The basic components-volume-profit analyses are volume or level of activity, which is the amount of output or sales. Unit selling prices are the prices the company assigns for selling its products. Variable cost- per-units are costs that stay fixed on a per unit basis but change in total with different levels of activity. Total fixed costs are fixed in total but vary on a per unit basis depending on the level of activity. Sales mix is the percentage in which each product is sold when a company sells more than one product.
The unit contribution increases when the sales price increases. If a company is selling a product at a sales price of $20 per unit, and the variable cost per unit is $5 then the contribution margin would be ($20-$5)=$15. If the sales price increases to $22, then the contribution margin would equal ($22-$5) = minus $17 per unit. Break even sales is when the level of sales that would cover all variable and fixed costs result in a zero profit for the company. When unit selling prices increase, contribution margin per unit causes the net income to be increase.
Below I will show how an increase in unit selling prices at Jessica’s homemade Candy Co. might affect contributions.
If Jessica’s Homemade Candy Co. bought products for $100 and marked it up by 200%, then the cost of selling the product would be $120. The contribution ratio would then be 50%. If she bought the product for $120 and the selling price stayed the same, then the contribution margin would decrease.
If she sold the product on sale for $80, and the variable cost per unit is $10 then the contribution margin would be ($80-$10) =$70. So the net income would increase.
Contribution ratios are the difference between sales and variable costs. This is called gross profits. It shows how much money you have left to pay for bills. An example of this is if a company or business...