4.2 Calculation & Pricing

In order to place an offer in the market, it may be necessary not to determine the price on a full cost basis, but to calculate the contribution margin. This means giving up part of the fixed costs or part of the administrative costs or profit.

Contribution margin accounting provides answers to the following questions:

• Which products are uneconomical and should not be offered any longer?
• From which number of units does the company reach the break-even point (break-even analysis)?
• Where is the absolute lower price limit of a product?
• What is more cost-effective: to manufacture a product yourself or to buy it?

 

Calculation scheme

Sales revenue ./. total variable costs= total contribution margin

Sales price per unit ./. variable costs per unit= contribution margin per unit

 

For one product, the list sales price in the sales calculation is € 436.70, with a profit of € 83.21 included. In order to check whether the costs are covered by this price, the variable costs must be determined. These amounted to € 410 in the calculation:

 

The production of the product makes sense because the positive contribution margin of each unit reduces the burden of fixed costs. The operating result is improved by each additional unit sold - in our example by € 26.70.

In contribution margin accounting, only the variable costs are charged to a product. If the achievable sales price exceeds the variable costs, a contribution margin is generated.

By back-calculating, it is possible to see which product revenues cover the fixed costs and which products generate profits. It is also possible to see which product groups should be discontinued or reduced in production because they generate too low or negative contribution margins. In practice, direct costing systems are designed as contribution margin accounting.

Example of a contribution margin calculation in euros

The contribution margin calculation indicates how high the contribution margin is to cover the fixed costs and to cover the profit.

 

Designation	Std. rate	Order 1	Order 2	Order 3
Order total = sales price		30.000 €	10.000 €	64.000 €
Fixed: Number of working hours		100	100	100
Fixed: Material costs		23.000 €	9.000 €	43.000 €
Variable: Wage cost share	25 €	2.500 €	2.500 €	2.500 €
Contribution margin		4.500 €	-1.500 €	18.500 €
Contribution margin per working hour		45 €	-15 €	185 €
- Fixed costs per working hour	20 €	20 €	20 €	20 €
Variable: profit per working hour		25 €	-35 €	165 €
Profit / loss total order		2.500 €	-3.500 €	16.500 €

Table 20: Contribution margin calculation

• Order 1 has a contract sum of 30,000 € with 100 working hours. After deducting the material costs, a sum of 7,500 € remains. This sum includes a profit mark-up of 2,500 € as well as a labour cost share of 4,500 €. Knowing the internal cost structure, the fixed costs of working time amount to 2,000 € and the variable wage costs to 2,500 €. The possible contribution margin is € 4,500, i.e. the variable cost shares.
• Order 2 has a contract sum of 10,000 € with 100 hours. This includes 9,000 € in material costs. The variable wage cost share is 100 *25 € = 2,500 €. This results in a negative contribution margin of 1,500 €. With this loss, the contribution margin per hour is 15 €. The total loss is 3,500 €.
• Order 3 has a total of € 64,000. With material costs of € 43,000 and a variable wage cost share of € 2,500, the contribution margin is € 18,500 and the profit is € 16,500.