Join Jim Stice for an in-depth discussion in this video Identify high contribution margins, part of Running a Profitable Business: Calculating Breakeven.
- [Voiceover] A business doesn't care as much…about the sales price of an item…as it does about the profit it will make from that item.…- [Voiceover] We call that the contribution margin,…the selling price minus the immediate cost,…the variable costs associated with that item.…- As an example, consider the contribution margin…that McDonald's makes from selling you some French fries.…To keep it simple, let's say that you pay…a dollar for French fries.…How much of that dollar does McDonald's get to keep…after paying for its variable costs,…such as the cost of the French fries themselves?…- I've heard estimates that they range from 75% to 90%.…
At the high end, that means that if McDonald's…sells you French fries for a dollar,…the variable cost to McDonald's is just 10 cents…with 90 cents left over for profit.…- Now we know why the cashiers at all fast food places…ask, "Would you like any fries with that?"…- Now let's take a mental trip through a supermarket…and see if we can identify the items…with high contribution margins.…
Want to learn more? Learn about three types of accounting—financial, managerial, and income tax—in their Accounting Fundamentals course.
- Breaking down fixed and variable costs
- Pricing a service to cover costs
- Identifying high contribution margins
- Calculating a company's breakeven point
- Conducting breakeven analysis with breakeven equations
- Computing target net income
- Exploring sensitivity analysis