Final answer:
The formula to calculate lost CM when at capacity is to subtract the contribution margin of the alternative product from that of the displaced product.
This represents revenue forfeit from not producing the next best alternative product.
Step-by-step explanation:
The formula to calculate lost Contribution Margin (CM) when a company is already at capacity involves determining the revenue that would be forfeited by not producing a unit of the next best alternative product.
Assuming that the fixed costs are unaffected by the decision since the company is operating at full capacity, the lost CM is the contribution margin of the displaced product minus any contribution margin the alternative product would bring in. Contribution margin is calculated as the product's selling price minus its variable costs per unit.
To illustrate, if a company sells Product A with a contribution margin of $20 per unit and has to forego producing Product A to make Product B, which has a contribution margin of $15 per unit, the lost CM per unit for choosing Product B over Product A would be $20 - $15 = $5.
The formula to calculate lost CM (Contribution Margin) when a company is already at capacity is:
Lost CM = Sales - Variable Costs
Contribution margin is the amount of money left over after subtracting variable costs from sales. If a company is already at capacity, it means it is producing and selling as much as it possibly can, so any additional sales would require additional resources or capacity.
Therefore, the lost CM would be the potential contribution margin from those additional sales.