Reference no: EM132292991

Question: Reply to below in 150 words

Contribution Margin, by definition means the sales minus variable costs. If the company doesn't produce anything, the variable costs are 0, which gives the company an idea of how much money is left over to operate. This is a quick and dirty way to evaluate potential changes in price changes and quality improvements, it may not be used based off of its limitations. For example, a company may make most of their sales based off of discounted prices when they sell in bulk. Any time the sales price is not constant, the data cannot be gathered. You also have to assume that the costs can be cleanly divided into fixed and variable costs, which often times is not the case. In the last discussion we evaluated KB homes using the same costs for their homes. This technique would not be beneficial in that example because the price of the home is going to vary based off of things you cannot control, like weather, the land, potential problems that may arise during the building, different workers and production/hour per worker. It would be impossible to calculate the break-even point and evaluate pricing changes/ product quality improvements based off of these variables that are near impossible to predict.