What is the relationship among variable costs, contribution margin, and break even?

Question

Im taking managerial accounting and im having trouble comming to a conclusion about this question...thanks

Answer 1

well you see... they are very related...

you have to take into consideration the fixed costs, which are the costs that you have to spend with or without production (in a utopic world of course)...

so, variable costs are all other expenses that depend on the quantity of products you produce. for example, in producing a can of soda, the cost of the can is variable, and he rent of the warehouse is fixed.

After those concepts cleared, contribution margin is a concept derived from variable costs, since contribution margin is what each product is going to generate to help upset the fixed costs and produce earnings. To obtain this, you simply subtract the variable cost from the sales... so... if you sell a soda for 1 dollar, and you spent 35 cents variable and 20 cents fixed, the contribution margin is 65 cents (1-0.35), saying you get 65 cents before paying fixed expenses for selling one unit.

After that, we get to our third concept, break even. This is when the fixed costs are EXACTLY covered, say in the same example, you have fixed expenses of $650, you have a contribution margin of 65 cents per can... so you would need to sell 1,000 cans to have a break even. The income statement (without cogs, but with var/fix) would look like:

Sales $1,000
Var Costs 350
Contrib Marg 650
Fix Costs 650
EBITDA 0

so, as you can see, those three terms are extremely related, break even could not exist without contr margin, and contr margin could not exist without var costs...

Answer 2

Sales - Variable cost = Contribution margin

(Contribution margin - Profit) / (Unit cost - unit variable cost) = break even point.

In equation form it is clearly visible you see the relationships.