contribution margin

Examples of contribution margin in the following topics:

• Break-Even Analysis

  • To find the amount of units required to be sold in order to break even, we simply divide the total fixed costs by the unit contribution margin.
  • Unit contribution margin can be thought of as the fraction of sales, or amount of each unit sold, that contributes to the offset of fixed costs.
  • When sales have exceeded the break-even point, a larger contribution margin will mean greater increases in profits for a company.
  • Contribution margin (C) is the unit net revenue (P = price) minus unit variable cost (V = variable cost).

• Break-Even Analysis

  • The quantity (P - V) is of interest in its own right, and is called the Unit Contribution Margin (C).
  • It is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs.
  • Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost:

• Defining Operating Leverage

  • In other words, because variable costs are reduced, each sale will contribute a higher profit margin to the company.
  • The DOL tells us, as a percentage, that for a given level of sales and profit, a company with higher fixed costs has a higher contribution margin - the marginal profit per unit sold.
  • Therefore, its operating income increases more rapidly with sales than a company with lower fixed costs (and correspondingly lower contribution margin).

• Marginal Analysis

  • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
  • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
  • In the marginal analysis of pricing decisions, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced.
  • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
  • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.

• Introduction to Markets for Inputs and Distribution of Income

  • The marginal product of each factor describes the contribution of each factor to the production of the output.
  • The marginal product of a factor can be described as:
  • Q = ALαKβ , the marginal products of the factors is:
  • If the marginal products are known and the relative prices of goods in the markets reflect the values of the outputs, the value of each factors contribution can be calculated as the product of MPF and the price of the output.
  • The change in the value of the output associated with a change in an input is called the value of marginal product (VMP) or the marginal revenue product (MRP).

• Marginal Revenue and Marginal Cost Relationship for Monopoly Production

  • For monopolies, marginal cost curves are upward sloping and marginal revenues are downward sloping.
  • Therefore, the maximizing solution involves setting marginal revenue equal to marginal cost.
  • Production occurs where marginal cost and marginal revenue intersect.
  • Production occurs where marginal cost and marginal revenue intersect.
  • Analyze how marginal and marginal costs affect a company's production decision

• Marginal Cost Profit Maximization Strategy

  • In order to maximize profit, the firm should set marginal revenue (MR) equal to the marginal cost (MC).
  • Firms will produce up until the point that marginal cost equals marginal revenue.
  • This strategy is based on the fact that the total profit reaches its maximum point where marginal revenue equals marginal profit .
  • This is the case because the firm will continue to produce until marginal profit is equal to zero, and marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
  • This graph shows a typical marginal cost (MC) curve with marginal revenue (MR) overlaid.

• Profit Margin

  • Profit margin is one of the most used profitability ratios.
  • The higher the profit margin, the more profit a company earns on each sale.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • The profit margin is mostly used for internal comparison.
  • A low profit margin indicates a low margin of safety.

• "Market Failure" and Property Rights

  • Individual J perceives the marginal costs of X as MC and the marginal benefits as MBP.
  • An individual who smokes a cigarette in a restaurant has made a decision to smoke based on the marginal benefits and marginal costs to themselves.
  • The second hand costs impose marginal costs on others.
  • Since individual cannot be excluded and there is no reason for them to contribute to the costs of production, they become "free riders."
  • In some cases free riders can be encouraged to contribute through social mechanisms such as feelings of philanthropy or guilt.

• Average and Marginal Cost

  • Marginal cost includes all of the costs that vary with the level of production.
  • Marginal cost is not related to fixed costs.
  • The marginal cost of producing the second pair of shoes is $10.
  • Average cost and marginal cost impact one another as production fluctuate :
  • This graph is a cost curve that shows the average total cost, marginal cost, and marginal revenue.