Marginal Costing Terms & Definitions – Contribution Margin/ Cost

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 (in Units) = Total Fixed Expenses / (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) /  (S – V)     =        F   /  (S – V)

      i.e. 1    =       F    /  (S – V) 

Multiplying both sides by S, 

      S * 1    =         ( F * S)   / (S – V) 

Therefore, the formula for the calculation of break even sales is: 

                  ( F * S)   /   (S – V)