Determination of Required Sales Volume:

The concept of contribution margin may be used as a quick measure to determine the unit sales volume required to achieve break even or any desired level of operating income. It is specifically important to companies deciding whether to introduce a new product line, build a new plant, or, sometimes remain in business.

To determine the relationship between sales volume and contribution margin, we will find the volume of ice-cream Quality store should sell in order to achieve break even. At the break even, contribution margin earned by the store must be large enough to cover the fixed costs. Data illustrates that each store has a fixed cost of Rs. 55,000 and contribution margin of Rs. 12.75. If the sale of each liter covers Rs. 12.75 of the fixed costs, then how many liters should be sold to cover a fixed cost of Rs. 55,000?

Sales volume (in units) = 55, 000 /12.75 = 4, 314 litres per month

Therefore formula to calculate sales volume is expressed as:

Sales volume (in units) = (Fixed costs × Operating income)/Contribution margin in per unit

The formula may be used to determine not only the sales volume at break even point but also at any desired level of operating income.