Contribution Margin Method

The basic approach to the breakeven calculation is the contribution margin method. This method is a refinement of the total cost method. This method, which indicates the number of units that must be produced and sold, is particularly useful to people involved in the acquisition of raw material and labor, actual production of the finished product, and storage and shipping of the product. The resulting target value of units to be produced and sold will guide many of the departmental functions of a company. The number of units required to meet the target focuses the production side of the company on how much work must be done. The purchasing department will base materials purchases on “the number.” Human resources ...

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