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Contribution analysis and Incremental Costs

Business Plan: Contribution analysis
Posted In: Entrepreneurs, Finance
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Contribution analysis is an approach for assessing questions referring to real life program evaluations. It is used to help decision makers, managers and researchers arrive to conclusions about their program, idea or policy if used and put in place to make a contribution to the outcomes. Contribution analysis helps reduce conflict of contribution by acting as an aid or tool for decision making in identifying costs, potential opportunities, fixed and variable costs, pricing to enhance tabulation of the end results in terms related to revenues, profit, challenges and overall performance of the program, decision or policy at hand.

Contribution analysis follows a systematic approach where a problem is set out, discussion to the theory and risks related to the problem addressed, existing evidence and challenges related to it and later a revision to the theories capability to address its challenges and reduce uncertainty.

Example 1:  Evaluation of incremental costs and benefits of different options in order to make decisions.

Incremental cost is the increase in total cost after an increase in production. A company manufacturing toys decided to increase production of their toys from 3000 units per day to 4000 units per day, with the cost of producing 1 unit increasing from 4.65$ to 5.75$ the company will have to spend 1.1$ more per unit on the 4000 new units produced. The initial revenue collected from production of 3000 units per day is 12$ per unit totaling to 36000$ for 3000 units and total cost of production is 13950$ giving the company a total net profit of 22050$. With the new increase in production and costs with a stable revenue of 12$ per unit the company will spend 23000$ to produce 4000units and revenue collected will be 48000$ giving the company bet profits of 25000$. This will mean initial profit was 7.35$ per unit and the new profit will be 6.25$ per unit if the incremental costs are introduced into the company. This means the new incremental strategy with almost a 15% drop in profits is not good enough for the company unless considerations are made to the new cost of production and better ways to reduce them.



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