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Summary

This chapter has discussed several important tools that can help you understand how your company's profit picture is structured:

  • The contribution margin analysis gives you a snapshot of how a particular product is performing, in terms of both its variable costs (which increase with each additional unit produced) and its contribution margin (sales revenue less variable costs).

  • The unit contribution analysis puts you in a position to consider the profitability of a given product in greater detail.

  • The break-even point in sales tells you how much revenue you must generate to cover both your products' variable costs as well as your fixed costs. This may imply that you need to lower your costs, increase your sales price, or increase the number of units sold.

  • The break-even point in units tells you how many units you need to sell to cover your fixed and variable costs. You may find that you need to increase sales staff to reach the break-even point in units. This can be a complex decision when increasing staff leads to a concomitant increase in fixed costs.

  • The sales mix analysis helps you understand how your product lines combine to result in a profit or loss. It can help pinpoint which products are performing best, and where you may need to make adjustments to costs to lift the performance of a given product.

  • The segment analysis gives you a broader perspective on a company with several divisions, each with its own set of products. You would typically use this sort of analysis to gain a longer-term understanding of the source of a company's profits.


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