Chapter 10. Contribution and Margin Analysis


  • Break-even Analysis

  • Looking into the Sales Mix

The relationships among the cost of producing or acquiring products for sale, the fixed costs that a company incurs to simply stay in business, the revenues it creates from selling its goods, and the volume of goods it sells all come together to produce net income. The ways these variables interact are predictable, but they can get complicated.

In the course of conducting your business, you are constantly working to manage your fixed and variable costs, to control them in ways that you believe will maximize your company's profitability.

Somewhat less often, on the earnings side, your decisions make a difference to the number of units you sell, and to the prices your competition and the marketplace allow you to charge. The presence of different product lines, each with its own cost and price structure, complicates the relationships even further.

There is a standard way of dealing with these numbers, variously called contribution margin analysis, price-volume analysis, and break-even analysis. Given the complexity of the relationships between different costs and sources of income, the basics of this sort of analysis are perhaps oversimplified.

But it's usually possible to tailor the analysis to accommodate the specifics of different situations.

Although QuickBooks does not offer a predesigned chart that shows the behavior of the various costs and revenues across different levels of ...

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