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How to Prepare a Break-Even Analysis with More Than One Product

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Compute the contribution margin ratio for each product.

Contribution margin measures how sales impact net income. As it comes in, contribution margin offsets fixed costs. After the total contribution margin exceeds fixed costs, it begins to increase profits above zero. (Of course, if contribution margin falls short of fixed costs, then the company incurs a net loss.)

To compute a company’s total contribution margin, subtract variable costs from sales:

Contribution margin = Sales – Variable costs

Contribution margin tells you how a company’s sales affects profits. For example, if a given sale creates $50,000 worth of contribution, that money will cover fixed costs and then go straight to the bottom line, net income.

One particular measure of contribution margin is the contribution margin ratio, which you compute by dividing total contribution margin by total sales. For example, a contribution margin of $300, with total sales of $400, works out as a contribution margin ratio of 75 percent.

You can also calculate contribution margin ratio on a per-unit basis, dividing a given product’s contribution margin per unit by its sales price.

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