Marginal Costing – Contribution Margin – Cost / Volume / Profit Formulae
This article focuses on the basic and important formulae used in Contribution margin - cost/ volume/ profit in marginal costing: Marginal cost, missing factor, contribution, units sold, break even point, break even sales, calculation of sales for desired profit, profit/volume ratio, contibution/sales ratio, margin of safety, quantity, target income etc.
Basic Equation:
Variable Cost = Direct Materials + Direct Labor + Direct Expenses Variable cost per unit = Difference in cost Difference in Activity level Variable Cost is also called as Marginal Cost. Sales (S) = Variable Cost (V) + Fixed Expenses (F) + or – Profit (P) / Loss (L) S = Sales V = Variable Cost F = Fixed Expenses +P = Profit -P = Loss Sales - Variable Cost = Fixed Expenses + or – Profit / Loss S - V = F + or – P Sales – Variable Cost = Contribution = S - V Fixed Expenses + or – Profit / Loss = Contribution = F + or – P In simple form, S – V = F + or – P In the above four factors, if any three factors are known, the remaining one can be easily found out. Sales = Variable Cost + Fixed Expenses + Profit Variable Cost = Sales – (Fixed Expenses + Profit) Fixed Expenses = Sales – Variable Cost – Profit Profit = Sales – Variable Cost – Fixed Expenses Units sold = Contribution margin / Contribution margin per unit A business is said to break even when its total sales are equal to its total costs. It is a point where There is no profit or no loss. Contribution is equal to Fixed Expenses. Break Even Point = Total Fixed Expenses (in Units) (Selling Price per Unit – Marginal Cost per Unit) The answer will be in units and not in value because break even point is based on unit cost. S – V = F + P At Break Even Point Profit equals zero. Hence, S – V = F For Break Even Point, the equation is S – V = F Dividing both sides by S – V, S – V = F (S – V) (S – V) i.e. 1 = F (S – V) Multiplying both sides by S, S x 1 = F x S (S – V) Therefore, the formula for the calculation of break even sales is: F x S (S – V) Marginal Cost Equation:
Contribution:
Missing Factor:
Units sold:
Break Even Point:
Break Even Sales:
Calculation of Sales for a desired or expected Profit:
(Fixed Expenses + Profit)
(Selling Price per Unit – Marginal Cost per Unit)
Or
(Fixed Expenses + Profit)
Contribution per Unit
The formula for the calculation of Sales to earn an expected or desired profit is:
(F + P) x S
S – V
Profit / Volume Ratio or Contribution / Sales Ratio
(P/V Ratio) or (C/S Ratio)
P/V Ratio
Contribution i.e. C
Sales S
Or
(Sales – Variable Cost) i.e. S – V
Sales S
Or
(Fixed Expenses + Profit) i.e. F + P
Sales S
Or
Changes in contribution in two periods
Changes in Sales in two periods
Or
Changes in Profit in two periods
Changes in Sales in two periods
The ratio can be shown in the form of percentage if the formula is multiplied by 100.
This ratio can be used for the calculation of
Break Even Point is Fixed Costs = F
P/V Ratio P/V Ratio
For the calculation of sales to earn a desired or expected profit is
Fixed Costs + Profit = F + P
P/V Ratio P/V Ratio
Contribution
P/V Ratio
Variable Costs = Sales (1 – P/V Ratio)
Contribution is Sales x P/V Ratio
Margin of Safety (M/S)
It is the difference between the actual sales and the sales at break even point.
Sales or Output beyond break even point is known as margin of safety.
Margin of Safety (M/S) = Present Sales – Break Even Sales
Or
= Profit
P/V Ratio
Break-Even and Target Income
Sales = Total Variable Costs + Total Fixed Costs + Target Income
Where Target Income is zero, then
Sales = Total Variable Costs + Total Fixed Costs
Which is the Break even sales.
Break-Even Point in Units = Total Fixed Costs / Contribution Margin Per Unit
Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio
Units to Achieve a Target Income = (Total Fixed Costs + Target Income)
Contribution Margin per Unit
Sales to Achieve a Target Income = (Total Fixed Costs + Target Income)
Contribution Margin Ratio
Break-even quantity = Total fixed costs
(selling price - average variable costs).
Explanation - in the denominator :
"Price minus average variable cost" is the variable profit per unit, or contribution margin of each unit that is sold.
This relationship is derived from the profit equation:
Profit = Revenues - Costs
Where,
Revenues = (selling price * quantity of product) and
Costs = (average variable costs * quantity) + total fixed costs.
Therefore,
Profit = (selling price * quantity) - (average variable costs * quantity + total fixed costs).
Solving for Quantity of product at the breakeven point when Profit equals zero,
the quantity of product at breakeven is
Break-even quantity = Total fixed costs
(selling price - average variable costs)








Comments
break even analysis
thank Sir its great help
thanks this help me alot!
thanks this help me alot!
Can you help me understand
Can you help me understand how to do this?
30. Last year, Twins Company reported $750,000 in sales (25,000 units) and a net operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, the company's:
A. contribution margin ratio is 40%.
B. break-even point is 24,000 units.
C. variable expense per unit is $9.
D. variable expenses are 60% of sales.
I don't know
I don't know
bnatey
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marginal costing
the meterial that so provided is satisfactory
marginal costing
the meterial that so provided is satisfactory
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