Companies Benefit from Contribution Margin Analysis
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Identify one situation in a company, such as Wal-mart, that could benefit from contribution margin analysis. Discuss any difficulties you may have in obtaining the data to make the analysis.
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Solution Summary
Identify one situation in a companu, such as Wal-mart, that could benefit from contribution margin analysis. Discuss any difficulties you may have in obtaining the data to make the analysis.
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Variable and fixed costs filter down through your business. Every product has variable costs that are directly attributable to its purchases and subsequent sales. These costs are effectively covered by sales. Fixed costs must be covered no matter what sells and at what price.
The degree to which your products each contribute to covering your fixed costs (and thus freeing up more profit) is what contribution analysis is all about.
Written out, the basic math behind contribution analysis is:
Total Sales - Variable Costs = Amount left for Fixed Costs/Profits
Convert the dollar figures into percentages and the equation becomes:
100% - Variable Cost =% of Sales
(You arrive at a Variable Cost Percent like this: Variable Costs/Total Sales = Cost %.)
The contribution margin formula can be applied to any product, any department or to your business as a whole. Let us take a hypothetical example of Walmart.
Let's assume that Last year Walmart added a new department, selling only three products. Walmart sales ...
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