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The cost-volume-profit analysis is the systematic examination of the relationship between selling prices, sales, production volumes, costs, expenses and profits. This analysis provides very useful information for decision-making in the management of a company. For example, the analysis can be used in establishing sales prices, in the product mix selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the current environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of cost-volume-profit is still increasing as time passes.
relationship between the cost, volume and profit is the contribution
margin. El margen de
el exceso de ingresos por ventas sobre los costos variables.
contribution margin is the revenue excess from sales over variable
concept of contribution margin is particularly useful in the planning
of business because it gives an insight into the potential profits that
can generate a business. The
includes the income statement of the company Fusion, Inc. which
has been prepared to show its contribution margin:
CONTRIBUTION MARGIN RATIO
margin contribution can also be expressed as a percentage.
margin ratio, which is sometimes called the profit-volume
indicates the percentage of each sales dollar available to cover fixed
costs and to provide operating revenue. For
the company Fusion, Inc. the
margin ratio is 40%, which is computed as follows:
Contribution margin ratio = ($1,000,000 - $600,000) / $1,000,000 = 40%
contribution margin ratio measures the effect on operating income of an
increase or a decrease in sales volume. For
example, assume that the management of Fusion, Inc. is
studying the effect of adding $80,000 in sales orders. Multiplying
the contribution margin ratio (40%) by the change in sales volume
($80,000) indicates that operating income will increase $32,000 if
additional orders are obtained. To
validate this analysis the table below shows
the income statement of the company including additional orders:
UNIT CONTRIBUTION MARGIN
The unit contribution margin is also useful to analize the profit potential of proposed projects. The unit contribution margin is the dollars from each unit of sales available to cover the fixed costs of operation and provide operating profits. For example, if Fusion, Inc.'s unit selling price is $20 and its unit variable cost is $12, the unit contribution margin is $8 ($20 - $12).
The contribution margin percentage is most useful when the increase or decrease in sales volume is measured in sales dollars. To illustrate, assume that the company Fusion, Inc. sold 50,000 units. Its operating income is $100,000, as shown in the following contribution margin income statement:
If sales of the company Fusion, Inc. could be increased by 15,000 units from 50,000 to 65,000 units, its operating income would increased by $120,000 (15000 units X $8), as shown below:
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