Break Even Analysis – 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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