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What Is Taken into Consideration to Figure Out the Contribution Margin?

Essay by   •  May 8, 2018  •  Case Study  •  350 Words (2 Pages)  •  275 Views

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1. What is taken into consideration to figure out the contribution margin?

To figure out the contribution margin you use the formula (Net product revenue - Product variable costs) ÷ Product revenue. When figuring out the contribution margin you must consider the price of your product or service. For instance, if your sale item is at a relatively high price and your contribution margin is negative or low then you should take into consideration the options you have. One option being to lower the sales price, so your contribution margin rises or discontinuing the item all together.

2. How is the break-even point determined?

With any successful company you need a break-even point. So that you are sure that the company isn’t going to lose money. To determine the break even point you need to divide the company’s fixed expenses by the company’s contribution margin ratio.

3. What is needed to determine the operating income?

Revenue- cost of goods sold, labor, and day to day expenses is the formula you would use to determine the operating income. This is done so that the investors of the company can have a visual/paper trail of the company’s revenue. Without an operating income no one is going to be willing to invest in a company because no one wants their money going somewhere blindly without knowing if they are going to profit from their decision.

4. Would the contribution margin, break-even point and operating income change if the compensation method for employees is modified?

I believe that the contribution margin, break-even point and operating income would change if the compensation method for employees is modified. I say this because each company has a plan that determines how much they need to pay their employees so that they aren’t losing money and have revenue. If compensation is modified and there isn’t a solution as to how to increase their incoming money then the company in turn may have a negative contribution margin, their break-even point will be a loss, and their operating income will tell investors that they need to get out while they can or not to invest at all.

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