Let's upsize our self to get more margin!!

Thursday, 18 February, 2021

Have you ever wondered when you are buying fast food in one their outlet, when you finished the order, what is the cashier ask before asking your payment or QR?

"Do you want to upsize your drink, sir? it will only cost you another 2500 rupiah"

"Do you want to upsize your french fries? more fries for you for another 5000 rupiah"

It is about hospitality and serves you more

it is NOT

Have you ever wondered that baby powder milk position is kept in a locked cabinet or any secured place behind the cashier in the grocery store?

It is a security and its expensive price reason

It is NOT

Let's pay attention to the price of the commodity, it is expensive, right?

Still, in the same grocery store, when you finish shopping and ready to pay, the cashier usually offer you, all the goods put in his/her front desk, "since your purchase is more than 50.000 rupiah, you can buy this two-pack of biscuit with only the price of one, it is cheap, Sir"

It is overstock and "near to expired date" goods

It is NOT always like that

Let's pay attention to the second part of the question from the fast-food cashier, it seems cheap and we can get more, especially with all the pictures put behind the cashier desk, right?

On the opposite with the milk, it seems a better price to get more goods, right?

It has all to do with accounting and finance, It is the contribution margin

Contribution margin is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. The total contribution margin generated by an entity represents the total earnings available to pay for fixed expenses and to generate a profit.

Seems complicated right? let's put it this way, it is GROSS PROFIT

The contribution margin concept is useful for deciding whether to allow a lower price in special pricing situations, should we say, a discount, a sale in place, or any deduction in selling price.

If the contribution margin at a particular price point is excessively low or negative, it would be unwise to continue selling a product at that price. it is a critical tool to determine the selling price.

The contribution margin concept can be applied throughout a business, for individual products, product lines, profit centers, subsidiaries, distribution channels, sales by customer, and for an entire business.

When using this measurement, be aware that the contribution margin does not account for the impact of a product on the bottleneck operation of a company. A low contribution margin may be entirely acceptable, as long as it requires little or no processing time by the bottleneck operation.

To calculate the contribution margin, subtract all variable costs of a product from its revenues, and divide by its net revenue. Product variable costs typically include, at a minimum, the costs of direct materials and sales commissions. The calculation is:

(Net product revenue - Product variable costs) ÷ Product revenue

Example:

The ABC Tools Shop sells some equipment sets to SYS Garage. In the most recent period, it sold $1,000 of equipment that had related variable costs of $400. ABC Shop had $660 of fixed costs during the period, resulting in a loss of $60.

Revenue $1,000

Variable expenses $ 400

Contribution margin $ 600

Fixed expenses $ 660

Net loss ($ 60)

ABC Shop’s contribution margin is 60%, so if it wants to break even, it needs to either reduce its fixed expenses by $60 or increase its sales by $100 (calculated as $60 loss divided by 60% contribution margin).

Now we know why we are not offered to upsize our burger instead of our fries and drink, right? yup exactly, because burger has lower contribution margin

- DP -

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