Effect of Change in Variable Cost and Sales Volume on Contribution Margin and Profitability
Effect of Change in Variable Cost and Sales Volume on Contribution Margin and Profitability:
Learning Objectives:

What is the effect of change in variable cost and sales volume on contribution margin and profitability.
The following data is used to show the effects of changes in variable cost and sales volume on the company’s contribution margin and profitability.
Basic Data:
Selling price————$250
Variable Expenses—$150 (60% of sales)
Contribution Margin—$250 – $150 = $100 (40% of sales)
Fixed Expenses: $35,000 per month
Suppose that a company is currently selling 400 units per month. Management is considering the use of higherquality components, which would increase variable costs (and there by reduce the contribution margin) by $10 per unit. However the sales manager predicts that the higher overall quality would increase sales to 480 units per month. Should the higher quality components be used?
The $10 increase in variable costs will decrease the unit contribution margin by $10from $100 down to $90.
Solution:
Expected total contribution margin with higherquality components:  
480 units × $90 per unit  $43,200 
Present total contribution margin:  
400 units × $100 per unit  40,000 
———–  
Increase in total contribution margin  $3,200 
======= 
According to this analysis, the higherquality components should be used. Since fixed costs will not change, the $3,200 increase in contribution margin shown above should result in a $3,200 increase in net operating income.
You may also be interested in other articles from “cost volume profit relationship” chapter
 Contribution Margin and Basics of CVP Analysis
 Difference Between Gross Margin and Contribution Margin
 Cost Volume Profit (CVP) Relationship in Graphic Form
 Contribution Margin Ratio (CM Ratio)
 Importance of Contribution Margin
 Change in fixed cost and sales volume
 Change in variable cost and sales volume
 Change in fixed cost, sales price and sales volume
 Change in variable cost, fixed cost, and sales volume
 Change in regular sales price
 Break even point analysis (calculation of breakeven point by contribution margin and equation method)
 Target profit analysis
 Margin of safety
 Sales Mix and Break Even with Multiple Products
 Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure
 Operating Leverage and degree of operating leverage
 Assumptions of Cost Volume Profit (CVP) Analysis
 Limitations of Cost Volume Profit Analysis
Other Related Accounting Articles:
 Effect of Change in Variable Cost, Fixed Cost and Sales Volume on Contribution Margin and Profitability
 Effect of Change in Regular Sales Price on Contribution Margin and Profitability
 Effect of Change in Fixed Cost and Sales Volume on Contribution Margin and Profitability
 Importance of Contribution Margin – Advantages of Cost Volume Profit (CVP) Analysis
 Limitations of CostVolumeProfit (CVP) Analysis
 Assumptions of CostVolumeProfit (CVP) Analysis
 Cost Volume Profit Relationship – (CVP Analysis)
 Cost Volume Profit (CVP) Consideration in Choosing a Cost Structure
 Effect of Change in Fixed Cost, Sales Price and Sales Volume on Contribution Margin and Profitability
 Contribution Margin and Basics of Cost Volume Profit (CVP) Analysis
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