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Steps To Follow Using Contribution Margin In The Cost-Volume-Profit Relationship

As described earlier, managers whether with financial or non-financial knowledge needs to at least understand the cost-volume-profit relationship to make decisions. The steps to remember the main element namely Contribution Margin is very simple & basic:

  • Contribution Margin(CM) is left after variable expenses have been deducted
  • CM amount will cover fixed expenses
  • After covering fixed cost, any remaining CM contributes to income
  • If CM is not sufficient to cover fixed expenses, we then see a LOSS situation

Append below a simple illustration of a profitable scenario when using the Contribution margin basis:-

ABC Company

Contribution Income Statement For Jan 07

Total ($)     Per Unit($)

Sales (500 Product X)      500,000          1,000

less: Variable expenses    300,000           400

Contribution Margin         200,000           600

Less: Fixed expenses         70,000

Net Operating Income     130,000

Notes:

  1. the CONTRIBUTION MARGIN(CM) namely the net operating income is the balance remaining from sales revenue after variable expenses have been deducted
  2. Per Unit column is important to make decision
  3. Note that the above information is only for the internal users and not external parties.

This entry was posted on Friday, November 2nd, 2007 at 6:15 am and is filed under 2. Cost-Volume-Profit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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