馃攳
Contribution Margin (Formula, Examples) | Calculation - YouTube
Channel: WallStreetMojo
[10]
hello everyone welcome to the channel of
Wallstreetmojo friends today we are
[15]
going to discuss on the tutol of a
contribution margin formula now
[20]
contribution margin as you can see is it in
a measurement through which
[24]
we understand how much a company's net sales that will contribute to the fixed
[29]
expense and the net profit after
covering the variable expenses so
[33]
basically let's discuss on this
contribution margin is a very cost
[37]
accounting concept because that allows a
company to determine the profitability
[40]
of the individual products I mean the
phrase contribution margin can also
[43]
refer to per unit measure of a
production gross operating margin
[47]
calculated simply as the products price
minus the total variable cost okay so
[52]
this metric allows an entity to evaluate
different area of business to determine
[57]
which service or product line to
emphasize based on the highest margin
[61]
okay let's break down the contribution
margin see contribution margin is
[66]
calculated by reducing the sales price
by the total variable cost regardless if
[71]
the cost is material labor or overhead
for example if we just take in a mindmap
[76]
way company XYZ let's say it is it sells
an item for let's say $100 okay the
[83]
company incurs a unit variable direct
material cost as 12 okay so sales is 100
[89]
material expenses is 12 and the unit
variable labor cost is 25 $10 of
[95]
variable overhead per unit and 8 as the
fixed overhead so the contribution
[98]
margin is what the 100 that was the
sales let any direct material expenses
[104]
that was 12
less the labor expense that was $25 less
[109]
the 10 as a variable overhead the fixed
overhead of $8 one will deducted 53 that
[115]
the total amount comes to $53 because
the fixed overhead per unit of $8 is not
[119]
considered right now contribution margin
let's consider its usefulness see
[125]
contribution margin is used by
management when making pricing decisions
[128]
this is especially true in special
pricing or special order situations
[133]
where fixed cost are some cost and
should not be factored into decision
[137]
whether to accept or reject
negative and low contribution margins
[141]
indicate a product line or business
segment may not
[143]
profitable in addition to the
contribution margin is helpful to
[147]
analyze the impact of different level of
sales finally a business can use
[151]
contribution margin to resolve any
bottlenecks if we read resources are
[155]
available a business wants to contribute
that scarce resource towards the most
[158]
profitable items
therefore constraints are eliminated by
[161]
awarding the most profitable items the
resources items the resources I mean if you
[166]
if you take the break you know target
income analysis the contribution margin
[171]
is a very integral aspect when
calculating the break-even point of
[175]
sales or the target level of sales the
contribution margin determines the
[178]
portion of each sale that is contributed
to covering the fixed costs for this
[182]
reason fixed costs divided by the
contribution margin results in number of
[185]
units needed to be sold to break-even so
to find out the target income the target
[190]
amount is added to the fixed cost now
contribution margin ratio see the
[196]
contribution margin is directly related
to the contribution margin ratio the
[200]
ratio can be calculated on per unit
basis or an aggregate basis that is on
[204]
total basis the per-unit basis divides
the contribution margin per unit by the
[208]
unit sales price where the total
contribution margin divides the total
[211]
contribution margin by the total revenue
so the figure will result in a
[214]
percentage that indicates what
percentage of the each dollar of revenue
[218]
generated to cover the fixed cost this
metric is calculated by dividing the
[222]
contribution margin by revenue see
contribution margin formula if we try to
[227]
evaluate I mean let's get into the
nitty-gritty of it see it is a very
[232]
significant concept in very every
business owner should understand I mean
[236]
and to calculate the contribution margin
all we need to look at are the net sales
[241]
and the total variable expenses so let's
see the formula and let's go into the
[247]
excel see the contribution margin
contribution margin is equal to the net
[257]
sales
[260]
divide less any you see total variable
expenses you remember we had already
[268]
calculated example on the same and which
had solved our purpose along with
[274]
finding out the contribution we can also
calculate the contribution per unit and
[278]
ratio as we as you have noted no
contribution margin formula let's take a
[283]
very practical example and which will
illustrate the contribution margin
[286]
formula let's say there's a company
whose name is Goody company okay a Goody
[293]
company has a net sales of close enough
to let's say 3 lakh it has sold
[303]
50,000 units I'm just writing units over
here okay off its product I mean the
[310]
variable cost of each I am just writing
vc that is the variable cost is 2
[315]
dollars and this is per unit again it is
$2 now find out the contribution what we
[322]
need to find we need to find
contribution then we need to find
[330]
contribution or unit and will calculate
also the contribution ratio so just
[342]
writing the ratio then contribution per
unit and the ratio so will simply use
