Question

The Career Skills Teamwork Assignment is as follows:

Your roommate asks for your help on the following questions about CVP analysis formulas.

1. How can the mathematical equation for break-even sales show both sales units and sales dollars?
2. How do the formulas differ for contribution margin per unit and contribution margin ratio?
3. How can contribution margin be used to determine break-even sales in units and in dollars?

Instructions:

Write a memo to your roommate stating the relevant formulas and answering each question.

Answer 1

To

The Roommate,

Answers to the CVP analysis formulas are:

1) The mathematical equation for break-even sales (in units) = Fixed costs / Contribution per unit , where contribution per unit = Sales price per unit - Variable costs per unit.

2) The formula for Contribution margin per unit = Sales price per unit - Variable costs per unit whereas the Contribution Margin ratio = Contribution margin per unit / Sales price per unit (or Total Contribution / Total Sales). The Contribution margin per unit is in dollar terms whereas Contribution Margin ration is in relative terms.

3)The contribution margin is used to determine Break - Even Sales (in units) = Fixed costs / Contribution margin per unit , where Break - Even Sales (in dollars) = (Fixed costs / Contribution margin ) * Sales price per unit. To get the BES in dollars, we have to multiple BES (in units) with Sales price per unit.

Thanks

Your Roommate