Suppose that a company expects the following financial results from a project during its first year operation:

-Sales revenue: $300,000

-Variable costs: $100,000

- Fixed costs: $50,000

* Total unit produced and sold: 10,000 units

a. Compute the contribution margin percentage.

b. Compute the break even point.

a. Contribution margin in percentage is 66.67%

b. Break even point in units is 2500 units

Explanation:

a.

Contribution margin is the value that each product is contributing towards covering the fixed costs of the business. The contribution margin is calculated by deducting Variable cost from the total revenue. The contribution margin ratio is the contribution margin expressed as a percentage of revenue.

Contribution margin percentage =  (Contribution margin / Sales) * 100

Contribution margin = Revenue - Variable costs

So Contribution margin ratio = [ (300000 - 100000) / 300000] * 100 = 66.67%

b.

The break even point in units the quantity of units needed to be sold in order for the firm to break even. Break even is the point where Total revenue equals total costs.

Break even in units = Fixed cost / Contribution margin per unit

Contribution margin per unit = Selling price per unit - Variable cost per unit

Contribution margin per unit = (300000 / 10000)  -  (100000 / 10000) = 20

Break even point in units = 50000 / 20 = 2500 units