CVP Analysis: What Formula Are You Actually Solving?
Everything starts with contribution margin: sales left after variable costs to cover fixed costs and then profit.
Contribution margin per unit
Selling price − variable cost per unit = contribution margin per unit.
Break-even units
Fixed costs ÷ contribution margin per unit. At break-even, operating income is zero.
Target profit
Add target operating profit to fixed costs and divide by contribution margin per unit.
Contribution margin ratio
Contribution margin divided by sales is useful when the question asks for break-even sales dollars.
Margin of safety
Actual or expected sales minus break-even sales measures how far sales can fall before the company reaches break-even.
Sales mix
With multiple products, expected sales mix matters. Do not blindly use a single-product formula.
The takeaway
Contribution margin pays fixed costs first, then creates profit.
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FAQ
Does fixed cost affect contribution margin per unit?
No.
What happens to break-even if contribution margin increases?
Break-even generally decreases.
What is margin of safety?
The amount sales exceed break-even sales.