Page 271 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes
Figure 12.4

Contribution Margin

In the short run, where many of the firms costs are fixed, businessmen are often interested in
determining the contribution additional sales make towards fixed costs and profits. Contribution
analysis provides this information. Total contribution profit is defined as the difference between
total revenues and total variable costs, which equals price less average variable cost on a per
unit basis. Figure 12.5 highlights the meaning of contribution profit. Total contribution profit,
it can be seen, is also equal to total net profit plus total fixed costs.
Figure 12.5

Contribution profit analysis provides a useful format for examining a variety of price and
output decisions.
As is clear from Figure 12.5 Total Contribution Profit (TCP) = Total Revenue (TR) – Total
Variable Cost (TVC)
= Total Net Profit (TNP) + Total Fixed Cost (TFC)
Therefore, if TNP = 0 then, TCP = TFC. This occurs at break even point. From
the above equation it is also clear that

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