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What is Contribution Analysis?
Contribution analysis is used in estimating how direct and variable costs of a product affect the net income of a company. It addresses the issue of identifying simple or overhead costs related to several production projects.
Contribution analysis aids a company in evaluating how individual business lines or products are performing by comparing their contribution margin dollars and percentage. Direct and variable costs incurred during the manufacturing process are subtracted from revenue to arrive at the contribution margin. This is, therefore, a very crucial procedure or tool to manage the growth of a business.
The formula for contribution margin dollars-per-unit is:
(Total revenue – variable costs) / # of units sold
For example, a company sells 10,000 shoes for total revenue of $500,000, with a cost of goods sold of $250,000 and a shipping and labor expense of $200,000.
The contribution margin per shoe is ($500,000 – $250,000 – $200,000) / 10,000
Contribution = $5.00 per shoe
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Contribution analysis helps compare how individual products are profitable to the company and is easy to use.
The significance of contribution analysis is that it indicates the profitability of each product and helps you understand the various components and specific external and internal factors that influence a company’s income, and it utilizes existing information.
The Cons of Contribution Analysis
Some disadvantages of contribution analysis are that its assumptions are unrealistic:
Sales prices remain constant; no discounts are given
Costs of production are linear
What is produced is what is sold (no inventory)
Learn More
Thank you for reading CFI’s guide to Contribution Analysis. To learn more, see the CFI resources listed below and check out our Financial Analysis Fundamentals course.
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:
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