In this section:
Application: Sparkling Jewelry
States :
Bijoux Éclatants is a company specializing in the design of high-end jewelry sets. To calculate its profitability, the company wants to determine its margin on variable cost. The financial data you have are as follows:
- Unit sale price excluding VAT: €500
- Unit variable cost: €300
- Quantity sold: 150 units
Work to do :
- Calculate the total turnover excluding tax.
- Determine the total variable cost associated with producing the jewelry.
- Calculate the total margin on variable cost.
- Analyze the interest of the variable cost margin for the company.
- If Bijoux Éclatants decides to increase its unit selling price by 10%, what would be the new unit variable cost margin?
Proposed correction:
-
The total turnover excluding tax is calculated by multiplying the unit sales price excluding tax by the quantity sold.
[
500 € x 150 = 75 €
]
Bijoux Éclatants' total turnover excluding tax is €75. -
The total variable cost is obtained by multiplying the unit variable cost by the quantity sold.
[
300 € x 150 = 45 €
]
The total variable cost for the production of the jewelry is €45. -
The total margin on variable cost is the difference between the total turnover excluding tax and the total variable cost.
[
€75 – €000 = €45
]
The total variable cost margin is €30.
-
Contribution margin indicates how much is left for the company to cover its fixed costs and generate a profit, after deducting variable costs. It is essential for making strategic decisions and analyzing the profitability of Bijoux Éclatants.
-
If the unit selling price increases by 10%, the new selling price will be:
[
€500 + (10% \times €500) = €550
]
The new margin on unit variable cost will be:
[
€550 – €300 = €250
]
The margin on unit variable cost after increase is €250.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| New unit selling price | Unit Selling Price + (10% x Unit Selling Price) |
| New margin on variable cost | New unit selling price – Unit variable cost |
Application: Sarah's Treats
States :
Les Gourmandises de Sarah is a family business of artisanal pastries. To assess its profitability, it wants to know its margin on variable cost on its flagship product, the pistachio macaron. Here is the available information:
- Unit sale price excluding VAT: €2,50
- Unit variable cost: €1,20
- Quantity sold: 5 units
Work to do :
- What is the total turnover excluding tax for macarons?
- Calculate the total variable cost for this production.
- Determine the total contribution margin.
- Discuss the impact of contribution margin on Sarah's pricing strategy.
- Sarah is considering offering a 10% discount on the sales price during a promotional week. What will the new unit contribution margin be?
Proposed correction:
-
The total turnover excluding tax is obtained by multiplying the unit sales price excluding tax by the quantity sold.
[
€2,50 x 5 = €000
]
The total turnover excluding tax for macaroons is €12. -
Total variable cost is calculated by multiplying unit variable cost by quantity sold.
[
€1,20 x 5 = €000
]
The total variable cost to produce the macarons is €6. -
The total variable cost margin is the difference between the total net sales and the total variable cost.
[
€12 – €500 = €6
]
The total variable cost margin for the macaroons is €6.
-
Contribution margin informs the company about the financial viability of its products and influences pricing decisions. A high margin helps cover fixed costs and increases Sarah's profits.
-
With a 10% discount, the new sale price will be:
[
€2,50 – (10% \times €2,50) = €2,25
]
The new margin on unit variable cost is:
[
€2,25 – €1,20 = €1,05
]
With the promotion, the margin on unit variable cost becomes €1,05.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| New unit selling price | Unit Selling Price – (10% x Unit Selling Price) |
| New margin on variable cost | New unit selling price – Unit variable cost |
Application: TechOrion
States :
TechOrion is a startup that specializes in manufacturing innovative electronic gadgets. As part of its launch, it wants to understand its contribution margin for one of its products, the fitness tracker. The following data is provided:
- Unit sale price excluding VAT: €150
- Unit variable cost: €85
- Quantity sold: 1 units
Work to do :
- Calculate the total turnover excluding tax for this product.
