Question

For a telecommunication company ( Jio telecommunication company as example)

How the contribution margin might be used to determine the profitability of that product and how it’s used to make the operations more profitable.  

Answer 1

Contribution margin analysis uses cost structure of the firm to analyse its impact on profitablity. The costs are classified into variable cost and fixed costs. Variable cost is the cost which varies at per unit level and fixed cost is constant at absolute level. Sales minus variable costs give contribution margin. Fixed cost is treated as period cost and reduced from contribution margin to arrive at net profit. Contribution margin analysis helps in understanding the relationships between cost, volume and profit. It is one of the important managerial techniques used by new companies to get competitive advantage in launching its new product. In Initial years the company should focus on getting large number of customers and positive contribution. The fixed cost will be recovered in long run with profitablity

Jio telecommunication has aggressively entered telecommunication market by offering lower price point packs in its service and has gained lot of customer during past few years and has become No.1 Telecommunication Company. It has applied a unique strategy with cvp analysis and has been able to lure customers with lower price point packs to gain customer base. The company has used the contribution margin analysis in its approach and ensured its contribution is positive in initial years to gain more customers. Once customer base is built the company has widened its service to gain revenue from other areas like e-commerce, to ensure it stays profitable in the business. Today the company is one of the profitable companies in highly competitive telecommunication industry. The company off late has attracted lot of international investors since it has developed a good sustainable business model.