The Effect Of Cost On The Profitability Of The Businesses Essay

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Introduction All businesses work with the main objective of making a profit. The determination of the profitability of the businesses will depend on the assessment of various factors of production as they contribute to the final income. The most primitive way of expressing the profit of a firm is through the subtraction of the costs from the revenues. Fixed cost is costs that are not changeable over a long period of time while the variable costs do change as time changes. Traditionally, the statement of accounts and profitability only took into consideration the interplay between the two factors- costs and revenues. In this traditional statement, variable costs and fixed cost were treated similarly. The separation of the costs as either fixed cost or variable cost came into being with the advent of the margin statement. In simplest terms, contribution margin has been used to indicate the result of excess between the revenues and the variable costs. The contribution margin is therefore, an in-depth statement of profit to take to account a lot of other financial variables in the like revenues, expenses, profits, and losses among others. Gross profit is a crude profit since it does not entirely belong to the company’s revenue. These are some of the loopholes in the accounting that the contribution margin exists to seal and it does this through the consideration of net profit in the accounting period other than the gross profit. The most important application of the contribution
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