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:

Contribution Margin   =   Revenues   –   Variable Expenses

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

Contribution Margin per Unit   =   Revenues per Unit   –   Variable Expenses per Unit

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

Contribution Margin per car = Revenues per car – Variable Expenses per car Contribution Margin per car = $24 – $9 Contribution Margin per car = $15

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.

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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:

Break-even Point in Cars per Week   =   Fixed Expenses per week   ÷   Contribution Margin per car

Break-even Point in Cars per Week   =   $2,400 per week   ÷   $15 per Car

Break-even Point in Cars per Week   =   160 Cars per Week

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

Oil Change Co. Projected Net Income For a Week Sales (160 cars serviced at $24 per car) $ 3,840 Variable expenses (160 cars at $9 per car) – 1,440 Contribution margin 2,400 Fixed expenses – 2,400 Net income $       0

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