Contribution margin?

Question

Use the formula stated: Contribution Margin = Revenue - Variable Costs

(CM = R - VC)

Your top two Agents ... Let's call them ... Agent J and Agent K, both

bring in two "must do deals" with new extraterrestrial ah ... accounts.

Agent J's is for $ 100,000 ... 50 units at sales price $2,000 per unit

Agent K's is for $ 50,000 ... 20 units at sales price $2,500 per unit

At first pass ... Agent J's looks to be the better proposal!

After all $100,000 is MORE than $ 50,000 right? And MORE is always better?

Variable cost is $1,900 per unit.

Yet when you run the numbers, using a Contribution Margin Statement, Agent

K's proposal is now the better deal ...

How can that be? What could be done to Agent J's proposal to make it better?

Answer 1

Agent K's proposal is better because the sales price per unit is much higher and Agent J's sales volume of 50 units is not enough to make up the difference in gross profit.

Agent J's proposal will generate $5,000 in gross profit and Agent K's proposal will generate $12,000 in gross profit.  Now if Agent J wants to generate the same gross profit of $12,000, Agent J will need to either a) increase the units sold, b) increase the sales price per unit, or c) some combination of the two.  For example, if Agent K sells 120 units at $2,000 per unit then the gross profit will be $12,000.  Or by increasing the per unit sales price to $2,140 and selling only 50 units the gross profit will be $12,000.

So yes, MORE is better, it just depends on more of WHAT?