Even Analysis

Even Analysis

Contribution margin is used by management when making pricing decisions. This is especially true in special pricing or special order situations where fixed costs are sunk costs and should not be factored into the decision whether to accept or reject. Negative or low contribution margins indicate a product line or business segment may not be profitable. In addition, the contribution margin is helpful to analyze the impact of different levels of sales. Finally, a business can use contribution margin to resolve bottlenecks. If limited resources are available, a business wants to contribute that scarce resource towards the most profitable items. Therefore, constraints are eliminated by awarding the most profitable items the resources.

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