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Contribution Margin
HCA311: Health Care Financing & Information Systems
Instructor Guisinger

Contribution Margin “is a cost accounting concept that allows a company to determine the profitability of individual products” (Investopedia, 2013). In order to determine the contribution margin, one must take the revenues and subtract it from the variable cost which would look like this: Revenues – Variable Cost. “Fixed costs are costs that do not vary in total when activity levels (or volume) of operations change. A good example of a fixed cost is rent expense. Rent would not vary whether the home was almost full or almost empty; thus, rent is a fixed cost” (Baker, 2011). “Variable costs, on the other hand, are costs that vary in direct proportion to changes in activity levels (or volume) of operations. A good example of a variable cost is food for the group home residents. Food would vary directly, depending on the number of individuals in residence; thus, food is a variable cost” (Baker, 2011).

The Mental Health program for the Community Center has just completed its fiscal year end. 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. The contribution margin for the Community Center Mental Health Program is: revenue – variable expenses= contribution margin. Revenue= $1,210,000

Variable Expenses= $205,000
Contribution Margin= $1,005,000
The results tell me that the Community Center Mental Health Program has taken a loss because the contribution margin is lower by $95,000 than the fixed expenses.

References:
Baker, J. J. & Baker, R. W. (2011). Health Care Finance, Basic Tools for Nonfinancial Managers (3rd ed.). Sudbury, MA: Jones & Bartlett Publishers. ISBN: 9780763778941 Investopedia. (2013). Definition of Contribution Margin. Retrieved February 24, 2013 from:...
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