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.
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
Learn accounting fundamentals and how to read financial statements with CFI’s free online accounting classes.
These courses will give the confidence you need to perform world-class financial analyst work. Start now!
Building confidence in your accounting skills is easy with CFI courses! Enroll now for FREE to start advancing your career!