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1. Define contribution margin and explain how it is used by a business - give different...

1. Define contribution margin and explain how it is used by a business - give different sets of examples, please.

2. What is the relationship between costs, volume and profit. What does each term mean? Provide an example of how you would use it.

3. What is the contribution margin ratio and contribution margin per unit? How are they used by a business

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Answer #1

1. Contribution margin refers to the contribution earned by the company from the sales of its product. It is computed by the formula Sales-variable cost= contribution. As can be seen by the formula contribution is what is left after the variable cost is incurred. Now, from other perspective, contribution= Fixed cost+ profit. because contribution is used for these two components only.

Business uses this contribution margin to rank their product in case multiple products are being produced and resources are limited. This concept is also applied in target costing.

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