How to do it
1. Classify the costs
Separate costs that change with activity from fixed costs for the relevant period and range.
2. Calculate the margin
Find contribution per unit, total contribution or the contribution margin ratio, keeping units and periods consistent.
3. Explain the decision
Connect the result to break-even, pricing, product mix or a special decision without ignoring capacity and demand.
Common mistakes & limitations
Classification can change
A cost may behave differently outside the relevant range. Contribution margin also does not capture every strategic or cash-flow consideration.
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