In this section:
Application: Gourmet&Cie
States :
Gourmet&Cie specializes in supplying gourmet products to starred restaurants. In order to improve their financial performance, the company must calculate the unit variable cost margin of their flagship products. One of these products, the “Foie Gras de Luxe”, is sold at €75 excluding VAT per box. The unit variable cost includes raw materials at €20, labor at €10, and packaging at €3. Help Gourmet&Cie analyze its margins and make informed decisions to improve its profitability.
Work to do :
- Calculate the total variable cost per unit for the product “Foie Gras de Luxe”.
- Determine the unit variable cost margin for this product.
- If the total variable cost increases by €5, calculate the new margin on unit variable cost.
- Analyze the impact of this increase in variable costs on the company's profitability.
- Propose a cost optimization strategy to maximize the margin on unit variable cost in the short term.
Proposed correction:
-
The total variable cost per unit is calculated by adding the individual variable costs:
Total variable cost per unit = €20 (raw materials) + €10 (labor) + €3 (packaging) = €33.
The total variable cost per unit is €33. -
The margin on unit variable cost is calculated by subtracting the unit variable cost from the selling price excluding tax:
Margin on unit variable cost = €75 – €33 = €42.
The margin on unit variable cost is therefore €42. -
With an increase in the total variable cost of €5, the new unit variable cost is:
New total unit variable cost = €33 + €5 = €38.
New margin on unit variable cost = €75 – €38 = €37.
The new margin on unit variable cost is €37.
-
The increase in variable costs reduces the unit contribution margin by €5, which decreases the profitability per unit sold. If the company maintains its sales volumes, overall profitability could be negatively affected. Managing variable costs is crucial to maintaining a healthy profit margin.
-
To optimize costs and maximize margin, Gourmet&Cie could negotiate better rates for raw materials, automate parts of the production process to reduce labor, or review contracts with suppliers to obtain discounts on packaging. These measures will help stabilize variable costs while maximizing profitability.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Raw materials + Labor + Packaging |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New margin on variable cost | PV HT – New total unit variable cost |
Application: BioZen Cosmetics
States :
BioZen Cosmetics, a natural beauty company, wants to assess the profitability of their new flagship product, an organic moisturizer. The selling price is €50 per jar, excluding VAT. Variable costs include ingredients at €15, production at €5, and packaging at €2. The management team wants to determine the contribution margin per unit to make decisions about launching nationally.
Work to do :
- Calculate the total unit variable cost of the organic moisturizer.
- Determine the unit variable cost margin for this product.
- Assuming a reduction in packaging costs of €1, recalculate the new margin on unit variable cost.
- Deduce how this reduction affects the overall monthly margin if the company sells 3000 units per month.
- Suggest additional actions that BioZen Cosmetics could take to maintain or increase its contribution margin.
Proposed correction:
-
Calculate the total variable costs:
Total variable cost per unit = €15 (ingredients) + €5 (production) + €2 (packaging) = €22.
The total variable cost per pot is €22. -
The margin on variable cost is the result of the difference between the selling price excluding tax and the unit variable cost:
Margin on unit variable cost = €50 – €22 = €28.
The margin on unit variable cost is therefore €28. -
If the packaging cost decreases by €1, then:
New total variable cost per unit = €22 – €1 = €21.
New margin on unit variable cost = €50 – €21 = €29.
The new margin on unit variable cost is €29.
-
With an increase in margin of €1 per unit sold, the overall monthly margin changes as follows:
New monthly margin = 3000 units x €29 = €87.
Old monthly margin = 3000 units x €28 = €84.
Reducing packaging costs improves monthly margin by €3. -
BioZen Cosmetics could consider purchasing ingredients in larger quantities to obtain discounts, further automating the production process to reduce costs, or conducting targeted marketing campaigns to increase sales and, therefore, margins.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Ingredients + Production + Packaging |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New margin on variable cost | PV HT – New total unit variable cost |
| New monthly margin | Quantity sold x New unit margin |
| Old monthly margin | Quantity sold x Old unit margin |
Application: VéloElectro
States :
VéloElectro, an innovative start-up in the field of electric bicycles, has just launched an entry-level model at €1200 excluding VAT, specially designed for urban environments. Production costs amount to €500, assembly to €150, and logistics costs to €50 per unit. The company wants to calculate the margin on unit variable cost to optimize its commercial strategy.
