Alpha, Beta, Gamma
What step could they take to improve profitability?
Please answer exercise 6.1 from the attached paper.
For this question, one of the first concepts that must be understood before proceeding is that of contribution and how it is calculated - since in order to calculate the relative profitability of the three services given the shortage of labour we have to first find the contribution for one unit of each service (i.e. alpha, beta and gamma); followed by the contribution per £1 of labour.
In cost volume profit analysis, contribution is defined as the amount remaining from sales revenue after variable expenses have been deducted. It is the amount available to cover fixed expenses and then to provide profits for the period. (Source: http://www.accountingformanagement.com/cost_volume_profit_analysis.htm) Contribution is ...
This solution provides you a contribution margin statement which shows the greatest profit availabel of the three companies, Alpha, Beta and Gamma. It also tells the steps that should be taken by the business in order to improve profitability in light of the labour shortage.