Contribution Margin Method PDF

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accounting notes...

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A. CONTRIBUTION MARGIN METHOD (FORMULA APPROACH)

a. Single break-even calculations 1. Break-even point in pesos BEP= FxC/CMR Where:

BEP=break even point FxC=total fixed costs CMR=contribution margin ratio CM/u=contribution margin per unit

2. Break-even point in units BEP=FxC/CM per unit Other Formulas: CM= S-VC

where

CM/u= SP-VC per unit

CM=contribution

CMR = CM / S

S= Sales

VCR = VC/S

VC = Variable costs

CMR + VCR = 100%

SP = Selling price

CMR = 1-VCR

CMR = contribution

VCR = 1-CMR

VCR = variable costs ratio

margin

margin ratio

Example: Consider the following data: Sales (10,000 units @ P10)

100,000

Variable costs (10,000 units @ P6)

60,000

Contribution Margin (10,000 units @ P4)

40,000

Fixed Costs

30,000

Profit

10,000

The break-even

point in units is:

BEP = FxC / CM per unit The break-even

=

30,000/4

point in pesos is:

BEP = FxC / CMR

=

30,000 / 40%

CMR = CM/S

=

40,000/100,000=40%

b. Multiple-Product/Service BEPp

= 7,500 units

= FxC / WaCMR

break-even

=P75,000

calculations

where: WaCMR=weighted

average

CMR

BEP u = FxC / WaUCM

WaUCM=weighted

average

unit CM

Illustrative Example A company

sells Products A, B and C. Data about the three products are as follows: Product A

Product B

Product C

Selling price

100

120

50

Variable costs per unit

60

90

40

Contribution margin per unit

40

30

10

Sales in units

1,000

2,000

5,000

8,000

Total fixed costs

101,680

1. Break-even point in pesos is: BEP p = FxC / WaCMR = 101,680/25.42% Computation of weighted average contribution

Product A

=P400,000 margin ratio (WaCMR)

Product B

Product C

Selling price

100

120

50

Variable costs per unit

60

90

40

Contribution margin per unit

40

30

10

WaCMR =

Total

Total CM / Total Sales =

150,000/590,000

Total

=25.42%...