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Break-Even Point Analysis

Contribution Margin

Practice Questions

1. Whether a business calculates break-even in terms of dollars or units, the first step is to calculate the contribution margin or the portion of revenue that can be used to cover fixed costs. Let's say you're an entrepreneur who makes belts out of recycled bicycle tires. If your variable costs per belt are $5 and you sell your belts for $35, what is the contribution margin?

  1. $35 j
  2. Insufficient information to determine. J
  3. $30 |
  4. $40
  5. Calculating break-even involves calculating the per unit contribution margin and then dividing fixed costs by that figure.

2. The contribution margin ratio expresses the contribution margin as a percentage of sales. Using the data from the prior question - $5/belt variable costs and $35/belt sales price - what is the contribution margin ratio?

  1. 0.14
  2. Insufficient information to determine. J
  3. 1.17 ]
  4. 0.86