7. How does the term, \"contribution margin\", get its name? In other words, wha

Question

7. How does the term, "contribution margin", get its name? In other words, what does it tell managers? 8. Should only variable product costs, variable period costs, or both types of variable costs be included when calculating the CM/ unit? How can managers quickly forecast operating income at different volumes within the relevant range using the CM/Unit information? Show how this is done 9. 10. How can managers quickly forecast operating income at different volumes within the relevant range using the CM Ratio? Show how this is done.

Explanation / Answer

7.Contribution margin ( CM) is the selling price per unit minus the variable cost per unit.Given a contribution margin , a manager can easily compute the break even and target income sales and make better decision regarding the addition or subtraction of a product line, about how to price a product, and what should be the sales structure on commissions or bonuses. CM measures how the growth in sales translates to growth in profits. Thus in the cost-volume profit analysis , CM plays a vital role in carrying out calculations regarding the profis and it is a tool to determine the break-even analysis for a firm.

8.The contribution margin income statement is a very important tool in planning and decision making by the managers.Variable costs , no matter if they are product or period costs are treated at the top of the statement. Fixed costs are used at the botom of the statement . A fixed cost is useful to calculate the variable costs before starting.The contribution margin income statement is a cost behaviour statement . Therefore rather than separating the product costs from the period costs ,like the traditional income statement , this statement separates the variable costs from the fixed costs. Therefore bst both variable costs must be included while calculating CM.

9.In the contribution margin income statement , the CM is calculated as : (SALES- VARIABLE COSTS)

GIVEN

SALES = $ 800000

LESS: VARIABLE COSTS $392000

Therefore we get contribution marin as $( 800000-392000)=$408000

Now when total fixed cost is subracted from the contribution margin we get the operating income.

Total fixed cost =Fixed overhead(product cost) +Fixed selling and administrative costs ( period cost)

Lets assumes fixed overhead to be $ 48000 and Fixed selling and administrative cost to be $ 112000

therefore we get Fixed costs as $(48000+112000) = $ 160000.

OPERATING INCOME = CONTRIBUTION MARGIN- FIXED COSTS

= $ (408000-160000)

=$ 248000

10.The contribution margin ration is the percentage of contribution over total revenue. It is calculated as

C/P =( P-V) /P= UNIT CONTRIBUTION MARGIN / PRICE.

For example if the price is $10 and the unit variable cost is $2 , then the unit contribution margin is $ 8 and the contribution margin ratio is $8/$10 = 80%.

The contribution margin can be thought as the fraction of sales that contributes to the offset of the fixed costs. It is the slope of profit line and therefore it can help in determing the operating income (operating profits) at different volumes of output.Higher the CM , higher the profits , hence forecasting by the managers becomes easier.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.