Work to do :
- Calculate the amount of variable costs for each electric bike sold.
- Determine the unit variable cost margin for this model.
- Imagine that production costs increase by 8%, calculate the new unit variable cost margin.
- Evaluate the impact of this increase on overall profitability, knowing that the company plans to sell 500 units per year.
- Propose a strategy for VéloElectro to compensate for the increase in production costs.
Proposed correction:
-
Add up all variable costs to get the total variable cost per unit:
Total variable cost per unit = €500 (production) + €150 (assembly) + €50 (logistics) = €700.
The variable costs for each bike amount to €700. -
The unit variable cost margin is obtained by subtracting variable costs from the selling price:
Margin on unit variable cost = €1200 – €700 = €500.
The margin on unit variable cost is therefore €500. -
Production costs increased by 8%:
New production costs = €500 x (1 + 0,08) = €540.
New total variable cost per unit = €540 + €150 + €50 = €740.
New margin on unit variable cost = €1200 – €740 = €460.
The new margin on unit variable cost is €460.
-
The drop in margin of €40 per bike impacts overall annual profitability:
Old annual margin = 500 units x €500 = €250.
New annual margin = 500 units x €460 = €230.
Overall profitability decreases by €20 per year. -
To compensate, VéloElectro could explore alternative suppliers for better prices, improve logistics efficiency to reduce costs, or even slightly adjust the selling price to offset the increased costs, while ensuring not to lose competitiveness in the market.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Production + Assembly + Logistics |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New production costs | Production x (1 + % increase) |
| New margin on variable cost | PV HT – New total unit variable cost |
| Old annual margin | Quantity sold x Old unit margin |
| New annual margin | Quantity sold x New human margin |
Application: TechCraft
States :
TechCraft, a company specializing in the manufacture of smart gadgets, analyzes the profitability of its latest product: an innovative wireless charger sold at €30 excluding VAT. The cost of materials is €8, assembly is €3, and packaging is €1. Management would like to understand the profitability of this product, which is crucial for a decision to expand into other markets.
Work to do :
- Calculate the total unit variable costs for the wireless charger.
- Calculate the unit variable cost margin for this product.
- If assembly costs increase by €1, what will be the new margin on unit variable cost?
- Discuss the potential impact on competitiveness if unit margin declines.
- Suggest ways to improve this margin.
Proposed correction:
-
Add up the variable costs:
Total variable cost per unit = €8 (materials) + €3 (assembly) + €1 (packaging) = €12.
Variable costs per charger are €12. -
The margin on unit variable cost is calculated as follows:
Margin on unit variable cost = €30 – €12 = €18.
The margin is €18 per unit. -
If assembly costs increase by €1:
New total variable cost per unit = €8 + €4 + €1 = €13.
New margin on unit variable cost = €30 – €13 = €17.
The new margin is €17.
-
A €1 margin decrease can influence the decision to align prices with competitors and potentially reduce profitability. A margin decrease weakens the ability to respond to competitor actions, such as price reductions.
-
TechCraft could consider reducing costs through bulk purchasing, investing in a more efficient manufacturing process, or even diversifying its offering for better customer value, all in order to boost margins.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Materials + Assembly + Packaging |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New margin on variable cost | PV HT – New total unit variable cost |
Application: SweetHome Furniture
States :
SweetHome Furniture produces and sells a high-end wooden table for €400 excluding VAT. The variable cost includes the wood at €120, the manufacturing at €100, and the finishing at €30. The company aims to optimize its margins to finance expansion projects. Help analyze the financial situation.
Work to do :
- Calculate the total variable cost per unit for the table.
- Determine the margin on unit variable cost.
- If the cost of wood increases by 20%, what will be the new margin on unit variable cost?
- Assess the implications of these increased costs on the decision to invest in new projects.
