COMMERCE 2AB3 Lecture Notes - Lecture 3: Lemonade Stand, Sensitivity Analysis, Contribution Margin
11 Feb 2015
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Document Summary
The cost-volume-profit model examines the relationship between firm cost structure (i. e. , relative proportion of fixed and variable costs) and sales volume and the effects of this relationship on the profitability of a firm. The model can be used by managers for the purposes of planning and decision making. This basic model combines four important variables volume of sales, costs, revenue, and profits. The basic model can be extended to assess the impact of price, cost, and volume changes, along with changes in product mix and income taxes. The following figure provides an outline for the materials covered in this chapter: Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. This amount contributes towards covering fixed costs and then towards making profit. Contribution margin is the net summary of the changes in that operating income. As the quantity of units sold increases, both total variable costs and total revenues increase at the same rate.
