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Cost-volume-profit (CVP) analysis helps managers make many important decisions such as:
- what products and services to offer
- what prices to charge
- what marketing strategy to use
- what cost structure to maintain
Contribution Margin amount remaining from sales revenue after variable expenses have been
deducted
CM ratio shows how the contribution margin will be affected by a change in total sales.
- For example: a 40% CM means that for each dollar increase in sales, total contribution margin will
increase by $0.40.
Incremental analysis considering only the costs and revenues that will change if the new program is
implemented. Alternative solutions 1 and 2 above use this type of analysis.
Change in Variable Costs and Sales Volume:
- Variable costs increase $10/speaker
- Sales increase from 400 to 480 speakers
*if Variable costs increase by $10, then unit contribution margin would go down $10, from $100 to
90/speaker.
*decrease in selling price per speaker will reduce the Contribution Margin by $20, down to $80
*fixed expenses are not included in the calculations because fixed expenses are not affected by the bulk
sale. All additional contribution margin increases the companys profits.