Contribution Margin and Breakeven Analysis Simulation

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IntroductionToday's business leaders are under enormous pressure to grow revenues, increase profits and expand the value of the business. Rather than focus on profit improvement, owners and managers should focus on improving underlying business activities and processes such as sales, production and distribution. In order to determine whether a business decision will improve profitability, you first must understand how costs are defined, as well as the relationship between cost, volume, and profitability. One of the important, yet relatively simple, tools afforded by cost/volume/profit analysis is known as contribution margin analysis. Your company's contribution margin is simply the percentage of each sales dollar that remains after the…show more content…
When looking at break-evens it is also helpful to look at fixed and variable costs. Fixed overhead is steady and can be factored in quite accurately. Variable costs are not as simple to calculate but in many industries variable costs follow certain percentages or ratios so they are easier to project. According to Tim Berry, the Break-even Analysis lets a manager determine what needs to be sold, monthly or annually, to cover the costs of doing business-the actual break-even point. The Break-even Analysis depends on three key assumptions:1.Average per-unit sales price (per-unit revenue: This is the price that you receive per unit of sales2.Average per-unit cost: This is the incremental cost, or variable cost, of each unit of sales. If you buy goods for resale, this is what you paid, on average, for the goods you sell. If you sell a service, this is what it costs you, per dollar of revenue or unit of service delivered, to deliver that service.

3.Monthly fixed costs: Technically, a break-even analysis defines fixed costs as costs that would continue even if the company went broke. Instead, always use the regular running fixed costs, including payroll and normal expenses (total monthly Operating Expenses). This will give the company a better insight on financial realities (Berry 2004.)Exhibit A, below, shows a 12-month income statement for three levels of fixed costs: $50,000, $75,000, and $100,000. Variable costs are constant at 40% of net sales:Fixed costs

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