What is meant by a product’s contribution margin ratio? How is the ratio useful in planning business operations?

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Write a 150 word minimum answer to the following question.

 

What is meant by a product’s contribution margin ratio? How is the ratio useful in planning business operations?

 

Write a 50 word minimum peer responses each to the two answers.

 

Answers 01. A company can never fully allocate all of its overhead costs no matter how great of an accountant they have working for them. Assume the company’s overhead costs included insurance, rent on facilities and equipment, payroll, accounting, liabilities, etc. Each period, the managers added those costs into the estimated cost of the job they were doing, which included labor and materials and of course, profit. This number would give them a “bid” for each job. Now say one of the employees were injured on the job. Even though the company had insurance, it may be a claim that wasn’t covered, or not fully covered. This would then cut in to the profits the company made from the job. Another thing to think about, in this instance, what if another company offered a lower bid on this job then you did. The client would hire the company with the lower bid then you which would result in a 100% loss of profit. Another reason it would not guarantee profit is if there were an unexpected economic downturn. Just a few years ago when they were laying people off, a lot of families had to cut back on things they were used to buying, especially at the grocery store. Things that seemed to be a necessity no longer were and we only bought what we needed. This caused production of things like cookies, candies and ice cream to decrease and the stores were ordering less of each.

 

Answers 02.  Allocating all overhead costs to the jobs produced, does not ensure that a company will see a profit.  Allocating those costs is just one facet of what is needed to be profitable.  Sales and marketing needs to ensure that enough of the manufactured goods are sold.  If 500 goods were produced and only 15 were sold, the company would still be falling short of seeing a profit.  Another thing that needs to be kept in control for profits to be realized is material costs.  If the costs are too high,  then the market cost of the product will need to be high as well, which could effect the number of items sold.  Not only does the allocation of the overhead need to be completed accurately, but the cost of all materials and labor need to be kept proportional in order for a company to realize profits.  If any of those factors are out of sync, then a lose can easily be expected.

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