- Suggest possible strategies to maintain a competitive margin.
Proposed correction:
-
The total variable cost is calculated as follows:
Total variable cost per unit = €120 (wood) + €100 (manufacturing) + €30 (finishing) = €250.
The total variable cost per table is €250. -
The margin on unit variable cost is deduced as follows:
Margin on unit variable cost = €400 – €250 = €150.
The margin on unit variable cost is €150. -
With a 20% increase in the cost of wood:
New cost of wood = €120 x (1 + 0,20) = €144.
New total variable cost per unit = €144 + €100 + €30 = €274.
New margin on unit variable cost = €400 – €274 = €126.
The new margin is €126.
-
The €24 per unit margin decrease may reduce the profits needed to finance the expansion. Faced with the decline in profitability per unit, the company could reconsider certain investment projects or prioritize them differently.
-
SweetHome Furniture could seek out cheaper wood suppliers, automate some manufacturing processes, or increase the perceived value of its products through design tweaks or eco-friendly certifications in order to continue to offer comfortable margins.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Wood + Manufacturing + Finishing |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New cost of wood | Wood x (1 + % Increase) |
| New margin on variable cost | PV HT – New total unit variable cost |
Application: EcoloTech
States :
EcoloTech, a company committed to sustainable development, produces an air purifier sold at €200 excluding VAT. Variable costs include electronic components at €60, labor at €30, and packaging at €10. In order to support its ecological initiatives, EcoloTech must evaluate the margin on unit variable cost.
Work to do :
- Calculate the total variable costs for the air purifier.
- Calculate the margin on unit variable cost.
- If the company reduces packaging costs by 20%, determine the new margin.
- Estimate how this cost reduction influences ÉcoloTech’s ecological strategy.
- Provide recommendations to further improve margins without compromising ecological values.
Proposed correction:
-
Add the variable costs to get the total:
Total variable cost per unit = €60 (components) + €30 (labor) + €10 (packaging) = €100.
The total variable cost per purifier is €100. -
The margin on variable cost is calculated as follows:
Margin on unit variable cost = €200 – €100 = €100.
The margin is €100 per unit. -
20% reduction in packaging costs:
New packaging costs = €10 x (1 – 0,20) = €8.
New total variable cost per unit = €60 + €30 + €8 = €98.
New margin on unit variable cost = €200 – €98 = €102.
The margin increases to €102.
-
This cost reduction improves profitability while allowing the company to reinvest to strengthen its ecological practices, thus showing that it is possible to combine profitability and values.
-
EcoloTech could invest in recyclable materials to reduce long-term costs, optimize logistics to spend less on transportation, and organize training to improve workforce efficiency without increasing the carbon footprint.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Components + Labor + Packaging |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New packaging costs | Packaging x (1 – Reduction in %) |
| New margin on variable cost | PV HT – New total unit variable cost |
Application: SolarStar Technologies
States :
SolarStar Technologies, a firm established in renewable energy, sells solar panels at a price of €850 excluding VAT. Variable costs include silicon at €300, assembly at €100, and logistics at €50. In order to maximize its profitability, the company seeks to know the margin on unit variable cost.
Work to do :
- Calculate the total unit variable costs associated with each solar panel.
- Determine the current unit variable cost margin.
- Consider a reduction in logistics costs of €10. What is the new unit margin?
- Elucidate the impact of this opportunity on annual profits for a sales forecast of 2000 units.
- Recommend a track to further minimize costs while preserving the quality of solar energy.
Proposed correction:
-
Calculate the total variable cost per unit as follows:
Total variable cost per unit = €300 (silicon) + €100 (assembly) + €50 (logistics) = €450.
Variable costs amount to €450 per panel. -
The margin on unit variable cost is calculated by:
Margin on unit variable cost = €850 – €450 = €400.
The current unit margin is €400. -
Let's assume a reduction in logistics costs of €10:
New total variable cost per unit = €300 + €100 + €40 = €440.
New margin on unit variable cost = €850 – €440 = €410.
The margin on unit variable cost increases to €410.
