In economic terms, we say that someone derives "Utility" from a good or service when the person prefers that this good or service exists rather than not exist; or when comparing two services or states, that you prefer one over the other (Pierce, 1988).
As we can see, the concept of Utility, as we use it in this article, refers, to begin with, to an assessment made by the person who enjoys (or suffers from) a service or a certain state.
Fundamentals of production analysisContribution analysis involves the use of a number of analytical techniques to determine and evaluate the effects on profits of:
- Changes in sales volume (that is, in units sold), in sales prices, in fixed costs, and in variable costs. It focuses on contribution margin, which is sales revenue minus variable costs.
- The Variable Cost Ratio For the Sierra Company, the contribution margin percentage (or ratio) will always be 40%, unless the selling price or variable cost ratio changes. Likewise, total fixed costs will always be $30,000 within the relevant interval of activity, unless management makes discretionary decisions that impact fixed costs.
For internal administration purposes, an income statement under the contribution margin approach is preferable.
The traditional method is the one studied in financial accounting courses that focus on reports for internal use.
This method does not apply the concept of variability of expenses. On the other hand, an income statement formulated under the contribution margin approach emphasizes the variability of expenses, due to its relevance in the responsibilities of the planning and control administrative function.