# Contribution margin

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Excel Assignment #2 Preparing a Contribution Margin Income Statement and Operating Leverage Summer 2013 1. Assume that a company is budgeting to sell 2,500 units of a product at a selling price per unit of \$32. The variable cost per unit is \$26 and total fixed costs are \$5,000. REQUIRED Prepare a contribution margin income statement and calculate operating leverage. 2. Suppose the company is unsure exactly how many units they will sell. As such, their marketing department has provided

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Contribution Margin and Break Even Analysis. Many factors come into play in determining business success. One of them is the financial factor. For a company to set financial goals it is crucial that its management know in detail the products or services they sale or provide. This is the analysis of two different scenarios at Aunt Connie 's Cookies Simulation (University of Phoenix, 2011) and the financial performance of Jamestown Electric Supply Company (Heiter, et. al. 2008). During both analysis

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you first must understand how costs are defined, as well as the relationship between cost, volume, and profitability. One of the important, yet relatively simple, tools afforded by cost/volume/profit analysis is known as contribution margin analysis. Your company's contribution margin is simply the percentage of each sales dollar that remains after the

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INCOME = REVENUES  (FIXED COSTS + VARIABLE COSTS) 240,000  (120,000 + 8,000) 240,000  128,000 = \$ 112,000 4. Suppose Andre revises the compensation method. The barbers will receive \$4 per hour plus \$6 for each haircut. What is the new contribution margin per haircut? What is the annual break-even point (in number of haircuts)? Show calculations to support your answer. Barber 's Salary by Week: \$ 160.00 Price per hour = \$ 4, hours per week = 40 Weekly salary per barber: 4 * 40 = 160 or

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CHAPTER 8 Cost-Volume-Profit Analysis ANSWERS TO REVIEW QUESTIONS 8-1 a. In the contribution-margin approach, the break-even point in units is calculated using the following formula: Break-even point = fixed expenses unit contribution margin b. In the equation approach, the following profit equation is used: sales volume ⎞ ⎛ unit variable sales volume ⎞ ⎛ unit fixed ⎜ ⎟ −⎜ ⎟ − ⎜ sales price × ⎟ ⎜ expense × ⎟ expenses = 0 in units ⎠ ⎝ in units ⎠ ⎝ This equation is solved for the sales volume in

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The break even point in units and sales have increased form 2003 to 2004 to 2006 due to the greater increase in fixed costs especially from expanding the business as well as insufficient average sales and unit sales to compensate these changes. The margin of safety has decreased over the years due to the increase in expenses and the lack of gross profit to compensate. Calculations: | | 2003 | 2004 |2006

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of Unit = Fixed Cost + Required Profit Contribution per Unit 1.1.4. Profit volume ratio The profit / volume ratio, better known as contribution / sales ratio (C/S ratio), expresses the relation of contribution to sales. P/V ratio = Contribution * 100 Sales (Or) P/V ratio = Fixed cost + Profit *100 Sales 1.1.5. Margin of Safety Margin of safety may be defined as the difference between actual sales and sales

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7-17 Healthy Hearth has sufficient excess capacity to handle the one-time order for 1000 meals next month. Consequently, the analysis focuses on incremental revenues and costs: |Incremental revenue per meal |\$3.50 | |Incremental cost per meal | 3.00 | |Incremental CM per meal |\$0.50 | |Number of meals

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750-\$679300= \$99,450 for Titanium and using the same formula above TCM for CarbonLite is 27,750. This gives us a combined contribution margin of \$127,200. Some management prefers to view the break even points via a percentage, in which case we would need to derive the contribution margin as a ratio. This would be the unit contribution margin/ unit sales price. Contribution Margin Ratio: \$96,950/\$778,750 =.13 Titanium \$27,750/679300=.04 CarbonLite

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In sales dollars? The break-even volume in units =Fixed Costs ÷ Contribution Margin per Unit =\$1,560,000÷\$830=1,880 units (rounded) Contribution Margin Ratio = Contribution Margin per Unit÷Units Selling Price=\$830÷\$1,580≈52.5% The break-even volume in sales dollars = Fixed Costs ÷ Contribution Margin Ratio =\$1,560,000÷52.5%≈\$2,971,428.57 3. Market research estimates that monthly equipment production could be increased to 3,500

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