Example of Contribution to Sales Ratio

Example of Contribution to Sales Ratio

There are two method of calculating the break even point. In this method break even is calculated directly in term of amount.

Formula

Break Even = Fixed Cost/ Contribution to sales ratio

Example of break even

Unit Sale Price	40
Variable cost	25
Fixed Cost (Rent)	50,000

Calculate break even by using contribution to sale ratio

Solution

Step 1 Calculate the Unit Contribution

 Contribution to sale ratio is calculated by subtracting the unit variable cost from the unit sale value.

Unit Sales	40
Less: Unit Variable Cost	(25)
Unit Contribution	15

Step 2 Calculate the contribution to sales ratio

Contribution to sale ration is calculated by dividing the unit sales by unit contribution.

Contribution/Sales

15/40

37.5%

Step 3 Calculate the break even Sales

Break even point is calculated in term of sales by dividing the fixed cost by contribution to sales ratio.

Fixed Cost/Contribution to sale Ratio

50,000/.375

133,333

The number of unit required to be sold to achieve break even sales may be calculated by dividing the break even sales with unit sales price i.e. 133,333/ 40 = 3,333 units