Fantastic view of business plan issues – Do not miss it

Business Plan Information
Basic Accountancy Metro
Financial Management Metro



Business Plan – How to Start a Business  Plan d’Affaire -  Créer une entreprise 启动自己的企业 Plan de Negocios – Como iniciar un negocio Plano de Negócios – Como iniciar um negócio Kế hoạch kinh doanh
Français
中文
Español
Português
Tiếng Việt



 

HOME  |  SHOP & DOWNLOAD  |  CONTACT  |  THE STORY

Contribution Margin - Example

Related answers:

This page explains:
  1. How to calculate contribution margin
  2. How to calculate contribution ratio

Contribution margin - also called gross profit - is the sales price received minus the variable cost.

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

Sales price

25.00 $.

- Purchase price at CD company:

18.75 $

- Packaging and padded envelope:

01.00 $.

- Postage:

02.00 $.

= Contribution margin:

03.25 $ (13 %)

Contribution margin
This calculation shows you that each time you sell a CD at $25. You will have $3.25 left. This has to cover expenses other than those related directly to purchasing, packing and dispatching the CD.

This amount is also called the contribution margin or gross profit.

You can buy a Business Plan iPhone app where contribution margin is explained - and 100 other startup issues. Budget templates can be forwarded to your computer.

Contribution ratio
You can also calculate a percentage, which is then called the contribution ratio. It is done like this:

  • 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 a 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%).

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

The same thing applies to, for example, accountants, lawyers, psychologists and others.

- Go to next business issue: Suppliers
- Calculate your turnover and sales - use a smart little tool

 
Prepare yourself for business
The well respected business magazine The Economist, has developed an online preparation course for you who want to enter a graduate management program, such as an MBA. It gives you 50+ point improvement.

Go to Graduate Management Admission Test (GMAT). Get a FREE taste of GMAT 50+ point success for 7 days.

Offer approved by Thomsen Business Information


- Click and share your experience on:
Contribution Margin - Example

 
Jane Banda, U.S. 01-03-2013
I am just so happy that I understand what he says. I always thought budgets and figures were difficult to grasp. Is this really all?

Eckford Jere, Zimbabwe 25-06-2012
23 years

Asim Ayaz, Pakistan 09-03-2012
Very nice ,easy to learn and Understand the Concept...THANX

Barbara Bowen, US 12-02-2012
Very easy explanation!

dr Agrawal, India 12-08-2011
Very simple, easy to follow

Manvendra Raturi, India 31-03-2011
It´s a simplest way to explain..... fantastic.....

Marie, Australia 04-03-2011
Fantastic explanation Thx

Swaroopa, UAE 08-02-2011
Very good information, couldn´t find a simpler explanation anywhere else...Thanks

Nerissa, Copenhagen 28-01-2011
The explanation is very simple and easy to understand than other sites I´ve visited. Very helpful. Thanks for sharing your knowledge and i hope you´ll continue doing so.

Ani, India 26-01-2011
simple and useful explanation.Thanks

Genius, USA 04-01-2011
Thank you, now I fully understand margarine. I think a good contribution of margarine is 1/5 per slice of toast.

NOEL , SA 15-11-2010
NOW I UNDERSTAND MARGINE

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.

 


5 tools to develop your own business plan:


Copyright © 2012 Dynamic Business Plan          21-10-2014


Be Specific About the Product You Sell
Competitors
Contribution Margin - Example
Distribution
Distributors
Do You Have the Right Supplier
Estimating Cost
How Much Stock Do You Need
Pricing - Focus on Expenses
Pricing - the Market in Focus
Product Lifespan



Accounting in Small Biz


FREE - Startup Budget