Sort the costs into variable and fixed, then compute contribution per unit, total contribution, and finally profit. The three figures answer different questions, and they are equal only by coincidence.
This lesson is part of profit, cost and cash are different questions. It uses ideas from fixed, variable, direct and indirect costs.
Worked example: Product A
An invented factory sells 500 units of Product A at RM40. The supplied table lists all costs.
| Cost | Amount | Type |
|---|---|---|
| Direct materials | RM8 per unit | Variable |
| Direct labour | RM6 per unit | Variable |
| Packaging | RM2 per unit | Variable |
| Sales commission | 10% of sales | Variable |
| Factory rent | RM3 000 | Fixed |
| Supervisor salary | RM2 400 | Fixed |
| Machine depreciation | RM600 | Fixed |
Step 1: variable cost per unit. Commission is 10% × 40 = RM4. So 8 + 6 + 2 + 4 = RM20.
Step 2: contribution per unit. 40 − 20 = RM20. Total contribution = 500 × 20 = RM10 000.
Step 3: fixed costs and profit. 3 000 + 2 400 + 600 = RM6 000. Profit = 10 000 − 6 000 = RM4 000. Break-even = 6 000 ÷ 20 = 300 units.
The mistake that shares fixed cost per unit
A tempting shortcut is to work out fixed cost per unit as 6 000 ÷ 500 = RM12 and subtract it in the unit calculation. That gives a “profit per unit” of 40 − 20 − 12 = RM8.
The figure only holds at 500 units. At 300 units the fixed amount per unit becomes RM20, and the same product earns nothing. Contribution stays RM20 at any output, which is why break-even uses it.
Check yourself
Product B sells 600 units at RM30. Materials are RM9 per unit, labour RM5 per unit and variable overheads RM1 per unit. The fixed items total RM4 200. Find contribution per unit, total contribution and profit.
Answer
Variable items = 9 + 5 + 1 = RM15. Contribution per unit = 30 − 15 = RM15.
Total contribution = 600 × 15 = RM9 000.
Profit = 9 000 − 4 200 = RM4 800.
What to study next
Test whether a break-even figure is realistic in testing a break-even result against feasible sales capacity. Log any slips in the mistake log and paper error review.
For a teacher to go through cost tables with you, see online one-to-one Accounting tuition.