000’s

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

Sales
Sales(10,000
(10,000units
unitsxx$50)
$50) $500,000
$500,000
Variable
Variablecosts
costs(10,000
(10,000units
unitsxx$30)
$30) 300,000
300,000
Contribution
Contributionmargin
margin(10,000
(10,000units
unitsxx$20)
$20) $200,000
$200,000
Fixed
Fixedcosts
costs 100,000
100,000
Operating
Operatingprofit
profit $100,000
$100,000
 $100
$75 Profit Line
Operating Profit

$50 Operating
(Loss) $000’s

$25 profit
$ 0
$(25) Operating Maximum
Maximum
$(50) loss profit
profit within
within
$(75) the
the relevant
relevant
$(100)
1 2 3 4 5 6 7 8 9 10 range.
range.
Units of Sales (000’s)
Maximum
Maximum loss loss
isisequal
Sales
Sales equal to
tothe
(10,000
(10,000 units
unitsxx$50)
the $50) $500,000
$500,000
total
totalfixed
Variablefixed
Variable costs.
costs (10,000
(10,000units
costs.
costs unitsxx$30)
$30) 300,000
300,000
Contribution
Contributionmargin
margin(10,000
(10,000units
unitsxx$20)
$20) $200,000
$200,000
Fixed
Fixedcosts
costs 100,000
100,000
Operating
Operatingprofit
profit $100,000
$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
Sales(10,000
(10,000units
unitsxx$50)
$50) $500,000
$500,000
Variable
Variablecosts
costs(10,000
(10,000units
unitsxx$30)
$30) 300,000
300,000
Contribution
Contributionmargin
margin(10,000
(10,000units
unitsxx$20)
$20) $200,000
$200,000
Fixed
Fixedcosts
costs 100,000
100,000
Operating
Operatingprofit
profit $100,000
$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
Sales Mix
Mix Considerations
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
Sales Mix
Mix Considerations
Considerations
Products
Product contribution A B
margin $16 $ 9

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

Fixed costs, $200,000

Sales
Sales Mix
Mix Considerations
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
Sales Mix
Mix Considerations
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
Operating Leverage
Leverage
 Operating
Operating Leverage
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
Bothcompanies
companieshave
havethe
thesame
samecontribution
contributionmargin.
margin.

Contribution margin
Income from operations
 Operating
Operating Leverage
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 ?

Contribution
$100,000margin
Jones Inc.: = 5.0
Income from
$20,000operations
 Operating
Operating Leverage
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 ?

Contribution
$100,000margin
Jones Inc. = 5.0
Income from
$20,000operations
 Operating
Operating Leverage
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