script.pdf
- 1. SCRIPT -Technically, it is the difference between sales and variable costs. When you produce a product or deliver a service and deduct variable costs of delivering that product, the leftover revenue is what we called the contribution margin. - Contribution margin shows you the aggregate amount of revenue available after variable costs to cover fixed expenses and provide profit to the company. It shows you how much money your company generates before paying for its fixed costs. The CM should be sufficient to cover all fixed costs as well as to contribute towards profit. If the amount of contribution margin is not enough to cover all fixed costs, the business will suffer a loss. -Contribution margin is helpful for determining how sales, variable costs, and fixed costs all influence operating profit. It gives business owners a way of assessing how various sales levels will affect profitability. Contribution margin is a tool of cost-volume-profit (CVP) analysis that helps businesses assess how costs, sales volume, and price affect operating profitability. And helps examine how changes in sales, variable costs, and fixed costs impact operating profit. -The contribution margin is the heart of marginal analysis. Its relevance is based on the premise that āan increase in contribution margin means an increase in profitā. there are two ways for a company to increase its contribution margins; They can find ways to increase revenues, or they can reduce their variable costs. The contribution can also be computed in so many ways: Net sales revenue minus variable costs = contribution margin; fixed costs + income = contribution margin; unit sales price minus unit variable costs = unit contribution margin; The number of units sold multiplied by the unit contribution margin equals the contribution margin. The computation of CM is not limited to the given formula. Let us proceed to the example: Consider the following data of Luzon corporation. Given, the unit sales price of 200, unit variable costs is 120, total fixed cost is 400,000, and units sold are 8,000 units.
- 2. The question is What would be the unit contribution margin and the total contribution margin? In this problem, we will use the unit sales price minus unit variable costs formula to get the unit contribution margin. So, 200 per-unit sales price-120 per unit variable costs equal P80. so, the unit contribution is P80/ unit. This tells you that each product the company produces and sells contributes P80 per unit toward covering fixed costs and generating a profit. Next, to get the total contribution margin we can just simply multiply the 8,000 units sold by the 80 per unit contribution margin so the total contribution margin is 640,000 and for another way of computation multiply units sold by the unit sales price to get the net sales revenue amount of 1,600,000 and multiply 8,000 units sold to unit variable costs to get the 960,000 total variable costs and then Get the difference of 1,600,000 and 960,000 and we will also have 640,000 as a total contribution margin. We can also get Cm by adding fixed costs and profit before that we need to compute first the profit; we will get the difference between the contribution margin and fixed costs and we will get 240,000 as profit. Then to check if the contribution margin is the same do work back and add fixed costs worth 400,000 to the 240,000 profit and we will get a Total contribution margin of 640,000. ā¢ Selling price, variable costs per unit, and fixed costs are known and constant. ā¢ Relative sales proportions of various products are known and constant. ā¢ Time value of money is ignored. Script 3rd assumption Selling price, variable costs per unit, and fixed costs are known and constant, here We know our selling price we know our variable cost per unit and we know our total fixed costs, and at least for the period we are working in they are not changing. 4th Relative sales proportions of various products are known and constant. If we have a multiple-product environment where we have a mix of different products, the mix stays the same and the 5th assumption is the Time value of money is ignored. We are ignoring time value of money for this analysis.