[347]
the contribution formula to find out the
contribution per unit and the
[350]
contribution ratio the company has a net
sales of how much 3 lakh the number of
[356]
units sold was how much 50,000 the selling price per unit would be how
[360]
much so let's write the selling price
for unit is going to be is equal to
[367]
3 lakh that is the net sales divided
by the total number of units that will
[373]
give us the net selling price per unit
the variable cost is 2 dollars
[378]
okay so let's calculate the contribution
contribution per unit okay so
[388]
contribution per unit would be selling
price that is
[395]
we just not calculated 6 less the
variable cost so that will be the
[400]
contribution per unit 6-4 okay
the contribution let's find the
[410]
contribution now so that will be is
equal to the contribution per unit into
[417]
the number of units as simple as that so
the contribution is $2 lakh the
[422]
contribution ratio now the next thing
that we are supposed to find so V we
[427]
found the first one contribution per
unit then the contribution and the
[431]
contribution ratio so that's going to be
is equal to 2 Lakh divided by the net
[438]
sales that is the contribution divided
by the net sales will give us the ratio
[443]
and the ratio is 67% or 66 67.67%
[448]
so in this example we would have
been given a fixed expense we could also
[452]
be able to find out the net profit of
the firm so let's get into the
[456]
explanation of the contribution margin
formula see contribution is a
[459]
measurement through which we can
understand how much a company's net
[462]
sales will contribute to the fixed
expense in the net profit after covering
[465]
the variable expense so while
calculating the contribution we deduct
[468]
the total variable expense from the net
sales and doing that allows us to look
[472]
at the fixed expense and net profit see
contribution those can we expect
[475]
expressed in in another way as well we
can easily change that we can easily say
[480]
that the contribution margin over here
will just repeat the whole formula D and
[487]
will say it will be fixed expense okay
this is another way of expressing fixed
[494]
expense plus the net income okay so that
is another way if it's explanation or
[502]
you know you can you can imagine
contribution margin in this fashion also
[506]
and in situations where there is no way
we can calculate the net sales we can
[510]
use the above formula so this formula is
basically useful when we don't have when
[517]
we don't have Net sales so if net sales is
not available we can use this formula so
[521]
use of the contribution margin formula
you may ask why we need contribution we
[525]
need contribution to find out the
break-even point
[527]
and we will look at how contribution
becomes useful in finding out the
[531]
break-even point let's say a firm has a
fixed expense as close enough to and
[537]
this is a new example let's take firm has a fixed expense has close
[543]
enough to 1 lakh but the variable cost
let's say is of the form is 30,000
[550]
so we need to find the
break-even point
[554]
BEP which is also known as we need to
find the break-even point so by using
[558]
this concept of contribution we can find
out the break-even point see the
[561]
contribution margin is what Net sales
divided by the variable cost that is we
[566]
can also calculate as fixed cost plus
net profit right so here we can write
[572]
net sales less variable cost we can
write as net sales less variable cost is
[580]
equal to fixed cost plus the net profit
okay so at a break-even point the key
[590]
assumption is that there will be no
profit or no loss okay that is called
[594]
breakeven so next sales minus variable
cost is equal to fixed cost plus net
[599]
profit so basically over over here the
profit we want as 0 as simple as that
[604]
okay so you can say net sales less
30,000 that is the variable cost is
[616]
equal to the fixed cost that is 1 lakh
that is available to us and the net
[623]
profit is 0 so we have the net sales
okay if we just solve this equation we
[629]
get net sales as 1 lakh 30 so that is
going to be our answer that means 1 lakh
[637]
30 of the net sales the form would be
able to reach to the break-even point
[640]
now we have almost calculated everything
we can also look at the contribution
[647]
margin what we have calculated in a much
more sophisticated way now whatever we
[653]
have calculated we can just see in terms
of template over here you can easily
[656]
calculate the ratio and template
provided the company net sales the
[659]
number of units sold 50,000 so the
selling
[661]
press 6 at the selling price of ball
unit is 6 and the variable cost is 2
[666]
so the contribution margin is 6 minus 2
that is 4 the contribution margin will
[671]
be margin per unit into number of units
sold so that will be margin contribution
[676]
margin will be 4 into 50000 that will be
2 lakh and the contribution ratio would
[682]
be is equal to margin divided by sales
that is 66.67% we have a contribution
[688]
margin calculator over here and you can
use this calculator for quick analysis
[694]
so if if let's say you have a sales of 2
lakh and a variable cost of let's say
[700]
30,000 so your contribution margin
formula is net change minus total
[705]
variable cost 1 lakh 70 so in this
fashion you can use this calculator to
[709]
quickly find the data thank you
Most Recent Videos:
You can go back to the homepage right here: Homepage