Contribution Analysis
Laticia G. Josiah
Finance 540
“Contribution Margin and Break Even Analysis” Simulation
Prof. Richard Franchetti
April 6, 2005
The ultimate goal of any firm is to generate profit. Steve Lefever states that there are two ways to generate profit: you can simply go from day to day and hope it happens or, you can identify the primary “drivers” of profitability and manage them. It is important for managers to manage how the sales dollars flow through the firm. Break-even analysis can help a firm make significantly better decisions for the future. This analysis is a very useful and effective method of assessing cost volume profit relationship. “The Contribution Margin and Break Even Analysis” simulation requires maximization of the firm’s contribution margin and operating profits. In assessing cost volume profits relationship, it is important for management to understand the concept of break-even analysis and contribution margin. “Break-even” refers to the point at which there is no profit or loss. No one is really in business to break-even but it is a very useful concept for evaluating strategic options. The concept that break-even analysis revolves around is the concept of contribution margin. In completing the simulation, understanding the concept of contribution margin was important in correctly deciding the best business decision to make. Contribution margin is the difference between the selling price of a product and the direct cost of producing that product. The remaining portion of each dollar is contributed to the amount necessary to cover the fixed costs. If there is just enough dollars contributed to cover all fixed costs, then the firm break-even. If sales produce a contribution margin greater than the fixed costs, the firm has generated a profit. If sales are not sufficient to produce enough dollars to cover fixed cost, then the firm will be operating at a loss. In the contribution margin and break-even analysis simulation,
Finance 540
“Contribution Margin and Break Even Analysis” Simulation
Prof. Richard Franchetti
April 6, 2005
The ultimate goal of any firm is to generate profit. Steve Lefever states that there are two ways to generate profit: you can simply go from day to day and hope it happens or, you can identify the primary “drivers” of profitability and manage them. It is important for managers to manage how the sales dollars flow through the firm. Break-even analysis can help a firm make significantly better decisions for the future. This analysis is a very useful and effective method of assessing cost volume profit relationship. “The Contribution Margin and Break Even Analysis” simulation requires maximization of the firm’s contribution margin and operating profits. In assessing cost volume profits relationship, it is important for management to understand the concept of break-even analysis and contribution margin. “Break-even” refers to the point at which there is no profit or loss. No one is really in business to break-even but it is a very useful concept for evaluating strategic options. The concept that break-even analysis revolves around is the concept of contribution margin. In completing the simulation, understanding the concept of contribution margin was important in correctly deciding the best business decision to make. Contribution margin is the difference between the selling price of a product and the direct cost of producing that product. The remaining portion of each dollar is contributed to the amount necessary to cover the fixed costs. If there is just enough dollars contributed to cover all fixed costs, then the firm break-even. If sales produce a contribution margin greater than the fixed costs, the firm has generated a profit. If sales are not sufficient to produce enough dollars to cover fixed cost, then the firm will be operating at a loss. In the contribution margin and break-even analysis simulation,