The Profit Equation - Concept of Contribution Margin

LO2. ​Perform CVP Analysis for Single and Multiple Products

Account Analysis

LO1. ​Identify common cost behavior patterns and estimate the relation between cost and activity using account analysis and the high-low method

​You decide that component cost and assembly labor are variable costs and all other items are fixed, compute the total production costs and variable cost per unit

is the number of units or amount of revenue (given a selling price) that must be sold or generate for a company to break even—to neither earn a profit nor incur a loss.​

​

See video presentation

Break-even Point Analysis

​

This video lecture covers the step by step procedure to perform break-even analysis.

​

Disclaimer: I do not own the video material. Credits to the owner.

​Concept + Example

​

The formula can also be used to determine the amount of sales to target certain amount of profit.

​

​Some text here about the topic of discussion.

​Analysis Variations

​

managers are very concerned that if they have a level of sales greater than break-even sales.

​

Hence, we provide them with the margin of safety.​

​

MoS = Expected Sales - Break-even sales​

​

See video presentation

Margin of Safety (MoS)

​

​relates to the level of fixed versus variable costs in a company’s cost structure. The higher the level of fixed costs, the greater the operating leverage. Also, the higher the operating leverage, the greater the percentage change in profit for a given percentage change in sales. Firms with high operating leverage are generally considered to be more risky than firms with low operating leverage.

​

LO3. Operating Leverage Effect

Operating Leverage

When there is a constraint, the focus shifts from the contribution margin per unit to the contribution margin per unit of the constraint.

​

The product that has the highest contribution margin per unit of the constraint should be produced because it will generate the greatest contribution to covering fixed costs and generating a profit.

​

LO3. Impact of Resource Constraints

Resource Constraints

​