![]() When those fixed costs are subtracted, that will leave the company with R40,000 profit. We already know that we have R200,000 in fixed costs. The contribution margin is R120 x 2,000 units, or R240,000. To put it a different way, the contribution margin is the rand amount that will cover fixed costs before you reach your break-even point, and it’s the rand amount that will go toward company profit after you reach your break-even point.įor example, let’s assume that 2,000 units are sold and compute the profit this way: It also includes any money left over after covering fixed costs and constitutes your company’s net operating profit or loss.Ī contribution margin formula is a useful tool that you can use to plan sales and costs of sales. This formula is the amount of money your company has on hand to cover your fixed costs after you pay all of your variable expenses. Total sales – variable costs = contribution margin (CM) You calculate your contribution margin by subtracting a product’s variable costs from the selling price. The contribution margin tells you how much money each item will contribute to your profits after you break even. Why apply the contribution margin formula?Īfter you know your break-even point, you can calculate the contribution margin of each item you sell. By using financial analysis and working on each component of the target profit formula, you may be able to lower costs, increase total sales, and generate a higher profit margin for your company. Remember to plug any change you’re considering into the break-even analysis formula so you’ll know how many units you’ll now need to sell to break even. For example, you might renegotiate a lower lease payment when your building lease is up for renewal, or ask your insurance agent for a lower quote on business insurance premiums.
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