Question

Please refer to the Microsoft corp and explain how you would determine the company’s contribution margin and contribution margin percent. In your initial post include the following:

1.     Identify which specific variables should be included in the calculation.

2.     Illustrate your explanation by calculating the contribution margin and contribution margin percent using hypothetical values.

3.     Explain what your calculated results tell you about the company’s sales and cost structure.

minimum of 250 words

Answer 1

The contribution margin is a measurement through which we understand how much a company’s net sales will contribute to the fixed expenses and the net profit after covering the variable expenses. So, while calculating the contribution, we deduct the total variable expenses from the net sales. To calculate this ratio, all we need to look at are the net sales and the total variable expenses. Here’s the formula – Contribution Margin Formula It can be expressed in another way as well. Formula to Calculate Contribution Margin In situations, where there’s no way we can know the net sales, we can use the above formula to find out the contribution. Example Goodey Company has net sales of $300,000. It has sold 50,000 units of its products. The variable cost of each unit is $2 per unit. Find out the contribution, contribution margin per unit, and contribution ratio. Company has net sales of $300,000. Number of units sold was 50,000 units. Selling price per unit would be = ($300,000 / 50,000) = $6 per unit. Variable cost per unit is $2 per unit. Contribution margin per unit formula would be = (Selling price per unit – Variable cost per unit) = ($6 – $2) = $4 per unit. Contribution would be = ($4 * 50,000) = $200,000. Contribution ratio would be = Contribution / Sales = $200,000 / $300,000 = 2/3 = 66.67%. In this example, if we would have been given the fixed expenses, we could also be able to find out the net profit of the firm.