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Hi I saw an example where they use the contribution margin ratio as the denominator in calculating the break-even point. I was trying to think of why that would be, but it gives me different answers.
I was thinking let’s assume R300 000 fixed costs and SP = 150 and VC = 100
Contribution Margin Ratio = (150 – 100)/150 = 1/3
Contribution = 150 *1/3 or 150 – 100 = 50Then I get different break-even points:
BE = 300 000/50 = 6 000 units
BE = 300 000/ (100 * 1/3) = 9 000 unitsWhat you are calling the ‘contribution margin ratio’ is not called that. It is called the CS ratio.
The breakeven point is 300,000 / 50 = 6,000 units.
Dividing the fixed overheads by the CS ratio does not give breakeven units. It gives the breakeven sales revenue.
300,000 / (1/3) = $900,000 (I have no idea why you have decided to stick in 100!!).
(And 6,000 units at $150 gives breakeven sales revenue of $900,000).
I do suggest that you watch my free lectures on CVP analysis. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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