Calculating the Contribution Margin

Topics: Variable cost, Management accounting, Costs Pages: 2 (519 words) Published: August 5, 2012
Calculating the Contribution Margin
Constance Hall Lindemann
HCA 311 Health Care Financing & Information Systems
July 1, 2012
Instructor: Heather Ables

Contribution margin is nothing more than a way to see if an organizations operation is profitable. The costs for any business will fall into two broad categories: fixed costs and variable costs.

Fixed costs are those whose amounts hardly ever change which means they are fixed, steady and unchangeable. Variable by contrast, are costs that are the exact opposite, they often fluctuate. An example could be the rent on an building which is a fixed cost, whereas the electric bill for the building will change upon the amounts of electricity used per month this is an example of variable cost. A contribution margin will focus on variable costs, as they are the costs that change from month, quarter, and annually. Because they are the ones that change this makes them harder to predict.

Using a contribution margin you can easily plan for what the expenses may be for the following month, quarter, etc. Many companies will use contribution margins as a profit measure to manage these ever changing costs. Since the financial manager is responsible for keeping cost under control, contribution margins is the best way to gauge how well management is doing. The first step in such breakdown is the calculation of the contribution margin. The significance of dividing costs into fixed and variable becomes obvious now, for a contribution margin calculation stresses either fixed or variable cost classifications; no different costs are recognized in this calculation.

Using the example from the text; “the program director determines that his program has revenue for the year of $1,210,000. He believes his variable expense amounts to $205,000 and he knows his fixed expense amounts to $1,100,000.” (Baker, 2011, p. 365)

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