Contribution Margin :

Is the result that comes from the revenues of unit sold, minus the sum of variable costs. And the results

shows , how much that product contributes to covering fixed cost and increasing profits. This can be done

per piece and would be Contribution margin per piece. (Wall Street Prep. n.d.)

Formula: (S-V) where S = Sales Revenue; V= Variable costs. (Investopedia Team , 2022)

In this activity, we have two type of products and here with see it with following financial information:

High-End Set Economical Set

Sales price     $3,500  per unit     $1,000  per unit  
Labor    $875  per unit    $250  per unit
Materials    $1400  per unit    $300  per unit
 per
Direct fixed costs     $25,000    $16,500  per month
month
Allocated fixed  per
   $85,000    $85,000  per month
costs  month

Contribution Margin for each product Line:

a) High-End Set has a Sale price per unit of $3,500 and a variable cost per unit of $2,275 ($875+$1,400 )

Contribution Margin of High-end set is S-V  $3,500 - $ 2,275 = $1,225 per unit.

b) Economical Set has a Sale price per unit of $1,000 and a variable cost per unit of $550 ($250+$300)

Contribution Margin of economical set is S-V  $1,000 - $ 550$ = 450 per unit.

Break-Even quantities for each product line:

a) To determine High-End set Break-Even point ,this formula is used:

Break-even point (units) = fixed cost / (Sales price per unit – variable cost per unit) or Fixed cost /

Contribution Margin per. (Heisinger , Hoyle. n.d.)

 Fixed cost we have two types, Direct and allocated. The values are respectively $25,000 and $85,000

adding these two numbers we get the total of fix cost ($25,000+$85,000) = 110,000

Break-even points = fixed cost/contribution margin  $110,000/$1,225= 90 units

b) To determine Economical set Break-Even point ,this formula is used:

Break-even point (units) = fixed cost / (Sales price per unit – variable cost per unit) or Fixed cost /

Contribution Margin per.

Fixed cost we have two types, Direct and allocated. The values are respectively $16,500 and $85,000

adding these two numbers we get the total of fix cost ($16,500+$85,000) = 101,500

Break-even points (unit) = fixed cost/contribution margin  $101,500/$450= 225 units

Break-Even quantities to earn $ 500,000 per year in the high-end line (at current sales price):

to obtain a profit on $500,000 on the high-end line I will use the following equation which is:

Q = (F+ Target Profit) / S-V (Heisinger , Hoyle. n.d.)

Q= quantity of units produced and sold. ; F= Fixed costs; S= sales price per unit; V= Variable cost per unit.

Fixed cost = ($25,000 + $85,000) x 12 meses = $1,320,000

Q= ($1,320,000 + $500,000) / $3,500 - $2,275)

Q= ($1,820,000) / $1,225

Q= 1,486 Units needs to be sold to obtain a gain of $500,000 in a year.

Break-Even quantities to earn $ 300,000 per year in the economical line (at current sales price):

to obtain a profit on $300,000 on the economical line, I will use the following equation which is:

Q = (F+ Target Profit) / S-V (Heisinger , Hoyle. n.d.)

Q= quantity of units produced and sold. ; F= Fixed costs; S= sales price per unit; V= Variable cost per unit.

Fixed cost = ($25,000 + $85,000) x 12 meses = $1,320,000

Q= ($1,320,000 + $300,000) / $1,000 - $550)

 Q= ($1,620,000) / $450

Q= 3,600 Units needs to be sold to obtain a gain of $500,000 in a year.

Investopedia Team. (2022, Sept. 23) Contribution Margin. Definition, overview and how to calculate
https://www.investopedia.com/terms/c/contributionmargin.asp

Heisinger, K., & Hoyle, J. (n.d.). Managerial accounting. Open Textbook Library. Retrieved November
05,2022. https://open.umn.edu/opentextbooks/textbooks/137

Wall Street Prep (n.d.). Contribution Margin, Guide to understanding contribution margin.
https://www.wallstreetprep.com/knowledge/contribution-margin/