Gross Margin vs Contribution Margin (Part 2: Breakeven Analysis)
In part 1, we explored the concept of Contribution Margin and how it differs from Gross Margin. In the case study of Arinze's factory, we established that the Contribution per unit was N3,000 and the Contribution Margin was 50%.
Now let's use the above information to calculate the Breakeven Sales and Volume. Recall that Breakeven is the point where the business does not make any profit but also does not make a loss.
Recall that Arinze's total fixed costs amounts to N477,000, made up of:
Production Staff Costs - N150,000
Non-Production Staff Costs - N245,000
Rent - N50,000
Electricity - N15,000
Miscellaneous - N10,000
Depreciation - N7,000
Breakeven Sales = Total Fixed Costs/Contribution Margin. Therefore, N477,000 ÷ 50% = N954,000. This means that for Arinze to breakeven in that month, they would need to generate sales revenue of N954,000.
Now, lets find out how many uniforms they would need to sell to breakeven (i.e. generate the N954,000 in sales).
Breakeven Volume = Total Fixed Costs/Contribution. Therefore, N477,000 ÷ N3,000 = 159 uniforms.
This means that if Arinze sells 159 units of uniforms (N954,000 in revenue) in May, he would neither make a profit nor a loss. He would just Breakeven.
Let's look at the Income Statement below in this breakeven scenario.
Post any questions in the comments section.