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Contribution Margin Approach to Cost-Volume-Profit Analysis

This chart enables you to visualize the components of costs and revenue from a Contribution Margin point of view. In this view, the difference between the selling price and the variable cost of each successive unit sold is allocated to the payment of fixed costs until these costs are fully paid. Thereafter, the difference from each unit contributes to the profit.

Contribution Margin Approach to Cost-Volume-Profit Analysis Definitions

Variable unit cost
Cost associated with producing an additional unit.
Fixed cost
The sum of all costs required to produce any product. This amount does not change as production increases or decreases.
Expected unit sales
The number of units that are expected to be sold.
Price per unit
Price you will be able to receive per unit.
Total variable costs
The product of units produced and variable unit cost (example 10 units at $5 variable cost produces a total variable cost of $50).
Total costs
Sum of fixed costs and variable costs.
Total revenue
Product of price and expected sale unit sales (example 10 units at $10 equals $100 total revenue).
Profit
Total revenue minus total costs.
Break-even
Number of units required to sell to make a profit of zero.