Question

Refer to the manufacturing company you selected for the Unit 2 Discussion and explain how you would determine the company’s contribution margin and contribution margin percent. In your initial post include the following:

• Identify which specific variables should be included in the calculation.
• Illustrate your explanation by calculating the contribution margin and contribution margin percent using hypothetical values.
• Explain what your calculated results tell you about the company’s sales and cost structure

Regarding to the above question. I have already came up with hypothetical values and calculated the contribution margin and contribution margin percent, the question that I have stuck in " what your calculated results tell you about the company’s sales and cost structure"., and what is the specific variable costs?

The selected company is beverage and food manufacture which has around $ 5000,000 sale/Revenue, $3,000,000 variable costs and 200,000 fixed costs.

Thank you in advance.

Answer 1

Contribution Margin -

Contribution Margin the difference between Sales/ Revenue and Variable Costs.

Sales are the sales made by the company during the given financial year. Variable cost are the costs associated with the sales for the period. Variable cost vary in the proprtion with sales.

Contribution also means the earnings left after deducting the variable cost and remaining for the payment of fixed expenses.

Contribution Margin Percentage -

Formula = Contribution / Sales x 100

It means the portion of contribution are remained after deduction of variable cost. In simple words this percentage shows the profit margin of the business.

Example -

In the above example let is 1st derive Contribution Margin -

Contribution = Sales - Variable Cost

= $5,000,000 - $3,000,000

= $2,000,000

Contribution Margin Percentage = Contribution / Sales x 100

= $2,000,000/$5,000,000 x 100

= 40%

From the analysis of the above example it shows that

Company has $2,000,000 profit available to make fixed cost payments. Also company has profit margin of 40% on sales.

Variable Cost =

Variable Costs are the cost which are changing as the company's sales revenue increases or decrease.

Some of the examples are -

1. Direct Material

2. Direct Wages