Question

Looking at Apple Corp. as the manufacturing company for computers and smartphones, explain how you would determine the company's contribution margin (CM) and contribution margin percent (CMP). 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

Again, I am looking for these regarding a manufacturing company for smartphones and computers! Thank you.

Answer 1

Before understanding contribution margin, certain terms need to be understood. They are:

1. Variable and fixed costs – Variable costs are costs which change with change in levels of production. For example, raw material used for manufacturing. The cost of material changes if the units produced change from 100 to 120 units.

Fixed costs are costs which remain fixed at various levels of production. Also, they cannot be changed in the short-term interval. For example, rent of factory needs to be paid despite production levels.

2. Sales – Sales figure used in our calculations is always the net sales figure. Net sales is obtained by deducting all returns and discounts from the gross sales figure.

Contribution margin is calculated by deducting variable costs from sales amount. Contribution margin percentage is calculated by dividing contribution margin with sales amount. Higher the contribution, indicates higher efficiency in production. A higher contribution margin percentage indicates that the firm has lower variable costs than the sales. It implies that the firm is able to produce goods efficiently.

Let us take an example:

The sales of a manufacturing company are USD 300 million. The costs incurred are as follows:

Material cost – USD 45 million

Labor cost – USD 18 million

Rent – USD 10 million

Other administrative expenses – USD 50 million

The variable costs incurred in the given example are material and labor, totaling to USD 53 million. The fixed costs incurred are USD 60 million.

Contribution magin is calculated as sales (USD 300 million) less variable costs (USD 53 million), i.e. USD 247 million.

Contribution margin percentage is calculated as 247 divided by 300, i.e. 82.33%.

This indicates that the company’s variable costs are only 28% of sales figure. The variable costs are lower than the fixed costs. It indicates a need for the company to renegotiate the fixed costs and adopt cost reduction strategies.