the amount form sales that is that is available to cover fixed costs (Sales-VC=CM-FC=Profit). Once fixed costs are covered, contribution margin adds to profits.
(TOTAL REVENUE-TOTAL VARIABLE COST).
contribution margin per unit:
the difference between the sales price per unit and all variable costs per unit. It is the amount operating income increases when one more unit is sold and decreases when one less unit is sold.
(Sales Price Per Unit
-All Variable Costs per unit (DM, DL, VOH, Period Costs, Commissions).
=Contribution Margin Per Unit)
contribution margin ratio (percentage):
gives the amount (in cents) of every sales dollar that is added to operating income when sales dollars increase.
(TOTAL CONTRIBUTION MARGIN/TOTAL SALES)
contribution margin income statement:
-all variable costs
occurs when operating profits = $0. An operating profift of $0 occurs when total contribution margin is equal to total fixed costs.
break-even quantity in units=
total fixed costs/contribution margin per unit.
break-even in sales dollars=
total fixed costs/contribution margin ratio%
margin of safety=
estimates the amount sales can decrease for a profitable company before the company is no longer profitable.
(CURRENT SALES (budget sales)
=MARGIN OF SAFETY
The point where contribution margin is equal to fixed cost is:
BREAK EVEN (because: sales-variable=contribution margin and contribution margin-fixed costs=profits) if they're equal to each other there will be no profit.
if the selling price per unit increases, unit sold to achieve break even will:
DECREASE. the number of units required to break even will be less because the contribution margin of each unit will be higher if the selling price is higher.