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
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).
- Total revenue minus total costs.
- Number of units required to sell to make a profit of zero.