Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Contribution Margin Cost Contribution margin costs are costs that are directly related to the production of a product or service. This fee is used to calculate the contribution margin, which is the difference between revenue and variable costs. The contribution margin is then used to determine the company's net profit after taking into account fixed costs. Contribution margin costs can be classified as variable costs, such as the raw materials and direct labor used in the production of a product or service. Contribution margin costs can also include costs such as shipping costs, insurance costs, and production machine maintenance costs. These costs may vary according to production or sales volume. The calculation of contribution margin costs is very important in a company's financial analysis. In making production decisions, companies must consider contribution margin costs as an important factor in determining optimal production levels. If the contribution margin costs are too high, the company may consider other alternatives such as outsourcing or downsizing production. In business practice, contribution margin costs are often used in calculating the costvolume-profit analysis (break even analysis). This analysis helps the company determine the break even point, which is the point at which the company's revenue equals the total costs incurred. By knowing this break-even point, the company can determine the sales target that must be achieved to achieve zero profit or break-even point. For example, if the contribution margin cost for a product is $50 per unit and the fixed costs for producing that product are $5000, then the break-even point is when the company sells 100 units of the product. If the company succeeds in selling more than 100 units of a product, it will generate a profit, whereas if the company fails to sell 100 units, it will incur a loss. In making business decisions, it is important to consider the cost of the contribution margin as an important factor in determining product or service prices, production quantities, and profit levels. If the cost of the contribution margin is too high, then the company may need to consider other alternatives such as lowering production costs or increasing product selling prices. Conversely, if the cost of the contribution margin is too low, the company may need to re-evaluate its production strategy and look for ways to increase production efficiency in order to increase the contribution margin. In practice, contribution margin cost analysis can also be used to help companies evaluate the performance of certain products or services, determine which products contribute the most to profits, and determine the right pricing and sales strategy to maximize contribution margins. For example, a company might consider reducing production costs by utilizing more efficient technology or production processes. In this case, the cost of the contribution margin will be one of the important factors that must be considered in making a decision. By understanding the concept of contribution margin costs, companies can make more informed decisions in managing their business and improve their financial performance. Contribution margin cost analysis can also assist companies in predicting the revenues and profits that may result from the production or sale of certain products or services. For example, company A manufactures clothing at a cost of $20 per unit. The selling price of the clothes is $30 per unit. In this case, the contribution margin cost per unit is $10 ($30 - $20). If company A sells 1000 units of clothing, its total revenue is $30,000 ($30 x 1000 units). The variable cost of producing 1000 units of clothing is $20,000 ($20 x 1000 units). Thus, the total contribution margin cost is $10,000 ($10 x 1000 units). If company A's fixed costs of producing clothing are $8000, then company A will break even when it sells 800 units of clothing ($8000 fixed cost / $10 contribution margin cost per unit). If company A manages to sell more than 800 units of clothing, then company A will make a profit. Conversely, if company A sells only 700 units of clothing, then company A will incur a loss of $1000 ($20 variable costs x 700 units) + $8000 fixed costs - $21,000 revenue). From the example above, it can be concluded that company A can increase profits by increasing the selling price of clothing or reducing production costs. Company A may also consider adding a new product or service that has a higher contribution margin cost to increase the company's revenue and profit. In the example above, company A's fixed costs are $8000. However, in practice, fixed costs may vary depending on the size of the company and the type of industry. Fixed costs can include building rent, employee salaries, equipment costs, and so on. Meanwhile, variable costs may vary depending on the amount of production or sales. Variable costs can include raw materials, direct labor wages, and so on. In the analysis of contribution margin costs, it is important to pay attention to the difference between fixed costs and variable costs, and take into account their impact on company revenues and profits. By understanding contribution margin costs, companies can make more informed decisions in managing their business and improve their financial performance. One example of the application of contribution margin cost analysis is in making decisions to determine the most profitable product or service to be produced or offered by a company. For example, company X produces three types of products, namely A, B, and C. Each product has different fixed costs and variable costs. The following is a breakdown of production and sales costs for each product: • Product A: Selling price per unit is $50, variable costs per unit are $30, fixed costs are $10,000 • Product B: Selling price per unit is $70, variable costs per unit are $50, fixed costs are $20,000 • Product C: Selling price per unit is $100, variable costs per unit are $80, fixed costs are $30,000 In this case, the cost of the contribution margin for each product is as follows: • Product A: $20 ($50 - $30) • Product B: $20 ($70 - $50) • Product C: $20 ($100 - $80) Thus, if company X only considers contribution margin costs, products A, B, and C will have the same level of profit. However, company X also needs to consider other factors such as market demand, level of competition, and marketing strategy. For example, if product A has a higher market demand than product B or C, then company X will probably prefer to produce and sell product A even though its contribution margin costs are lower. In this case, contribution margin cost analysis can help company X make better decisions in choosing the most profitable product or service and in accordance with the company's business goals.