Cvp Analysis Essay Example

in unit selling prices will affect the contribution margin. The contribution margin is the amount of revenue remaining after deducting variable costs.Say that XYZ auto parts store sells a particular part for 100 dollars. The variable costs would be say 50 dollars. Both of these are per unit. Take the variable costs per unit and subtract it from the selling price per unit and you get a 50 dollar contribution margin.

Say that the selling price per unit increase to 200 dollars. With the variable costs staying the same, the contribution margin per unit has increased as well to 150 dollars. One could say that the price per unit increase or decreases the same as the contribution margin per unit so long as the variable costs stay the same.In conjunction with the contribution margin, there is the contribution margin ratio. The contribution margin ratio is the contribution margin per unit divided by the unit selling price.

In using the XYZ Auto Parts Company from the example above, we can figure out their contribution margin ratio. The first part of the example has 50 dollars divided by 100 dollars. This leaves us with a 50 percent contribution margin ratio. In the later part of the example the contribution margin ratio increases to 75 percent.

As you can see the contribution ratio is affected by any changes in the components. Using the same XYZ Company, we can see what affect a decrease in fixed costs will have on sales. Using the formula from the school’s material, sales equals variable costs plus fixed costs plus net income. If the variable costs and the net income stay the same and

only the fixed costs would decrease, the sale would then also decrease. This is only taking into account that the other two variables of the formula stay the same, which in real life it is a possibility that they would change.