International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online) Vol. 7, Issue 2, pp: (312-320), Month: October 2019 - March 2020, Available at: www.researchpublish.com
EXAMINING THE RELATIONSHIP BETWEEN CONTRIBUTION AND PRODUCTION CAPACITY Dr. Ahmed Mohamed Ameen
Abstract: This paper examines the relationship between production capacity and contribution. A total of 81 companies in Michigan City are to be sampled and their views analyzed so as to make a policy making recommendations to the cost accountants and production managers. Bothproduction/optimal output and contribution are factors of Cost Volume Profit (CVP) analysis. While many perceive fixed cots be the main factor influencing the production capacity, there is a research gap on this fact. This is due to the fact that variable cost varies with production levels. Being that contribution takes into consideration only the fixed cost, it is a critical factor in determining the production capacity and the optimal production levels thereof. This has been proven from the literature conducted in this research paper. 81 emails were sent, but only 73 responded which is 90%.Over 80% of the 73 companies from which views were sampled confirmed this fact, though an overwhelming majority, were yet to make their production decisions based on the level of contribution. This paper, therefore, recommends that contribution be included in determination of production capacity, the current system be changed, sensitivity analysis be done for all assumptions and a further research be done on this topic, whenever assumptions are made, it is advisable that a sensitivity analysis be performed to determine to ensure that more realistic results are realized and a further research conducted on this topic. Keywords: relationship between production capacity, Cost Volume Profit (CVP) analysis, production capacity. ABBREVIATIONS: Abbreviation
Meaning
CVP
Cost Volume Profit
NBV
Net Book Value
IFRS
International Financial Reporting Standards
GAAP
Generally Accepted Accounting Principles
1. INTRODUCTION 1.1 Background Contribution is one of the critical concepts used by business owners in assessing the ability to produce a certain volume of goods and/or services. This concept focusses on the effects of variable cost on the volume of output targeted. In essence, contribution is a subsection of Cost Volume Analysis (CVP) (Hanna & Kyoung, 2016).This concept focuses on the returns that a company or a business makes from each unit of a product sold and whether that returns are enough to allow the subject business make profit, after taking into account the fixed costs (Choo & Tan, 2011). This concept looks at the profit made on individual products. It is used in calculating how many items that should be sold to cover all the business cost which are variable in nature.
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