Week 7 Discussion 2
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“Contribution Margins” Please respond to the following:
- Pick a product or service with which you are familiar. Discuss the importance of contribution margins when setting the price for that product or service.
RE: Week 7 Discussion 2
Tide is not just a product; it’s a promise. It’s not just any laundry detergent; it’s one that renews clothes and the stories they tell. A company like Tide can calculate an overall contribution margin and a contribution margin per unit. While the contribution margin shows how much revenue is left over after variable expenses, the contribution margin per unit shows how much profits will increase with the sale of each unit. Profits increase with incremental production levels once a company sells enough product to meet its variable expenses. The contribution margin often helps a company decide whether it should manipulate its selling price and sales volume. Some of the ways a company can increase a contribution margin is by reducing fixed costs, increasing the sales price or increasing sales of units with the highest contribution margin. A higher contribution margin usually means that a business can spend more on advertising to increase its sales volume. Lower contribution margins might mean that a company will have to rely on less-expensive forms of promotion, such as publicity and customer referrals.
RE: Week 7 Discussion 2
A product I deal with on a daily basis is a cup of coffee from Starbucks. The contribution margin pricing is used to set the base selling price for an item to gain the best profit. I know a cup of coffee sets the profit margins high with Starbucks. Take a regular cup of coffee sold by Starbucks. This is called a grande. The actual cost of a cup to make is approximately 34 cents. Starbucks sells this approximately for $3.75. To get the margin pricing, subtract the cost from the revenue and divide the difference to get the margin. In this case the margin would be about 91%. The contribution margins are the coffee, equipment, labor and supplies including the overhead costs of running a business. The lower the margins, the higher the profit may be. With one package of coffee, 10-12 cups could be made. So setting contribution margins in this case equals profitability.