What is the 'contribution-sales ratio' where a Selling price per unit of $99, a Variable cost per unit of $66 and a Fixed costs of $495,000 are given
The details of the question is as follows: The directors of Upholland Ltd are planning for the launch of a new electronic game and are considering selling this new game for a Selling price per unit of $99. It anticipates that the Variable cost per unit will be $66 and the Fixed costs attributable to this product are $495,000. The directors have not factored in any risks in their estimation of selling price and costs. (QUESTION). What is the contribution-sales ratio and its meaning?
The contribution sales or C/S ratio = (Sales revenue - Variable cost of sales)/Sales revenue x 100
Here, the sales revenue is $99 and the variable costs are $66. This gives the C/S ratio as (99 - 66)/66% = 50%
From the C/S ratio of 50%, we can infer that if the sales were to increase by $1, the increase in net operating income would be 50 cents.
The profits earned by the company is equal to the Total Sales*(C/S ratio) - Fixed costs
As the fixed cost required for this product is $450000, the company would break even when the sales are equal to $450000*2 = $900000.
If a company has a high C/S ratio, the net operating income is also impacted by a large extent if there is a change in the sales revenue.
CONTRIBUTION=SALES PER UNITS-VARIABLE COST PER UNITS
THE BREAK EVEN VALUE =BREAK-EVEN IN UNITS *SALES PERUNIT
Thanks for the answer provided. But there is still more to the question.
1) what will be the break-even point in units and value
2) Profit or loss if sales were 25,000 units and £1,386,000
3) Sales revenue required to give a profit of £264,000.
4) Margin of safety if the sales were as in (2) and (3)