- What is the total variable cost for fitness trackers sold?
- Find the total margin on variable cost.
- Consider how TechOrion could adjust its variable costs to improve its margins.
- If the quantity sold decreases by 200 units, what will be the new total contribution margin?
Proposed correction:
-
The total turnover excluding VAT for trackers is calculated as follows:
[
€150 x 1 = €200
]
The total turnover excluding VAT for fitness trackers is €180. -
The total variable cost for the 1 units is:
[
€85 x 1 = €200
]
The total variable cost is €102 for the trackers sold. -
The total margin on variable cost is calculated by subtracting the total variable cost from the total turnover excluding tax.
[
€180 – €000 = €102
]
The total margin on variable cost for the trackers is €78.
-
To improve its margins, TechOrion could negotiate lower supplier rates to reduce unit cost or optimize its production process to reduce variable costs. In addition, increasing the selling price could also strengthen margins.
-
With a decrease in quantity sold to 1 units, the total variable cost would be:
[
€85 x 1 = €000
]
The total reduced turnover excluding tax would be:
[
€150 x 1 = €000
]
The new total variable cost margin therefore becomes:
[
€150 – €000 = €85
]
The total variable cost margin falls to €65.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| Adjusted total variable cost | Unit variable cost x New quantity sold |
| Adjusted margin on variable cost | Adjusted revenue – Adjusted total variable cost |
Application: NatureSymphony
States :
NatureSymphony is a company that manufactures and sells natural skin care products. In order to determine its profitability, the company seeks to evaluate its contribution margin for its best-selling BioLuxe face cream. Here are the data:
- Unit sale price excluding VAT: €35
- Unit variable cost: €18
- Quantity sold: 3 units
Work to do :
- Calculate the total turnover excluding tax for BioLuxe cream.
- Calculate the total variable cost for this quantity.
- What is the total contribution margin for this product?
- Think of a marketing strategy that could increase the contribution margin.
- Imagine that 500 additional units are sold with the same price and unit cost, what would be the increase in the total contribution margin?
Proposed correction:
-
The total turnover excluding tax is calculated by:
[
€35 x 3 = €200
]
The total turnover excluding tax for BioLuxe cream reached €112. -
The total variable cost is given by:
[
€18 x 3 = €200
]
The total variable cost for this production is €57. -
The total margin on variable cost is determined by:
[
€112 – €000 = €57
]
The total variable cost margin for BioLuxe cream is €54.
-
NatureSymphony may consider a marketing strategy of promoting its products to increase sales volume without changing the price, or promoting its products through attractive packaging or limited editions to justify a price increase.
-
If 500 additional units are sold:
[
35 € x 500 = 17 €
]
[
18 € x 500 = 9 €
]
The increase in the margin on variable cost would be:
[
€17 – €500 = €9
]
The total variable cost margin is therefore increased by €8.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| Additional turnover | Unit selling price excluding VAT x Additional quantity |
| Additional variable cost | Unit variable cost x Additional quantity |
| Increase in margin | Additional revenue – Additional variable cost |
Application: Gourmandiz
States :
Gourmandiz, a company renowned for its fine chocolates, is looking to assess its contribution margin for its newest product: the Praline Supreme bar. Here is the available financial data:
- Unit sale price excluding VAT: €8
- Unit variable cost: €4,50
- Quantity sold: 2 units
Work to do :
- Calculate the total turnover excluding tax of the Praline Supreme tablet.
- Determine the total variable cost for the sales made.
- Identify the total margin on variable cost for this product.
- Consider how seasonal discounts might impact Gourmandiz's contribution margin.
- If the unit variable cost increases by €0,50, what would be the new unit margin on variable cost?
Proposed correction:
-
Calculation of total turnover excluding tax:
[
€8 x 2 = €000
]
The total turnover excluding tax for the Praline Supreme tablet is therefore €16. -
The total variable cost is determined by:
[
€4,50 x 2 = €000
]
The total variable cost for this quantity is €9. -
The total margin on variable cost is calculated as follows:
[
€16 – €000 = €9
]
The total margin on variable cost for the Praline Supreme tablet amounts to €7.
