Documentation – A Control Mechanism of Supply Chain Logistics
Supply chain operations and network extend beyond domestic boundaries and global boundaries of all countries. A logistical exercise originates at the buyers end and involves multiple agencies including buyer, seller, 3PL freight forwarder, transporters at various juncture, shipping lines, airlines, various governmental agencies, customs departments at various locations and financial institutions like banks to complete […]
Westley and MacLeans Model of Communication
Yet another achievement in the discipline of communication was the Westley and MacLean’s model of communication proposed in the year 1957 by Bruce Westley and Malcolm S. MacLean Jr. Let us try to understand this model with the help of below examples: At night, when suddenly an individual experiences the shaking and trembling of the […]
Co-Working Spaces: The New Trend in Real Estate
There is a relatively new form of a business model emerging in the real estate space across the world. The model is addressed by several names viz. co-working spaces, on-demand workplaces, shared offices, etc. This workspace model has gained impetus because of spiraling real estate costs. It is also very effective for companies who do […]
What is Gross Domestic Product (GDP) ?
Gross domestic product (GDP), this is a term which is familiar to pretty much anybody who has ever read any newspaper. This number is considered by many to be the most important indicator of the state of the economy. However, how little clarity we have on the subject is remarkable. The average public is not […]
Guidelines for Effective Communication
Effective communication is a part and parcel of any successful organization. A communication should be free from barriers so as to be effective. Communication is a two way process where the message sent by the sender should be interpreted in the same terms by the recipient. The characteristics of effective communication are as follows: Clarity […]
It begins with the same old way. Companies have to compute the contribution margin for each of their products. This is a possibility if a company has a couple of hundred products. If there are thousands of products, we may have to use the sales based approach mentioned in the end of this article.
So, for each of the products find the contribution margin and divide it by the selling costs, to derive the contribution margin ratio.
The next step is to find the relative weights of each of these products. The common way to do this is to estimate the relative proportion of sales that different products have. For instance, if for every 1 product A, we sell two product B’s, their ratio is 1:2. We will need a ratio of the sales of all the products. This is found out by going into the empirical sales data that the company has. On the other hand, we can also find out if the sales are expected to change in the future period and make adjustments in our ratio based on this expectation.
The final step is to calculate a weighted average. This is done by multiplying each contribution margin ratio of every item with its relative weight, adding all of them together and then dividing them by the total number of weights. The number we obtain is our multiproduct contribution margin.
Now, this calculation is completely based on our assumption about the relative weights of the sales. If the weights change too much, the contribution of the weights will also completely change. So we need to understand that if the proportion of sales is changing, our contribution margin is obsolete.
For large companies like Wal-Mart where there are thousands of products, the multiproduct contribution margin is calculated based on the sales dollars. Instead of finding contribution margin ratio for each item, one ratio is found out for increase in every sales dollar. This number is pretty accurate, if it is computed using the correct empirical estimates.
Your email address will not be published. Required fields are marked *
