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Web MBA 5003 - Graduate Business Fundamentals Article Synthesis Model

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Patrick Satkunas
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113 views

Web MBA 5003 - Graduate Business Fundamentals Article Synthesis Model

Uploaded by

Patrick Satkunas
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Contribution Margin: What It Is, How to Calculate It, and Why You Need It

Article Synthesis

Contribution Margin: What It Is, How to Calculate It, and Why You Need It

Article Synthesis

Student’s Name

Arkansas State University

09/03/2022
Contribution Margin: What It Is, How to Calculate It, and Why You Need It
Article Synthesis

The Importance of the Contribution Margin

The contribution margin is the leftover revenue you make from a product or service once you’ve

deducted the cost of delivery (Gallo, 2017). The concept is fundamental to business decision-

making as it can affect what products are kept and cut, how much of a particular product is

produced, and even the cost of the product. To summarize, the contribution margin is a critical

view of profit as it forces you to understand the cost structure (Gallo, 2017).

Fixed and Variable Costs: What Are They and How Do They Differ

Fixed costs remain the same, while variable costs can vary. Facility costs such as rent, certain

utilities, and equipment are fixed. Salaries and labor can also be considered fixed costs (Gallo,

2017). However, if the sales team is compensated with commissions this would be considered

variable. Other variable costs can include direct materials and utilities that vary based on

consumption. Travel for work is also a variable cost. Wages for hourly workers could be fixed or

variable depending on whether they work the same schedule consistently or if their hours vary

weekly. All overtime wages are considered variable.

Mistakes When Applying the Contribution Margin

One of the biggest and most common mistakes is incorrectly categorizing where costs fall. This

isn’t as straightforward as one might believe. Not everything falls cleanly into buckets of fixed or

variable. Some costs can be considered “quasi-variable,” meaning it falls between the two

categories (Gallo, 2017). Something usually considered fixed may be variable in this situation

and vice versa.

Another common mistake is the assumption that cutting the lowest-contribution-margin product

is a way to cut cost/increase profitability (Gallo, 2017). One should consider all costs when
Contribution Margin: What It Is, How to Calculate It, and Why You Need It
Article Synthesis

making major business decisions; after all, only looking at one piece of the puzzle isn’t going to

give you the whole picture.

The Practical (or Impractical) Application of the Contribution Margin

Torrid Holdings Inc. is a retail chain with stores in all 50 US states, Puerto Rico, and Canada.

The main complication when applying the contribution margin concept to Torrid is that they

report at a high level. Torrid’s products were broken out into two categories: Apparel and Non-

Apparel. Their expenses are also reported at a high level, with fixed and variable costs falling

into the same categories. Torrid’s expenses were reported in the following categories:

Cost of Goods Sold:

• Merchandise costs - variable

• Freight - variable

• Inventory shrinkage - variable

• Payroll expenses associated with merchandising department - fixed

• Distribution center expenses - variable

• Store Occupancy Costs – fixed

Selling, General, and Administrative Expenses:

• Operating Costs not included in the cost of goods or marketing (this could be an array of

costs that could be fixed or variable)

Marketing Expenses:

• Targeted online performance marketing costs (variable)

• Store and Brand Marketing (variable)

• Direct Mail Marketing Costs (variable)

• Payroll and benefits associated with marketing team (fixed)


Contribution Margin: What It Is, How to Calculate It, and Why You Need It
Article Synthesis

Interest Expense:

• Interest expense and other fees associated with Existing ABL Facility

(SECDATABASE, 2022)

Since the fixed and variable costs are rolled up into the categories above, it’s difficult to

determine the contribution margin.


Contribution Margin: What It Is, How to Calculate It, and Why You Need It
Article Synthesis

References
Gallo, A. (2017). Contribution Margin: What It Is, How to Calculate It, and Why You Need It.
Harvard Business Review.
SECDATABASE. (2022). Retrieved from Form 10-K Torrid Holdings Inc.:
http://pdf.secdatabase.com/248/0001628280-22-007877.pdf

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