Chapter 9

Straight to the Bottom Line: Examining Contribution Margin

In This Chapter

arrow Figuring contribution margin

arrow Meeting income goals with cost-volume-profit analysis

arrow Analyzing your break-even point and target profit

arrow Finding the margin of safety

arrow Exploring operating leverage

Consider the following exchange:

“I’ve got a million-dollar idea. Everybody wants a Rolls Royce, but no one wants to pay for a Rolls Royce, right?”

“Yeah. They’re way too expensive.”

“Okay, here’s my idea: I’m going to sell Rolls Royces but at a price that people can afford: just $999.95.”

“But making a Rolls Royce costs a lot of money. How will you ever earn a profit?”

“Who cares? At these prices, I can sell so many cars, I’ll make it up in volume.”

As this discussion shows, 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 will affect net income, which is your profit. Suppose you sell one Rolls Royce for ...

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