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Chapter 19. Analyzing Contributions and ... > Making Assumptions in Contribution A...

Making Assumptions in Contribution Analysis

The analysis of contribution margin, break-even points, and the relationships among costs, volume, and profit makes some assumptions that must be met before you can put much trust in the results of the analysis. The assumptions discussed in the next few sections are particularly important.

Linear Relationships

Contribution margin analysis assumes that revenues and expenses are linear across the relevant range of volume. Suppose that you offer volume discounts to your customers. In that case, when you sell more goods, each additional, incremental sale generates less revenue per unit than when you sell fewer units. The revenue line would be similar to that in Figure 19.10. Notice that it is no longer straight (linear), but that it increases more slowly as volume increases (non-linear).


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