Contribution analysis

Contribution analysis - Contribution margin analysis is...

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Contribution margin analysis is another tool managers use for decision making, expenses are categorized as either fixed or variable. The variable costs are deducted from sales to obtain the contribution margin. Fixed costs are then subtracted from contribution margin to obtain net income. This information helps the manager to (1) decide whether to drop or push a product line, (2) evaluate alternatives arising from production, special advertising, and so on, (3) decide on pricing strategy and products or services to emphasize, and (4) appraise performance. For example, contribution analysis involves how to formulate a bid price on a contract, and whether to accept an order even if it is below the normal selling price. Gross margin, found in the conventional income statement, which is sales minus the cost of goods sold, is not useful for this type of decision analysis. Contribution analysis recognises that it takes time to achieve an impact and does not seek to prove an impact before it could be achieved. It provides information on whether a program is
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Contribution analysis - Contribution margin analysis is...

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