-
Seasonal discounts, by lowering the selling price, could potentially reduce the unit margin, unless they increase the sales volume to the point of offsetting the decrease in unit margin. A consideration of fixed costs will be decisive.
-
New unit variable cost of €5 (€4,50 + €0,50):
[
€8 – €5 = €3
]
The new margin on unit variable cost would be €3.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| New margin on variable cost | Unit selling price excluding VAT – (Unit variable cost + Increase) |
Application: EducationForAll
States :
EducationPourTous, an online learning platform, is seeking to determine its contribution margin for its “Mastering Excel” training program. The following information is available:
- Unit sale price excluding VAT: €200
- Unit variable cost: €120
- Quantity sold: 500 units
Work to do :
- Calculate the total turnover excluding tax of the training courses sold.
- What is the total variable cost for these sales?
- What is the total margin on variable cost?
- Analyze the impact of potentially lower variable costs through automation technology.
- If the program sells for 10% less, without changing costs, what new unit margin results?
Proposed correction:
-
The total turnover excluding tax for training is:
[
200 € x 500 = 100 €
]
The total turnover excluding tax for the “Master Excel” program is €100. -
The total variable cost is calculated as follows:
[
120 € x 500 = 60 €
]
The total variable cost for training is therefore €60. -
The total margin on variable cost is obtained by carrying out:
[
€100 – €000 = €60
]
The total variable cost margin is therefore €40.
-
Automation could reduce variable costs by limiting the need for personnel and optimizing processes, which could increase the share of variable cost margin, allowing more pricing flexibility and increasing profitability.
-
With a 10% discount, the new price will be:
[
€200 – (0,10 x €200) = €180
]
The new unit margin on variable cost will be:
[
€180 – €120 = €60
]
The new unit margin therefore results in €60.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| New unit selling price | Unit selling price excluding VAT – (10% x Unit selling price) |
| New margin on variable cost | New unit selling price – Unit variable cost |
Application: Green Mode
States :
Mode Verte is a brand of organic clothing made from eco-friendly fibers. To assess the profitability of its new collections, the company seeks to calculate its contribution margin on its pants line. Here is the data:
- Unit sale price excluding VAT: €60
- Unit variable cost: €35
- Quantity sold: 2 units
Work to do :
- Determine the total net sales of the trouser line.
- Calculate the total variable cost.
- Find the total margin on variable cost.
- Consider the potential impact of an increase in raw material costs on contribution margin.
- If Mode Verte reduces its variable costs by €2 per unit, what would the new unit margin be?
Proposed correction:
-
The total turnover excluding tax is:
[
€60 x 2 = €500
]
The total turnover excluding tax for the trousers is €150. -
The total variable cost is obtained by:
[
€35 x 2 = €500
]
The total variable cost for the trousers is €87. -
The total margin on variable cost is calculated by subtracting the total variable cost from the total turnover excluding tax.
[
€150 – €000 = €87
]
The total margin on variable cost is therefore €62.
-
The increase in the price of raw materials could increase the unit variable cost, thereby reducing the unit margin on variable cost. In such circumstances, the company could be forced to readjust its prices or production.
-
By reducing variable costs by €2 per unit:
[
Adjusted unit variable cost = €35 – €2 = €33
]
The new unit margin is:
[
€60 – €33 = €27
]
The new unit margin on variable cost would therefore be €27.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| Adjusted variable cost | Unit variable cost – Reduction |
| New margin on variable cost | Unit selling price excluding VAT – Adjusted variable cost |
Application: FreeEnergy
States :
ÉnergieLibre provides solar panels for homes and businesses. In order to maximize its margins, the company wants to calculate the margin on variable cost for its “SolEco” model. Here is the information:
- Unit sale price excluding VAT: €1
- Unit variable cost: €650
- Quantity sold: 750 units
Work to do :
- Calculate the total turnover excluding tax for SolEco panels.
