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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:
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
S - V = F + or – P
Contribution:
In simple form, S – V = F + or – P
Missing Factor:
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
Units sold:
A business is said to break even when its total sales are equal to its total costs.
It is a point where
(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
Hence, S – V = F
S–V = F
(S – V) (S – V)
i.e. 1 = F
(S – V)
Multiplying both sides by S,
Sx1 = FxS
(S – V)
Therefore, the formula for the calculation of break even sales is:
FxS
(S – V)
Or
The formula for the calculation of Sales to earn an expected or desired profit is:
(F + P) x S
S–V
P/V Ratio
Contribution i.e. C
Sales S
Or
Sales S
Or
Sales S
Or
Changes in contribution in two periods
Or
The ratio can be shown in the form of percentage if the formula is multiplied by 100.
Contribution
P/V Ratio
It is the difference between the actual sales and the sales at break even point.
Or
= Profit
P/V Ratio
Break-Even Point in Units = Total Fixed Costs / Contribution Margin Per Unit
"Price minus average variable cost" is the variable profit per unit, or contribution margin of each unit that is sold.
Where,
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,