Before reading this I recommend reading my first article, ‘cost volume profit analysis definitions’. In this article I will explain a number of relevant formulas that are commonly used in cost volume profit analysis.
Contribution Margin (CM): The amount of dollars per unit that is available to meet fixed costs and make a profit:
CM = Sales price – Variable costs per unit
Breakeven point (BEP): (The point at which the firm transitions from making a loss to making a profit)
BEP (sales) = BEP volume x Sales price per unit
Margin of Safety (MS): Allows a firm to determine the difference between the expected same volume and the breakeven point volume. Obviously, all else being equal, the higher the margin of safety the lower the risk of generating a loss.
Profit $: (self explanatory)
Profit = MS x sales price
Or
Profit = CM x quantity – Fixed costs
Example: Tee-ns is a fashion company that produces tee –shirts for teenagers. At the beginning of 2010 Management drafted the following budget:
Hi,
I wonder why Profit cannot be calculated as “Total sales – Breakeven sales” because it seems logically correct to me but I got different different numbers from above:
Sales – Breakeven sales = 25000x$20 – 18750x$20 = 125,000?
Thanks heaps
Kat,
In your calculation you have ignored variable costs. Variable costs still increase beyond the breakeven point. If you were following you idea the formula would instead be:
25,000*(20-12) – 18,750*(20-12) =$50,000
Hope this helps,
Vinnie