Question

How would a change in strategy such as shifting advertising emphasis to high Contributed Margin products affect your budget?

Answer 1

A Product having high contribution margin means it will contribute more to profit as compared to low contribution margin.

Let’s take an example:

Product		Selling Price	variable cost	Contribution
A	High Contribution Margin product	20	4	16
B	Low Contribution Margin product	40	32	8

Now, A is High contribution product and B is Low.

Remember that Company reaches on its profit after deducting the fixed cost from Contribution derived from all sales. Hence fixed cost is not allocated to a particular product. For example: Building Rent, depreciation etc.

Let’s say Organization is currently emphasizing its advertisement campaign more on low volume product. Sales quantity increased by campaign will lead to additional profit of $8 per unit but if the same emphasize is shifted to product A and given the condition, Product A sale also increases by same quantity, Profits will be more , $16 per unit sold.

Remember that Advertisement cost is irrelevant cost in this case since it is applied in both the alternatives i.e. Product A and Product B.

Since the company’s bottom line got impacted positively due to focus on higher contribution margin, Next year budget will have higher profits predicted for following years. Higher Profits means Higher Dividends for Stakeholders, scope for increase in workforce pay etc. Company can allocate the increased higher profit to any of the activity which it deems fit.