-
Assess the impact on annual profits with the new margin:
Old annual margin = 2000 units x €400 = €800.
New annual margin = 2000 units x €410 = €820.
An annualized saving of €20 is achieved. -
Minimizing costs could involve using innovative technologies to improve the energy efficiency of panels or by forming strategic partnerships to reduce supply costs while preserving quality.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Silicon + Assembly + Logistics |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New margin on variable cost | PV HT – New total unit variable cost |
| Old annual margin | Quantity sold x Old unit margin |
| New annual margin | Quantity sold x New unit margin |
Application: HealthyPet
States :
HealthyPet offers organic pet food. A bag of organic kibble sold at €25 excluding VAT is appreciated by demanding owners. Variable costs include ingredients at €9, labor at €3, and packaging at €2. With increasing product sustainability as a priority, the company must analyze its margins to ensure sustainable growth.
Work to do :
- Calculate the sum of variable costs per bag of kibble.
- Determine the unit variable cost margin for the bag.
- If ingredient costs increase by 10%, then what is the changed unit margin?
- Anticipate the impact on sales if the company decides to increase the selling price to maintain its margin.
- Suggest an alternative to maintain the current margin without increasing prices.
Proposed correction:
-
Add the costs together to get the total variable cost:
Total variable cost per unit = €9 (ingredients) + €3 (labor) + €2 (packaging) = €14.
The total variable cost for a bag is €14. -
The margin on unit variable cost is calculated in this way:
Margin on unit variable cost = €25 – €14 = €11.
The margin is €11 per bag. -
With a 10% increase in ingredient costs:
New ingredient costs = €9 x (1 + 0,10) = €9,90.
New total variable cost per unit = €9,90 + €3 + €2 = €14,90.
New margin on unit variable cost = €25 – €14,90 = €10,10.
The new margin is €10,10.
-
Raising the price to preserve margin could hurt sales, as consumers are sensitive to price increases, especially in the sensitive organic pet food market.
-
HealthyPet could invest in reducing costs through bulk orders or by streamlining packaging, opting for less expensive but still responsible materials, in order to maintain their market position.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Ingredients + Labor + Packaging |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New ingredient fees | Ingredients x (1 + % Increase) |
| New margin on variable cost | PV HT – New total unit variable cost |
Application: VeggieDelights
States :
VeggieDelights, a premium vegan food company, is planning to understand their contribution margin for one of their flagship products, the “Gourmet Vegan Burger,” which retails for $15 excluding VAT. Variable costs include ingredients at $5, preparation at $2, and packaging at $1. Help them ensure a healthy margin to enable an expansion strategy.
Work to do :
- Determine the total variable cost per vegan burger.
- Calculate the margin on unit variable cost.
- Imagine a €0,50 increase in preparation costs. What is the effect on the margin?
- Suggest a marketing technique to compensate for the decrease in margin in consumers' opinion without changing prices.
- Explain how increasing volume could help regain lost margin.
Proposed correction:
-
To obtain the total variable cost, we accumulate the following costs:
Total variable cost per unit = €5 (ingredients) + €2 (preparation) + €1 (packaging) = €8.
The total variable cost is €8 per burger. -
The margin on variable cost is obtained by proceeding as follows:
Margin on unit variable cost = €15 – €8 = €7.
The unit margin is therefore €7. -
In case of increase of €0,50 in preparation costs:
New total variable cost per unit = €5 + €2,50 + €1 = €8,50.
New margin on unit variable cost = €15 – €8,50 = €6,50.
The margin decreases to €6,50.
-
VeggieDelights could roll out a campaign focusing on the nutritional and ecological quality of its burgers to justify the price and thus make the marathon reduction more acceptable.
-
Volume growth would allow economies of scale to be exploited, thereby spreading fixed costs and providing the opportunity to negotiate better rates with suppliers, which could restore or even increase the margin.
Formulas Used:
| Title | Formulas |
|---|---|
| Total variable cost per unit | Ingredients + Preparation + Packaging |
| Margin on unit variable cost | PV HT – Total variable unit cost |
| New margin on variable cost | PV HT – New total unit variable cost |