Answered: Explain the concept of contribution and…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Explain the concept of contribution and its importance to the CVP technique.

Expert Solution

Step 1

CVP Analysis:

Cost-Volume-Profit (CVP) analysis is a technique that shows the relation of sales volume and product costs. It calculates the change in profit is due to changes in costs or selling price.

The following are the basic components of a cost volume profit analysis:

1. Sales: This is the amount of sales income earned or expected by the organization.
2. Variable Costs: These are costs that alter as sales units change.
3. Contribution Margin: It is the difference between Sales Revenue and Variable Costs.
4. Fixed Costs: Costs that remain constant for any level of output within the capabilities of an organization.
5. Income: Contribution Margin over Fixed Costs.