Contribution Margin

An important term used with break-even point or break-even analysis is contribution margin. In equation format it is defined as follows:

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The contribution margin for one unit of product or one unit of service is defined as:

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At Oil Change Co. the contribution margin per car (or per oil change) is computed as follows:

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The contribution margin per car lets you know that after the variable expenses are covered, each car serviced will provide or contribute $15 toward the Oil Change Co.'s fixed expenses of $2,400 per week. After the $2,400 of weekly fixed expenses has been covered the company's profit will increase by $15 per car serviced.

Break-even Point In Units

The break-even point in units for Oil Change Co. is the number of cars it needs to service in order to cover the company's fixed and variable expenses. The break-even point formula is to divide the total amount of fixed costs by the contribution margin per car:

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It's always a good idea to check your calculations. The following schedule confirms that the break-even point is 160 cars per week:

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