A practical example worksheet at your fingertips to run numbers for the application of any business investment:
Sales = X
Variable Costs = Y
Fixed Costs = Z
Variable Cost Margin
Y ÷ X x 100 = Variable Cost Percentage
100% – Variable Cost Percentage = Contribution Margin
Z ÷ Contribution Margin = Breakeven Sales Required
A restaurant and catering company is looking to purchase two new delivery vans @ $60,000 each − a total cost of $120,000 (including dealer and on-road costs).
Their current performance is:
- Sales $2,350,650
- Variable Costs $1,481,290
- Fixed Costs $361,800
They are looking to lease the vehicles over a three year term with a 40% balloon payment @ 5.6%.
Therefore lease repayments will be approximately $4,856.49 per month.
Variable Cost Percentage = $1481,290 ÷ $2,350,650 X 100 = 63.0%
Contribution Margin = 100% – 63% = 37%
Sales required to cover lease payments = $4,856.49 ÷ 37% = $13,125 per month or $157,500 per annum
This amounts to an increased turnover of 6.7% to maintain current profitability.
This could then equate to the number of deliveries required each year knowing the average value of an order.