Contribution Margin is a term used in most retail business situations. By figuring out the contribution margin of a product, you can determine what products to add or remove from a product line to make smart pricing decisions.Retail businesses can include beauty supply stores, auto supply stores, grocery stores, restaurants, copy and business centers or any where else goods are sold to the general public at a marked up price. A product mix is a mix of brands and styles that give a customer a selection of choices. You may have on your shelf two different brands of soap. If both soaps are priced the same, the contribution margin may be different from each soap. Learning calculate the contribution margin will help you determine which brand is more profitable to your business.
Instructions
Calculate Contribution Margin
1. Determine your total sales for your product. Total sale is the gross total of items sold. This number can be retrieved by accessing your sales program via the computer or by your sales register. You sales total should not include any other variables like labor, sales commission or other expenses. This is a pure and straight forward number.
2. Subtract your variable costs from the total sales. Variable costs can include production, packaging and labor costs. Production is the cost of the machinery and power to operate the machinery. Packaging can include the outer packaging and the actual product packaging. Labor costs includes your man power needed to produce the product as well as their benefits costs.
3. Compare the contribution margins between all your products. Determine if some products must be removed from your product line up or perhaps their prices must be changed.
4. Set a regular schedule to analyze your contribution. Most businesses perform this function on a monthly basis. Some perform this quarterly. Depending on your staff size, you may want to opt to perform this monthly to track each products margin performance more accurately.
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