of certainty i.e. variable and fixed cost can be known.
it is a tool for short term planning and is concerned with tactical decision making ("best use or alternative uses for existing capacity")
Main assumptions are...
VC/unit remains unchanged throughout analysis - FC totally unchanged - Possible to separately identify VC and FC - Product mix doesn't change - Results of analysis are only as good as the stability of these underlying assumptions...
Changes in level of revenue and cost arise only because of changes in number of products produced/sold
The analysis covers a single product or assumes that the sales mix when multiple products are sold will remain constant as the level of total units sold changes
A reporting format where costs are reported by cost behavior and a contribution margin is calculated
Total contribution margin
(Sales revenue - variable costs) - the amount availiable to cover fixed costs and then contribute to profits
Unit contribution margin
(Sales price per unit - variable cost per unit)
Contribution margin ratio
(Unit contribution margin / unit sales price) - the proportion of each sales dollar available to cover fixed cost and earn a profit - once all fixed cost have been covered any revenue (cm) remaining is profit
Contribution margin percentage
(Unit contribution margin ratio x 100) - the percentage of each sales dollar available to cover fixed cost and earn a profit