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. Both production/ 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 contr ibution 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.