Contribution Margin Method

Note: I know this stuff is a little heavy but it is here by popular demand.

Revenues (R) = Qty (Q) x Price Per Unit (P)
Total Expenses = Total Variable Fixed Costs (F)
Total Variable Cost (TVC) = QXV Per Unit (V)
Profit = Revenues – Total Expenses
At breakeven, Profit = 0
0 = R – (TVC+F) or 0 = (QxP) – ((QxV) + F)
F=Q x (P-V)
Breakeven Quantity (BEQ) = F/(P – V)

To Convert Breakeven Sales Volume (revenue)
P x BEQ = P x (F/ (P – V))
BE Sales = F/ (P – V)/P*

*Contribution Margin Ratio

EXAMPLE SITUATION ONE

HVAC System Sales Price is $6000.00
Your Cost to Purchase (direct cost) is $2250.00
Variable Costs per unit (labor taxes, insurance, etc.) is $250.00
Fixed Costs (rent, communications, utilities, etc.) are 875,000

Contribution Margin = $3,500 ($6000.00 – $2250.00 – $250.00)
Contribution Margin % = 58.33% ($3,500/$6000.00)
Breakeven Qty. = 250 units sold ($875,000/$3,500.00)
Breakeven Sales Volume = $1,500,000.00 ($875,000/58.33 x 100)[1]

 

EXAMPLE SITUATION TWO

Service Rate = $60.00 per hour

Direct Wage = $15.00 per hour (amount you pay)

Payroll Taxes, Insurance, etc. = $10.00 per hour (variable expenses)

Fixed Costs = $87,000 (rent, etc.)

Contribution Margin = $35.00 per hour ($60.00 – $15.00 – $10.00)

Contribution Margin % = 58% ($35.00/$60.00)

Breakeven Hours = $87,500/$35.00 = 2500 hours

Breakeven ($) = $87,500/58% = $150,000

 

Prepared by James R. Leichter

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[1] The actual calculation is slightly different due to rounding to two places to the right of the decimal point.

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