Entrepreneurial Finance: Contribution Analysis

Question 1

What is the most important concept for decision making?

Answer 1

Contribution

Question 2

What can contribution analysis be used for?

Answer 2

It can be used for more than just breakeven: it can be used for any decision that will impact contribution

Question 3

Why is contribution analysis often called CVP analysis?

Answer 3

It helps make decisions when COSTS or VOLUMES have an effect on PRICES

Question 4

What is the first step of contribution analysis?

Answer 4

Start with the situation or decision: Are you doing something new, or are you adjusting your current strategy?

Question 5

What is the first issue you have to deal with if you are doing something new?

Answer 5

Can you handle the risk? Would you make money? Can you cover your costs?

Question 6

What tool do you use to see if you can handle the risk/cover your costs?

Answer 6

Breakeven: when fixed costs are covered by contribution from sales

CFC / contribution per unit

Question 7

What is the second issue you have to deal with if you are doing something new?

Answer 7

Don’t just ask if you will meet breakeven, but also ask “when does it make sense to do this” or “at what level does it make sense to do this” or “will you make a profit on it?”

Question 8

What is the tool you use to see when it makes sense to use a new strategy?

Answer 8

Decision point: when incremental fixed costs are covered by incremental contribution (incremental fixed costs / incremental contribution)

Question 9

What is the issue you have to deal with if you are adjusting your current strategy (i.e. making decisions that affect costs and/or volume)?

Answer 9

Is there a positive impact on profit?

Question 10

What is the tool you use to see when it makes sense to adjust your current strategy?

Answer 10

Is total incremental contribution > incremental fixed and negligible negative qualitative impact?