ABSTRACT
Contribution margin analysis is another tool managers use for decision making. In the contribution margin approach, expenses are categorized as either fixed or variable. The variable costs are deducted from sales to obtain the contribution margin. Fixed costs are then subtracted from contribution margin to obtain net income. This information helps the manager to: (1) decide whether to drop or push a product line; (2) evaluate alternatives arising from production, special advertising, and so on; (3) decide on pricing strategy and products or services to emphasize; and (4) appraise performance. For instance, this procedure would be useful to formulate a bid price on a contract, and to decide whether to accept an order even if it is below the normal selling price.
