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Contribution Margin Analysis and Break-Even Calculations

1. The contribution margin (CM) ratio for the company is currently 30%. The break-even point is 20,000 units or $600,000 in sales. 2. An $80,000 increase in sales would lead to a $24,000 increase in contribution margin and an $8,000 increase in monthly net operating income after accounting for a $16,000 increase in advertising costs. 3. If prices were reduced by 10% to $27 per unit, and unit sales increased to 39,000, there would be a $6,000 net operating loss due to the increased fixed costs of $60,000.

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24 views2 pages

Contribution Margin Analysis and Break-Even Calculations

1. The contribution margin (CM) ratio for the company is currently 30%. The break-even point is 20,000 units or $600,000 in sales. 2. An $80,000 increase in sales would lead to a $24,000 increase in contribution margin and an $8,000 increase in monthly net operating income after accounting for a $16,000 increase in advertising costs. 3. If prices were reduced by 10% to $27 per unit, and unit sales increased to 39,000, there would be a $6,000 net operating loss due to the increased fixed costs of $60,000.

Uploaded by

Pam Zingapan
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1. The CM ratio is 30%.

Total Per Unit Percent of Sales


Sales (19,500 units).......... $585,000 $ 30.00 100%
Less variable expenses ..... 409,500 21.00 70
Contribution margin.......... $175,500 $ 9.00 30%

Break-even point = Fixed expenses___


in unit sales Unit contribution margin
= $180,000_
$9.00 per unit
= 20,000 units

Break-even point = Fixed expenses


in sales dollars CM ratio
= $180,000
0.30
= $600,000 in sales

2. Incremental contribution margin:


$80,000 increased sales × 0.30 CM ratio .............. $24,000
Less increased advertising cost .............................. 16,000
Increase in monthly net operating income............... $ 8,000

3. Sales (39,000 units @ $27.00 per unit*)........... $1,053,000


Less variable expenses
(39,000 units @ $21.00 per unit)............................ 819,000
Contribution margin................................................ 234,000
Less fixed expenses ($180,000 + $60,000)............. 240,000
Net operating loss.................................................. $ (6,000)
*$30.00 – ($30.00 × 0.10) = $27.00

4. Unit sales to attain = Fixed expenses + Target profit


target profit CM per unit
= $180,000 + $9,750
$8.25 per unit**
=23,000 units
**$30.00 – $21.75 = $8.25

1. a. The new CM ratio would be:


Per Unit Percent of Sales
Sales......................................... $30.00 100%
Less variable expenses............... 18.00 60%
Contribution margin................. $12.00 40%
The new break-even point would be:
Break-even point = Fixed expenses___
in unit sales Unit contribution margin
= $180,000 + $72,000
$12.00 per unit
= 21,000 units
Break-even point = Fixed expenses
in sales dollars CM ratio
= $180,000 + $72,000
0.40
= $630,000

b. Comparative income statements follow:

___Not Automated___ _____Automated_____


Total per Unit % Total per Unit %
Sales (26,000 units)......... $780,000 $30.00 100% $780,000 $30.00 100%
Less variable expenses....... 546,000 21.00 70 468,000 18.00 60
Contribution margin.......... $234,000 $9.00 30% $312,000 $12.00 40%
Less fixed expenses........... 180,000 252,000
Net operating income....... $54,000 $60,000

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