Small Business Management Toolbox
Undertake financial planning
Formulas for costing and pricing calculations
Contribution margin
The contribution margin is the amount remaining from sales revenue after variable
costs have been deducted.
Contribution margin per unit = Selling price per unit - Variable costs per unit
This can be thought of as the amount each unit ‘contributes’ to the profitability of the
business and can be used to calculate operating income or profit.
Operating income = Contribution margin per unit × Number of units sold - Fixed costs or profit
The contribution margin can also be expressed as a ratio.
Contribution margin ratio =
Contribution margin
Selling price
Breakeven
Breakeven occurs when the total contribution margin exactly equals total fixed costs,
ie the level of sales is just enough to cover the variable and fixed costs of production.
When breakeven occurs the following formulas apply.
Selling price per unit = Variable costs per unit +
Fixed costs
Number of units
Fixed costs = (Selling price per unit - Variable costs per unit) × Number of units
or
Fixed costs = Contribution margin × Number of units
Number of units =
Fixed costs
Selling price per unit - Variable costs per unit
The previous two formulas are all rearrangements of the first breakeven formula.
Income from breakeven sales =
Fixed costs
Contibution margin ratio
Small Business Management Toolbox
Undertake financial planning
Formulas for costing and pricing calculations
Margin of safety
The margin of safety is the amount by which sales can drop before losses begin to
be incurred.
Margin of safety = Total number of sales - Number of sales to breakeven
The margin of safety also provides a quick means of estimating operating income at
any level of sales.
Operating income = Margin of safety x Contribution margin ratio
Profit level and sales volume
To calculate the sales volume needed for a desired profit level.
Sales volume =
Desired profit level + Fixed costs
Selling price per unit - Variable costs per unit
or
Sales volume =
Desired profit level + Fixed costs
Contribution margin per unit
Operating income
Operating income = (Total sales - Breakeven sales) x Contribution margin ratio
Percentage markup
Percentage mark - up =
Sales price - Cost price
×100
Cost price
 Australian National Training Authority (ANTA) 2003. All rights reserved