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Contribution margin

Among the many categories of profit to distinguish one special, which requires specific calculation of marginal profit. Calculation of volume contribution margin one of the most important tasks for the managers and financial analysts of the company, as it allows you to quickly recoup fixed costs, and thereby increase the income of the enterprise. According to the definition - contribution margin is the increase in total income that the company received from the sale of an additional unit of the good. There is another definition, which comes from dependence marginal revenue, in other words, the contribution margin is the difference between income from the sold products variable costs, used for its production. In the volume of income when the estimates do not take into account the VAT.

 Example marginal

Among other things, the calculation of the profit margin is on a commodity unit, which produces and sells something or other enterprise, and provides an indicator of unit contribution margin. This indicator is needed in order to show the dynamics of growth of profit on each new unit of production. In the end, when covering of all expenses of enterprise due to certain volume of sales profit no profit margin equal to the amount of fixed costs, in other words, this phenomenon is also called the break-even point. Conversely, the rate of excess variable costs the date the amount of the margin of profit.

It is worth to clarify the characteristics of fixed and variable costs. This is most easily done by representing that the company has ceased to produce products - those costs that are ongoing and are called permanent. These include the rent of premises or equipment, pay interest on credits and loans, wages managing the enterprise, the protection. Variables expenses on the contrary, characterized by transient availability - payment for energy resources, transportation, labor, purchase of raw materials for further production.

The impact of production on margins.

With the release of several kinds of products, the calculation of marginal allows to determine more profitable position and relatively unprofitable. Thus, knowing the strengths and weaknesses of the product range, you can focus on those that will promote the increase of the marginal income.

 The schedule of profit

It should be noted that the calculations of the marginal income is over a certain period of time. Also, it enables you to determine the right amount of products, which production is to produce and implement to ensure that planned in the future to earn the necessary income. Also, changes in marketing and price policy of the enterprise can affect the volume of sales. To study how these changes affect the demand and the realization also use the analysis of changes of the marginal profit for a given period of time.

Based on the above, a simple rule  allows to assert,  that the increase in the volume of goods and services, which produces and sells the company, reduces the amount of fixed costs per unit of output, and Vice versa.  

Ways to increase profit margin

The first and most simple way to increase profit margin, obviously, is the search for cheaper and more available sources of raw materials for manufactured products. Also significant is the role of the markup for a commodity unit. But market competition, regulation of pricing of the state levers and potential deterioration in the quality of production objectively prevent full use of these factors.

In this case, the optimum cost-effectiveness analysis and  the relevance of one or another product in the market of goods  and services, and, respectively, the concentrations of all production capacities and marketing developments in the production and realization of specifically this type of goods. Having calculated the share of marginal income for each group and category of goods, with high probability you will know what to focus on.

One of the unusual but effective ways of reducing variable costs, and accordingly the increase in profit margin is participation in various tenders. This is useful if the enterprise manufactures the products that may be of interest to the public institutions or structures. In this case, you must be ready to present competitive, meet all the requirements and options products on time and within the specified volumes.

 The calculation of marginal with discounts

Given the technological and production features of the enterprise, to increase profit margin, you can use the update of the assortment. In advance having considered variable costs, you can define those strengths that will eventually provide the reduction of variable costs. For example, it concerns those enterprises that can use recycled materials, reducing thus the waste disposal costs.

One way to increase sales volumes of products can be a powerful advertising and development of those regions where your products are little or no on the market. On the one hand, this would entail additional costs for transport and advertising services, but the effect can surpass all expectations and to compensate for the spent money. 

Whichever route changes to increase profit margin in the process of production and realization of goods you choose, always clear and accurate approach to any innovation. Only pre having considered all the possible costs and expenses, making a plan of action and intervention, can with relative confidence to proceed to the practical application of new methods and technologies in your company. 

Read also: - Gross profit as a method of estimation of efficiency of production - Frictional unemployment - Inflation