Unit Contribution Method

Introduction

From the previous section, we already know that:
NI = TR − TC
The business will start making a profit when the total revenue gets bigger than the total costs.
Most businesses need to know the point at which they will begin making profit.
This point begins after they break even and is known as the break-even point.

Unit Contribution Margin Method (UCM)

It also possible to find the break-even point in units using the unit contribution margin (UCM).
The unit contribution margin is the difference between the selling price and the unit variable costs.
After the unit variable costs are covered,
the remaining amount from the selling price of each unit sold can contribute toward covering fixed costs.
Unit Contribution Margin = Selling Price − Unit Variable Costs

To find how many units must be sold to break even,
divide the total fixed costs by the Unit Contribution Margin as shown below:
Break-even point in units = Fixed Cost ÷ Unit Contribution Margin

Example: The fixed costs of Joe's coffee store are $50,000. The variable costs per unit of production of a customized pack of coffee are $5.
The selling price is $15.00 per pack.
Question: Find the break-even point in units using the unit contribution margin method.
Solution:
From this information, it can be determined that, after the $5.00 per pack variable costs are covered,
each pack sold can contribute $10 toward covering fixed costs.
Unit Contribution Margin = Selling Price − Unit Variable Costs = 15 − 5 = $10
Dividing fixed costs by the unit contribution margin calculates the level of sales at which Adam's coffee store will break even.
Break-even point in units = Fixed Cost / Unit Contribution Margin = $50000 / 10 = 5,000

Adam's coffee store will break-even if it sells 5000 packs.
As sales exceed 5000 packs, Adam's coffee store makes a profit. Sales of less than 5000 packs produce a loss.

Please access the following link to do a similar exercise about unit contribution margin:
Unit contribution margin exercise


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Date of last modification: March 19, 2019