Using the information below:

What is the total contribution margin and the operating profit when we sell 41 units?

How did you determine your answers?

For example, if our fixed costs for the month are $100, and the selling price is $9 per unit, and the variable costs per unit is $4, our equation would like look:

Break-even quantity = $100 / ( $9 - $4)

So for this example, break-even quantity is 100/ 5 = 20 units.

That is the equation that our authors show at the top of page 132.

Now, lets talk about part of that equation, selling price minus variable cost. Using our numbers from the example, subtracting the variable cost from the selling price gave us $5. We call that the unit contribution margin.

The unit contribution margin is the amount of the sale that contributes to covering or offsetting the fixed costs. Every time we sell the product, we have $5 to help cover the fixed costs.

So lets say we only sell 1 unit this month, lets calculate our net income.

Revenue 9

Variable Cost 4

Contribution Margin 5

Less Fixed Cost 100

Operating Profit (95)

Do you see how the contribution margin helps to cover the fixed costs? Lets look at a month in which we sell 10 units.

Revenue (10 x 9) 90

Variable Cost (10 x 4) 40

Contribution Margin (10 x5) 50

Less Fixed Cost 100

Operating Profit (50)

With more sales, we have more contribution margin to offset the fixed cost, which reduces our net loss

Now our formula, gave us a break even quantity of 20 units. Lets prove that true.

Revenue (20 x 9) 180

Variable Cost (20 x 4) -80

Contribution Margin (20x 5) 100

Less Fixed Cost 100

Operating Profit 0

Sure enough, our break-even formula was correct. So what happen to contribution margin when we have covered our fixed cost?

Lets see when we sell 21 units, one more than the break-even amount.

Revenue (21 x 9) 189

Variable Cost (21 x 4) -84

Contribution Margin (21x 5) 105

Less Fixed Cost 100

Operating Profit 5