The Mental Health program for a Community Center has just completed its fiscal year end. The program director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000.
Part 1: Compute the contribution margin for the Community Center Mental Health Program.
Contribution margin indicates the cumulative amount of revenue available to provide profit to the company after variable costs to cover fixed expenses. This is calculated by subtracting variable costs from net revenue. $1,210,000 - $205,000 = $1,005,000
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Part 2: As we read, the profit-volume (PV) ratio is also known as the contribution margin (CM) ratio. Using the same assumptions as above, compute the PV ratio.
Profit-volume ratio demonstrates the correlation between contribution and sales and is typically expressed in percentage.
P/V Ratio = Contribution/Sales
Since Contribution = Sales – Variable Cost,
P/V ratio can also be expressed as:
P/V ratio = (Sales – Variable cost/Sales) i.e. S – V/S
P/V ratio = ($1,210,000 - $205,000)/ $1,210,000
= 0.83
Since it usually expressed in percentage
= 83%