- Determine the total variable cost for this production.
- Calculate the total margin on variable cost.
- What would be the impact of a 5% increase in the selling price on the unit margin?
- What would happen if sales increased by 100 units with the same cost and price conditions?
Proposed correction:
-
The total turnover excluding tax for the panels is:
[
1 € x 000 = 750 €
]
The total turnover excluding tax for SolEco is €750. -
The total variable cost for the 750 units is:
[
650 € x 750 = 487 €
]
The total variable cost for this production is €487. -
The total margin on variable cost is calculated by:
[
€750 – €000 = €487
]
The total margin on variable cost is €262.
-
A 5% increase in the selling price:
[
Adjusted selling price = €1 + (000% x €5) = €1
]
New unit margin:
[
€1 – €050 = €650
]
After the increase, the unit margin would rise to €400. -
If sales increase by 100 units, the additional revenue would be:
[
1 € x 000 = 100 €
]
With the same variable cost:
[
650 € x 100 = 65 €
]
The increase in the margin on variable cost would be:
[
€100 – €000 = €65
]
The total variable cost margin would increase by €35.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| Adjusted selling price | Unit selling price excluding VAT + (5% x Unit selling price) |
| New margin on variable cost | Adjusted selling price – Unit variable cost |
| Additional turnover | Unit selling price excluding VAT x Additional quantity |
| Additional cost | Unit variable cost x Additional quantity |
| Increase in total margin | Additional revenue – Additional cost |
Application: SantéPure
States :
SantéPure produces herbal food supplements for well-being. The company wants to analyze the variable cost margin of its product "VitalBoost Plus". Here are the data:
- Unit sale price excluding VAT: €25
- Unit variable cost: €12
- Quantity sold: 1 units
Work to do :
- Calculate the total turnover excluding tax generated by “VitalBoost Plus”.
- Estimate the total variable cost associated with this product.
- Deduct the total margin on variable cost.
- Let's say the fixed cost of a new packaging increases the unit variable cost by €1, how does this affect the unit margin?
- Assuming an increase of 200 units sold, while adjusting for new unit costs, what is the new total contribution margin?
Proposed correction:
-
The total turnover excluding tax for “VitalBoost Plus” is calculated by:
[
€25 x 1 = €800
]
The total turnover excluding tax generated by “VitalBoost Plus” is €45. -
The total variable cost for the add-ons is:
[
€12 x 1 = €800
]
The total variable cost for “VitalBoost Plus” is €21. -
The total margin on variable cost is obtained by:
[
€45 – €000 = €21
]
The total margin on variable cost amounts to €23.
-
If the unit variable cost increases by €1, it becomes:
[
12 € + 1 € = 13 €
]
New unit margin:
[
€25 – €13 = €12
]
The unit margin is now €12. -
With the increase in sales of 200 units and the new variable cost:
Additional turnover:
[
25 € x 200 = 5 €
]
Additional variable cost:
[
13 € x 200 = 2 €
]
New margin on variable cost for added units:
[
€5 – €000 = €2
]
The new total variable cost margin becomes:
[
€23 + €400 = €2
]
The new total variable cost margin is €25.
Formulas Used:
| Title | Formulas |
|---|---|
| Total turnover excluding VAT | Unit sales price excluding tax x Quantity sold |
| Total variable cost | Unit variable cost x Quantity sold |
| Total variable cost margin | Total turnover excluding tax – Total variable cost |
| Adjusted variable cost | Unit variable cost + Increase |
| New margin on variable cost | Unit selling price excluding VAT – Adjusted variable cost |
| Additional turnover | Unit selling price excluding VAT x Additional quantity |
| Additional cost | Adjusted Variable Cost x Additional Quantity |
| New adjusted total margin | Total variable cost margin + (Additional turnover – Additional cost) |