Managerial accounting: contribution margin ratio and its usefulness in business planning
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1. What is meant by a product's contribution margin ratio? How is this ratio useful in planning business operations? Give an example of a company and specific items that might go into the calculation of the contribution margin. Can break-even sales be calculated by using contribution ratio?
2. Your friend remarked, 'A company will never drop a product from its product line that has a positive contribution margin. It will want to garner every bit of profit that it can.' Is this true in all cases? What are the risks and benefits of evaluating product continuation or implementation from using the contribution margin?
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Active since 2008