Concept of Contribution Margin in CVP analysis
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Discuss the concept of contribution margin (CM). CM is the first step in arriving at CVP analysis. Discuss the importance of computing CM and how often you think organizations should track changes in CM. Do you think CM analysis can be performed at the departmental level? Do you think it can be performed even down to the product level, i.e. produce versus cheese in a grocery store?
Please discuss what you think the informational differences are between the two financial statements. This will further support your first module's learning outcomes in understanding the differences between cost, managerial, and financial accounting. As you can see, both financial statements result in the same operating income, but the way in which they arrive at it is different. Please comment on the differences and which one you think is more informational.
Contribution Income Statement Emphasizing Contribution Margin (in 000s) Financial Accounting Income Statement Emphasizing Contribution Margin (in 000s) Financial Accounting Income Statement Emphasizing Gross Margin (in 000s)
Revenues $ 1,000 Revenues $ 1,000
Variable manufacturing costs $ 250 Cost of goods sold ($ 250 + $ 160) 410
Variable nonmanufacturing costs 270 520
Contribution margin 480 Gross margin 590
Fixed manufacturing costs 160 Nonmanufacturing costs
Fixed nonmanufacturing costs 138 298 ($ 270 + $ 138) 408
Operating income $182 Operating income $ 182
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Solution Summary
Discussion is 448 words in everyday language suitable for novice to intermediate. Discussion teases apart the distinction between financial income statement and contribution margin income statement and how each contributions a different view of the organization.
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Contribution margin is the sales less all variable costs. It tells you the incremental profits expected with an incremental unit of sales, after covering the fixed costs.
Organizations need to know the contribution margin to track the incremental profits from activities and to be sure that they are covering all variable costs. They also need to know if the volume generated is adequate to cover fixed costs of the business. Contribution margin is tracked typically much more often than external financial statements because any changes in contribution margin may signal a need for a change in sourcing material, hiring and business processes. Tracking the variable costs is more important than the fixed costs as the fixed ...
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