5.11: Chapter 5 Key Points

CVP Key Takeaways

Fixed Cost stays the same in total but varies per unit.

Variable Costs stay the same per unit but vary in total.

To calculate cost per unit (this works for any type of cost per unit):

Cost                (make sure to use the correct cost)

Units produced

Contribution Margin is Sales – Variable Cost (contribution margin per unit is Sales price per unit – Variable cost per unit).

Contribution Margin RATIO is: Contribution Margin per unit / Sales Price per unit

You can find the breakeven point IN UNITS or the units necessary at any income level using the same formula:

Fixed Costs + Target Income

Contribution Margin per unit

Note: At breakeven, your target income is ZERO.

You can calculate breakeven point in SALES DOLLARS or Sales necessary to achieve a specific amount of income in 2 ways:

1.  Fixed Costs + Target Income

Contribution Margin RATIO

Note: At breakeven, your target income is ZERO.

1. OR, an alternative method is to take your breakeven point in UNITS x sales price per unit.

Contribution Margin Income Statement assumes all costs can be classified as either Fixed or Variable Costs. The basic structure is:

Sales

– Variable Costs

= Contribution Margin (Sales – Variable Costs)

– Fixed Costs

=Net Income (Contribution Margin – Fixed Costs)

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