Question

Explain how you would determine the company’s contribution margin and contribution margin percent. In your initial post include the following:

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

Answer 1

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

In order to calculate contribution margin and contribution margin percentage we need the following:

1. total net sales revenue = total sales - sales discounts - sales returns and allowances
2. total variable costs

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

total net sales = $1,000,000

total variable costs = $750,000

contribution margin = $1,000,000 - $750,000 = $250,000

contribution margin % = $250,000 / $1,000,000 = 25%

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

The higher the contribution margin, the more money the company has to cover fixed costs and generate profit. Generally the higher the contribution margin, the better.

In this case, a 25% contribution margin would be considered low, but it all depends on the fixed costs of the company. The larger the fixed costs, the more a company needs to have high contribution margins.