Euro Commercial Paper
In the previous articles, we have already studied about regular commercial paper as well as asset-backed commercial paper. However, there is one more type of commercial paper that is commonly used by investors. This type of commercial paper is called the Euro commercial paper. This commercial paper is issued in large volumes by many issuers […]
Why are Investors Getting Spooked by an Inverted Yield Curve?
In the past week, the American investors witnessed an inverted yield curve for the first time since the year 2007. An inverted yield curve is one of the most tell-tale signs that a recession is around the corner. This is the reason why the sighting of the yield curve sent both the equity as well […]
Primary Markets vs. Secondary Markets
The buying and selling of financial securities is a complex process that has evolved over many years. Each security represents a claim on the financial resources of a firm. The claim could be an equity claim or a debt-related claim. When a retail investor looks at the stock market, they see only the market where […]
Government Regulations Which Impact Start-Ups
Start-ups are private entities. It is true that start-ups thrive because of the resourcefulness and innovation of the people behind the start-up. However, the empirical data suggests something equally interesting. It is important to note that many successful start-ups tend to be located in the same geographic areas. This is because many times, governments in […]
The Financial Disadvantages of Retail Warehouse Automation
In the previous few articles, we have already seen what retail warehouse automation is. We are now aware of the different degrees of retail warehouse automation which is prevalent in the industry. We also know that such automation is very popular because there are several financial advantages which arise from such automation. However, it would […]
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.
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