Profitability cases using the contribution margin approach?

Question

Hi,

May I know how can I use the contribution margin approach for a profitability case?

The reason why is because I am trying to understand how to structure a framework given that we need to identify changes in the product mix.

Cheers!

Answer 1

My friend, we need more details please in order to answer constructively. Please give us things like case prompt, any data or exhibits you have, etc.

Having said that, based on the minimal prompt you provided, here is that concept I think that shall apply

Let us say there are 3 products 1, 2, 3.

Sales volumes are S1, S2, S3 units each

Prices are P1, P2, P3 dollars per unit

Margin on each product unit is M1, M2, M3 dollars

Total Revenue will be P1*S1 + P2*S2 + P3*S3 dollars

Total Profit will be M1*S1 + M2*S2 + M3*S3 dollars

Now you just need to play around with the items in the Total Profit expression to find the profit maximizing product mix.

If you have a product with higher sales and lower margin vs other products, you would need to switch production to higher margin products in order to increase overall profit.

Answer 2

Hi there,

Contribution margin is essentially another way of saying “profit per product type”.

So, simply ask for the contribution margin across products to identify which are the biggest drivers of change. Once you've done that, dive into the contribution margin for the given product (price and attributable costs).