2 Contribution Margin Free Online FlashCards

What is contribution margin?

Contribution margin is sales revenue remaining after variable costs are deducted; it first covers fixed costs, and any remainder becomes operating income.

How do you calculate contribution margin per unit?

Unit CM equals selling price per unit minus variable cost per unit: $\text{Unit CM} = \text{Selling price per unit} - \text{Variable cost per unit}$.

What does the contribution margin ratio measure?

The CM ratio is contribution margin divided by sales: $\text{CM ratio} = \frac{\text{Total CM}}{\text{Total sales}}$. It shows the share of each sales dollar available for fixed costs and operating income.

How does a contribution-format income statement group costs?

It groups costs by behavior—variable or fixed—rather than by function.

What is total CM for 1,000 units with unit CM of $\$20$?

Total CM is $\$20{,}000$: $1{,}000 \times \$20 = \$20{,}000$, also equal to $\$50{,}000 \times 40\%$.

What does one additional unit sold add to operating income?

Under the usual cost-volume-profit assumptions, each additional unit sold adds its unit CM to operating income, if no other factors change.

How do you calculate break-even units for one product?

Break-even units equal fixed costs divided by unit CM: $\text{Break-even units} = \frac{\text{Fixed costs}}{\text{Unit CM}}$.

How do you calculate units needed for a target operating income?

Units for target operating income equal fixed costs plus target income, divided by unit CM: $\text{Units} = \frac{\text{Fixed costs} + \text{Target operating income}}{\text{Unit CM}}$.

A product sells for $\$50$ with $\$30$ variable cost per unit. What is its unit CM?

The unit CM is $\$20$: $\$50 - \$30 = \$20$.

If unit CM is $\$20$ and selling price is $\$50$, what is the CM ratio?

The CM ratio is $40\%$: $\frac{\$20}{\$50} = 0.40$. Each sales dollar contributes $\$0.40$ toward fixed costs and operating income.

What is the calculation sequence in a contribution-format income statement?

It subtracts variable costs from sales to show contribution margin, then subtracts fixed costs to find operating income.

With $\$20{,}000$ CM and $\$14{,}000$ fixed costs, what is operating income?

Operating income is $\$6{,}000$: $\$20{,}000$ contribution margin minus $\$14{,}000$ fixed costs.