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It is difficult to give clear guidelines for how big the contribution ratio should be on a product. Or to say how much you have to mark-up your product.
You should always charge the highest possible price. The highest possible
price varies from place to place and from product to product. It also depends on
the competition in the area.
Different lines of trade has a different mark-up and then also different
gross profit.
Definition of Contribution Ratio
The difference between Sales and Variable cost is called Gross profit. It
shows how much money you have got left to pay for your rent, telephone, internet
access, marketing, etc. and your own pay.
Gross profit in % is called Contribution Ratio. It is calculated like this:
- Gross Profit x 100 / sales price = Contribution Ratio (CR)
Example of calculating the Contribution Ratio
Imagine you are selling jeans trousers.
- You buy them at 20 $
- You make a mark up of 200 %
- The selling price will then be 60 $ (20 $ + the mark up)
- The Contribution Ratio will be 67 %
Mark up
The below list should be read like this:
- If you make a mark-up of 30% the equivalent in
Contribution Ratio will be 23 %.
- If you make a mark-up of 200% the equivalent in
Contribution Ratio will be 67 %.
|
Mark up |
CR |
Mark up |
CR |
|
4 |
3.8 |
80 |
44.4 |
|
10 |
9.1 |
85 |
45.9 |
|
20 |
16.7 |
90 |
47.4 |
|
30 |
23.1 |
95 |
48.7 |
|
40 |
28.6 |
100 |
50.0 |
|
50 |
33.3 |
140 |
58.3 |
|
60 |
37.5 |
200 |
66.7 |
|
65 |
39.4 |
300 |
75.0 |
|
70 |
41.2 |
500 |
83.3 |
|
75 |
42.9 |
1,000 |
90.9 |
- Read about
how to act on a bad gross profit / contribution margin- Go to next
business issue: Influence on Profits
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