Reference
Marginal profit
“Marginal profit” is the profit remaining
after subtracting variable cost from revenues.
Reference
Target income
“Target income” is the amount of profit
sought from the manufacture and sale
of a product. Setting a target income is
useful for break-even point calculations,
including how many units need to be
sold.
For example, to calculate the breakeven point based on a target income,
calculate the marginal profit + target income. In other words, fixed cost + target income = (unit revenue – unit variable cost) × units sold. From that, units
sold = (fixed cost + target income) ÷
(unit revenue – unit variable cost).
Example
With revenues of 1 million yen, variable cost of 800,000 yen, and
fixed cost of 100,000 yen, calculate the unit variable cost, the unit
contribution margin, and break-even revenues.
●Unit variable cost
800,000 ÷ 1,000,000 = 0.8
Expresses that 1 yen of sales incurs 0.8 yen of variable cost.
●Unit contribution margin
1 – 0.8 = 0.2
Expresses that 1 yen of sales contributes 0.2 yen of profit.
(0.2 yen includes profit and fixed costs.)
●Break-even revenues
100,000 ÷ 0.2 = 500,000
The break-even point is where profit is zero, which makes all contributing
profits fixed costs. To calculate break-even revenues from fixed cost, divide fixed cost by the unit contribution margin. In this case, with revenues
of 500,000 yen being the break-even point, exceeding that value results in
a profit, and failing to meet it results in a loss.
Revenues
Profit (100,000)
1 million yen
Total cost
Amount
Break-even point
(500,000)
0.8
(fixed + variable cost)
Variable cost
(800,000)
1
Loss
0.2
Fixed cost (100,000)
Sales volume
If revenue at the break-even point is set to 1, then the
ratio of variable cost and fixed cost is equal to the ratio of
unit variable cost to unit contribution margin, or 0.8 : 0.2.
39