Traditionally, there are two things which are calculated while performing the cost volume profit analysis. These are calculating the contribution margin and contribution margin ratio. (Navaro, 2005)
Contribution Margin = Sales – Variable costs
Contribution Margin Ratio = Contribution / Sales
The above calculations therefore focus on the overall fixed and variable costs of the firm while at the same time providing insight into how the costs vary with the output. However, when this technique was developed, firms were more labor intensive and had different manufacturing costs break up. The new firms have more constant costs which normally do not wary because most of the modern organizations are now capital intensive organizations with fixed labor costs. For example, a supervisor may be paid the same wages regardless of the fact that whether the machine works at its full capacity or not. As such many argue that the maximization of the contribution margin may no longer be relevant for the modern organizations. (Luther, and O’Donovan., 1998) ...