Contribution is revenue minus variable costs. It represents the amount available to cover fixed costs and generate profit. The contribution margin ratio is contribution divided by sales revenue and expresses what percentage of sales is available for fixed costs and profit. It is calculated by taking the difference between total sales and total variable costs, then dividing by total sales. Higher contribution margin ratios indicate more sales revenue available for covering fixed costs and generating profit.

1. Contribution is the amount of earnings remaining after all direct costs have been subtracted
from revenue. .
Total Contribution is the difference between Total Sales and Total Variable Costs.
Formulae:
Contribution = total sales less total variable costs.
Contribution per unit = selling price per unit less variable costs per unit.
Contribution Margin Ratio = Sales RevenueSales Revenue − Variable Costs
Contribution = 1 Sales – Variable Cost in rs
2 = Fixed Cost + Profit
Contribution margin ratio is calculated by dividing contribution margin figure by the net sales
figure. The formula can be written as follows:
The ratio is also shown in percentage form as follows:
Example 1
The total sales revenue of Black Stone Crushing Company was $150,000 for the last year.
The fixed and variable expenses data of the last year is given below:
Variable expenses:
Manufacturing: $60,000
Marketing and administrative: $30,000

2. Fixed:
Manufacturing: $10,000
Marketing and administrative: $8,000
Required: Calculate contribution margin ratio and also express it in percentage form.
Solution:
Contribution margin = $150,000 – ($60,000 + $30,000)
= $150,000 – $90,000
= $60,000 60000/150000*100
Contribution margin ratio = $60,000/$150,000
= 0.4
Contribution margin percentage = ($60,000/$150,000) × 100
= 40%
The contribution margin is 40% of net sales which means 40% of sales revenue is available
to cover all fixed expenses and generate profit for the business.
Example 2:
The Monster company manufactures and sells two products. The data relating to sales and
expenses for the last six months is given below:
The total fixed expenses for the last six months were $60,000. Out of these fixed expenses,
50% were manufacturing and remaining 50% were related to marketing and administrative
activities. There were no beginning and ending inventories.
Solution:

3. Product A’s contribution margin ratio is 0.42 or 42% where as product B’s contribution
margin ratio is 0.5 or 50%. Product B is contributing more for covering fixed expenses and
generating profit because its contribution margin ratio is higher than product A.
Profit Volume (P/V) Ratio
The Profit Volume (P/V) Ratio is the measurement of the rate of change of profit due to
change in volume of sales. It is one of the important ratios for computing profitability as it
indicates contribution earned with respect of sales
P/V Ratio = Sales – Variable cost/Sales i.e. S – V/S
or, P/V Ratio = Fixed Cost + Profit/Sales i.e. F + P/S
or, P/V Ratio = Change in profit or Contribution/Change in Sales
The formula for the sales volumes required to earn a given
profit is:
P/V Ratio = Contribution/Sales 60000 2010 2011
or, P/V Ratio = Fixed Cost + Profit/Sales 12000 15000
Illustration 1: 100000 120000
Find out:
ADVERTISEMENTS:

4. (i) P/V ratio,
(ii) Fixed Cost
(iii) Sales Volume to earn a Profit of Rs. 40,000
ADVERTISEMENTS:
Solution:
Illustration 3:
The sales turnover and profit during two years were as
follows:
You are required to calculate:
(i) P/V ratio
(ii) Sales required to earn a profit of Rs. 40,000.
(iii) Profit when sales are Rs. 1,20,000.
Solution:

5. What is a break-even point?
When your company reaches a break-even point, your total sales equal your total
expenses. This means that you’re bringing in the same amount of money you need to
cover all of your expenses and run your business. Whenyou break-even, your business
does not profit. But, it also does not have a loss.

6. How to Calculate Break Even Point in
Units”
FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)
Fixed Costs = $2,000 (total, for the month)
Variable Costs = .40 (per can produced)
Sales Price = $1.50 (a can)
CALCULATING THE BREAK-EVEN POINT IN UNITS
Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
$2000/($1.50 – $.40)
Or $2000/1.10
=1818 units
Calculating the Break-Even Point in
Sales
: