Contribution margin - an example

Example of contribution margin
If you sell CDs at $ 25.- on the internet and promote it like this: No postage and packaging, your calculation could look like this:

This calculation shows you that each time you sell a CD at 25 $. you have 3.25 $ left. This has to cover other expenses than those related directly to purchasing, packing and dispatching the CD.
This amount is also called the contribution margin or gross profit.

- Calculate your turnover and sale - use a smart little tool

Metro maps:
Understand Basic Accountancy	How to startup a business

• Contribution margin x 100 / sales price

In the above CD example the contribution ratio is:

• 3.25 $ x 100 / 25 $. = 13 %

Contribution margin when selling service
The contribution margin differs substantially between different trades. The above example generates a relatively modest contribution margin.

Compare this to a consultant giving management and development presentation which may pay you 1500 $ per presentation. Here you may only have 50 $ of direct expenses for the cab taking you to the hotel where the presentation is held. This generates a 1450 $ contribution margin. (97 %).

But then you probably have considerable fixed costs and you cannot expect to sell presentations 40 hours a week.

The same thing apply to e.g. accountants, lawyers, psychologists and others.
- Go to next business issue: Suppliers

		Click and share your experience on: Contribution margin - an example
		Eric, Baloyi, SA 26-11-2009 Never underestimate the information of contribution margin. It is the most important key figure in the budget/financial statement.

Visit bookshop and find free download

Copyright © 2009 Dynamic Business Plan          29-07-2010

Related answers:

	Competitors
	Contribution margin - an example
	Distributers
	Distribution
	Estimating Cost
	Pricing - focus on expenses
	Pricing - the market in focus
	Product Lifespan
	Stock / Store
	Supplier
	The exact product / service