Accounting Analysis

Unit 4 IP MA

Contribution Margin

Contribution margin is considered as the concept of cost accounting that allows any organization to find out the profitability of any individual product or service. Contribution margin is the marginal profit that is earned over per unit sales. This concept helps in the analysis of cost volume profit (CVP) which is a form of management accounting. Contribution margin with higher figures are more common and considered positively in the sector of labor intensive while a contribution margin with lower level figures are considered positive in the industrial sector of capital intensive. The word contribution margin also means to the measurement of per unit of a gross operating margin of a product. Contribution margin is calculated by subtracting the variable cost of a product form the price of that product. In the haircut styling business of Andre, the fixed costs that Andre has to bear currently is $1,750 per month that includes rent as well. While the compensation that Andre has to give to its employees is $9.90 per hour and the total number of employees that Andre has currently hired are five only. That means a total amount of $396 is given to five of Andre's employees every month that makes it a total yearly expense of $19800. The amount of contribution margin pair haircut for Andre's business is found out to be $11.60 and the process for calculating contribution margin is as under:

Formula

Formula for calculating contribution margin

Contribution margin (C) = Revenue (P) - Variable Cost (V)

sales (revenue)

$12

variable cost (per sales)

$0.40

 

 

contribution margin (per haircut)

$11.60

Contribution margin (C) = Revenue (P) - Variable Cost (V)

Contribution margin (C) = 12 - 0.40

Contribution margin (C) = $11.60Break-Even Point

Break-even point is a procedure that is used extensively by the people who are responsible for production management or management accounting of an organization. Break-even analysis is used by having a categorized list of production cost in-between those items that are variable in nature (that cost which changes when there is a change in the level of output either in production or service by an organization) and those costs that are fixed in nature (costs that are not directly related to the level of output by an organization). In other words, break-even point can be defined as the total variable and fixed costs are evaluated and compared with the revenue generated by sales of product or services so that the level of sales volume, level of production or sales value at which an organization doesn't makes neither any profit nor any loss. Now in order to calculate the break-even point, first we will have to calculate the fixed cost of the business that is as follows:

FIXED COST

 

Rent and Fixed expenses

$1,750

Baber's Compensation

$396

 

 

Total Fixed Cost

$2,146

Finding Break-Even Point

Fixed cost / Contribution margin = 2,146 / 11.60 = $185



Operating Income

Operating income is defined as that amount of profit earned by any kind of business operations after deducting cost of goods sold, operating expenses, wages and amount of ...