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Log in through your institution journal article A Contribution Margin Approach to the Analysis of Capacity UtilizationThe Accounting Review Vol. 42, No. 2 (Apr., 1967) , pp. 254-264 (11 pages) Published By: American Accounting Association https://www.jstor.org/stable/243931 Read and download Log in through your school or library Subscribe to JPASS Unlimited reading + 10 downloads Journal Information The Accounting Review is the premier journal for publishing articles reporting the results of accounting research and explaining and illustrating related research methodology. The scope of acceptable articles embraces any research methodology and any accounting-related subject. The primary criterion for publication in The Accounting Review is the significance of the contribution an article makes to the literature. Publisher Information The American Accounting Association is the world's largest association of accounting and business educators, researchers, and interested practitioners. A worldwide organization, the AAA promotes education, research, service, and interaction between education and practice. Formed in 1916 as the American Association of University Instructors in Accounting, the association began publishing the first of its ten journals, The Accounting Review, in 1925. Ten years later, in 1935, the association changed its name to become the American Accounting Association. The AAA now extends far beyond accounting, with 14 Sections addressing such issues as Information Systems, Artificial Intelligence/Expert Systems, Public Interest, Auditing, taxation (the American Taxation Association is a Section of the AAA), International Accounting, and Teaching and Curriculum. About 30% of AAA members live and work outside the United States. Rights & Usage This item is part of a JSTOR Collection. The contribution margin is the sales price of a unit, minus the variable costs involved in the unit's production. It is used to find an optimal price point for a product. What Is the Contribution Margin?The contribution margin is the amount of money a business has to cover its fixed costs and contribute to net profit or loss after paying variable costs. It also measures whether a product is generating enough revenue to pay for fixed costs and determines the profit it is generating. The contribution margin can be calculated in dollars, units, or as a percentage. Additionally, the contribution margin is used to determine the break-even point, which is the number of units produced or revenues generated to break even. It also lets you know how much a particular product is contributing to your overall business profit. How Do You Calculate the Contribution Margin?To understand the contribution margin, you'll need to familiarize yourself with the financial terms included in the calculation. NoteA company's variable expenses include costs that fluctuate along with changes in production levels. Some examples of variable costs are raw materials, direct labor, and electricity. Fixed expenses are the costs that are consistent. These expenses can fluctuate, but for the most part, they stay the same. Examples of fixed costs include building rent, insurance, salaries, and utilities (that are not directly related to production). You can calculate the contribution margin by using the following equation: Sometimes it's useful to put the answer in terms of units, to understand how much profit one unit generates. The contribution margin per unit is calculated as: The contribution margin is the difference between sales and variable costs. The amount that's left over is the combination of fixed expenses and profit. So if the price of your product is $25 and the unit variable cost is $5, the unit's contribution margin is $20. How Is the Contribution Margin Ratio Different?The contribution margin ratio is the percentage of difference in a company's sales and variable expenses. Variable expenses are subtracted from sales to isolate profit and fixed expenses. This ratio then explains in percentage form the amount of revenue that is profit and fixed expenses: How the Contribution Margin WorksThe break-even point is one of the purposes for calculating your contribution margin. It exhibits the point at which a company covers fixed expenses and generates no profit. You can calculate your break-even point in units to determine the amount you must sell to break even. This method uses total fixed expenses (for your products) and the average contribution margin per unit. Calculate your average contribution margin per unit using the formula: Then calculate your break-even point in units: The break-even point can be used with other methods of analysis. NotePerforming a cost analysis of your fixed and variable costs at regular intervals can help to determine where you could make changes if needed. For example, a cost analysis of fixed expenses could reveal a high amount of fixed costs. You could then investigate ways to reduce your fixed expenses. Analyzing a product's contribution margin and break-even point provides information on the company's operational efficiency. These two measurements also give business owners information on pricing. Once you know the profit (or loss) a product is generating, you can begin to analyze and adjust prices accordingly. It's also a way to help structure sales commissions or decide which products to keep in your product line and which ones to remove. You can apply your company's resources to those products with the best contribution margins. Limitations of Contribution MarginsIf expenses are classified as fixed when they are actually variable, it can cause a misleading contribution margin calculation and result in a poor business decision. Also, products with a low contribution margin that sell in high volume with no required effort would be worth keeping in the company's product line. Key Takeaways
What is the difference between contribution margin and gross margin?Gross margin is the amount of profit left after subtracting the cost of goods sold from revenue, while contribution margin is the amount of profit left after subtracting variable costs from revenue.
Which of the following statements about contribution margin is correct?Answer and Explanation: The answer is b. Contribution margin is the difference between fixed and variable expenses.
What is the difference between contribution and gross profit?Gross profit is your income or sales less cost of goods sold (COGS), which are all fixed costs (above the line on your income statement). Contribution margin analyzes sales less variable costs, such as commissions, supplies, and other back office expenses (costs listed below the line on the income statement).
What is the relationship between contribution margin and gross profit quizlet?There is no relationship between Profit and Contribution margin. As total sales increase beyond the break-even point, the degree of operating leverage will decrease. A company's cost structure is not important as long as it achieves its sales goal.
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Which of the following causes the difference between the planned and actual contribution margin
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