In your own words, explain what the Contribution Margin is (more than the formula), why it is important to know, and what it has to do with Incremental Decision Making.
Solution
1)contribution margin represents that portion of sales revenue that is not consumed by variable cost or cost of goods sold.
It is an excess of sales revenue over variable cost.
2)contribution margin is used to determine whether it is worthful or wise to sell products at that contribution margin or not.If contribution margin is negative ,an organisation should stop selling the products as it will be incurring losses.
so contribution margin is used as a tool for decision making i.e.whehter to make product or not.
3)Suppose, we have to decide whether to accept additional line of business or not, we will check whether such line is generating additional contribution or not.
If such line of business is generating additional or incremental contribution then such line of business should be undertaken otherwise not.(as fixed cost remain constant )
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In your own words- explain what the Contribution Margin is (more than.docx
1. In your own words, explain what the Contribution Margin is (more than the formula), why it is
important to know, and what it has to do with Incremental Decision Making.
Solution
1)contribution margin represents that portion of sales revenue that is not consumed by variable
cost or cost of goods sold.
It is an excess of sales revenue over variable cost.
2)contribution margin is used to determine whether it is worthful or wise to sell products at that
contribution margin or not.If contribution margin is negative ,an organisation should stop selling
the products as it will be incurring losses.
so contribution margin is used as a tool for decision making i.e.whehter to make product or not.
3)Suppose, we have to decide whether to accept additional line of business or not, we will check
whether such line is generating additional contribution or not.
If such line of business is generating additional or incremental contribution then such line of
business should be undertaken otherwise not.(as fixed cost remain constant )
