Monday, December 12, 2011

Sales mix and contribution margin

As you are creating your budget and planning for 2012 a review of both your product mix and the contribution margin each product brings to your business is important.  The mix refers to the amount of each product you sell compared to total sales.  Most businesses sell at least a few different things and the price is generally different for each product.  The ideal situation calls for the highest margin products to generate the most sales.  This isn't always the case which is why it is important to look at the contribution margin of each product and determine if the pricing is adequate.

Contribution margin can be thought of as the fraction of sales that contributes to the offset of fixed costs.  Alternatively, unit contribution margin is the amount each unit sale adds to profit.  The contribution margin is calculated by subtracting the variable cost of each unit from the price of each unit.  Given the contribution margin, an owner can easily compute breakeven points and target income levels, and make better decisions about whether to add or subtract a product line and about how to price a product. The contribution margin can also be used to monitor the efficiency of manufacturing operations.

All the budgeting and planning we have discussed so far take research, a calculator and time, but the results are worth it.  Small business owners who put this effort into running their business see the growth and profitability they want and need.

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