Examining Contribution Margin
In This Chapter
Figuring contribution margin
Meeting income goals with cost-volume-profit analysis
Analyzing your break-even point, target profit, and margin of safety
Exploring operating leverage
When you have to make a business decision about what to sell, how much of it to sell, or how much to charge, you first need to understand how your decision is likely to affect net income — your profit. Suppose you sell one refrigerator for $999.95. How does that sale affect your net income? Now suppose you sell 1,000 of the same make and model at this price. How does that sales volume affect net income?
Contribution margin simplifies these decisions. In this chapter, you find out how to calculate contribution margin and how to apply it to different business decisions, using both graphs and formulas. You also find out how to prepare something called a cost-volume-profit analysis, which explains how the number of products sold affects profits. And you discover how to prepare a break-even analysis, which indicates exactly how many products you must ...