Question

The variable costing concept removes fixed costs, which are uncontrollable, from the decision-making process (see variable costing income statement). This forces management to focus on the variable factors of production, sales revenue and variable costs. I remember learning this concept in economics at LBCC, where a company should shut down if a product’s price falls below variable cost and just incur fixed costs.

Have you ever heard the saying “The company loses $1.00 on every unit sold, but we are confident the losses can be made up on volume.” Really?

In theory, companies should not operate with a negative contribution margin (sales revenue-variable costs), but my guess is that some do especially in this economic environment?

Do you think companies actually operate (or produce products) with a negative contribution margin?

Answer 1

The Variable Costing is the new concept in Management Accounting Concept. It basically revolves around Contribution Margin per unit. It is also known as Marginal Costing. Positive Contribution Margin is the key to Profit in this method. Idea behind that is Fixed Costs Remain same even if one unit is produced, therefore to make profit if company has a Positive Contribution margin , can just increase its volume of sales which will eventually give it the Desired Profit.

However there may be some cases when there is negative contribution margin arising from product. In this Scenario, Company Started incurring loss for each unit of product sold, which eventually only increases the amount of total loss of the company.

However , to recover from this situation, Companies can either increase the Individual Selling Price of their Product which can make its Contribution Margin Positive or they can adopts some of the methods to Decrease their Variable Costs. Sometimes Customers are not willing to pay more for same product, therefore Company's only way left is to reduce their Variable Costs like they can hire low rate labour or can buy raw materials from another suppliers who can supply raw materials at a low price.