Question

Explain the different uses of a contribution margin analysis.

Answer 1

Contribution Margin analysis means the analysis of the residual margin which comes after deduction of variable expenses from revenues. This analysis compares the cash spent on various goods and services to help the management decide that which one is to be sold and which one is to be discarded. Contribution margin can be compared with fixed cost to be paid each period to help management analyze that whether current pricing policy is generating profits or not. This analysis can also be used to decide the consideration to be paid at the time of acquisition of any business to see whether consideration paid by entity is worth buying or not, this may help managers to altering consideration to be paid to a reasonable level.