ShmoopTube

Where Monty Python meets your 10th grade teacher.

Search Thousands of Shmoop Videos

Cost Accounting: What is Weighted Average Contribution Margin In Multi-Product Companies? 2 Views


Share It!


Description:

What is Weighted Average Contribution Margin in Multi-Product Companies? Weighted average contribution margin is used as part of a breakeven analysis in companies that make more than one product. It’s used to determine how much the company is making from each product and ultimately how much each product is helping to pay for fixed costs the company has.

Language:
English Language

Transcript

00:00

and finance Allah shmoop weighted average contribution margin in multi

00:06

product companies Well you want a company that makes salad

00:11

dressings When you started out you had one product a

00:13

meat flavored salad dressing for people who want to be

00:16

vegan but missed the taste of meat and don't miss

00:19

the guilt At that point it was relatively easy to

00:21

attribute costs and margins He only had one product to

00:24

worry about Eventually though you expanded You launched a second

00:28

product a salad dressing that tastes like meat from endangered

00:31

species black rhino twist and giant panda barbecue Mostly Well

00:36

don't worry The flavors are all simulated with chemicals No

00:39

animals were actually harmed in the making of this video

00:42

Okay so figuring out contribution margin becomes more complicated Here

00:46

You use a weighted average contribution margin to let you

00:49

know which product has the higher margin or contribution to

00:52

your profits In any company you have two basic types

00:55

of expenses There are expenses that relate directly to your

00:57

product You're trying to make light these expenses air known

01:00

as cog zor costs of goods sold There are also

01:03

expenses that don't apply to a specific product but to

01:06

the cost of running the company as a whole Regular

01:09

people would call these expenses overhead But just like rappers

01:13

and private detectives and old movies accountants have you know

01:16

their own lingo They call these expenses S G N

01:19

A or sales general and administrative expenses Imagine for a

01:23

second that we're back when your company had only one

01:26

product You want to figure out how many bottles of

01:28

cell addressing you had to sell to reach break even

01:30

the cause for the salad dressings A buck fifty per

01:33

bottle that covers chemicals that make the meat flavor in

01:35

the herbs and spices and the things like the plastic

01:38

for the bottle and the printing of the labels and

01:40

all That stuff also covers the direct labor that goes

01:43

into making the bottles of dressing But you've got all

01:45

the overhead stuff you have to cover as well The

01:48

rent on your headquarters the advertising budget the CEO's salary

01:52

all that stuff All that overhead is DNA in accounting

01:55

slang and it adds up to three million bucks a

01:58

month You Sela Sela dressing for three dollars a bottle

02:00

to retailers so your gross profit or gross contribution per

02:04

bottle of dressing is a buck fifty right It cost

02:06

you a buck Fifty in *** to make it yourself

02:08

for three dollars And you got a buck fifty leftover

02:10

Well that buck fifty is known as contribution and its

02:13

margin here is fifty percent the amount each bottle contributes

02:17

Either too well paying the overhead costs or the bottom

02:19

line depending on how many items you're selling here right

02:22

So you want to know how many bottles you need

02:24

to sell to cover that three million dollars a month

02:27

Take three million divided by the buck fifty and that

02:29

gets you two million bottles Once you sell two million

02:32

bottles you've covered your overhead nut and the gross profit

02:35

then start to all fall to the bottom line Okay

02:37

simple enough But how about when you move on to

02:39

multiple products Those unattached overhead costs then get spread over

02:44

additional products so the math gets a lot more complicated

02:47

when you try to assign the amounts of overhead So

02:49

we enter the weighted average contribution margin Well basically you're

02:53

taking multiple products and splitting the overhead across him The

02:56

weighted average comes in well because you need to split

02:58

the overhead fairly You do so by looking at the

03:01

contribution margin for each product and putting it in context

03:04

for the sales mix So you launch your second product

03:07

You know that salad dressing that tastes like meat from

03:09

endangered animals Endangered species flavor sells for four dollars two

03:13

customers but cost to twenty five to make So the

03:15

contribution It's a buck seventy five It's a more specialized

03:18

flavor so you only sell half the volume of the

03:21

original flavor If you sell two million bottles of original

03:24

flavor to cover you're not well You can expect to

03:26

sell only one million bottles of the endangered species New

03:30

flavor You'LL earn contribution margin of a dollar fifty per

03:33

bottle for the original or three million dollars total Meanwhile

03:36

one million bottles of the new flavor will get you

03:39

one point seven five million right They sold three million

03:42

total bottles of dressing two million of the original self

03:45

and one million in the new stuff and you got

03:46

four Seventy five or four point seven five million to

03:50

apply to the overhead and or to the bottom line

03:52

Well four point seven five million divided by three million

03:54

bottles gives you a weighted average of approximately a dollar

03:58

fifty eight per bottle So how many total bottles and

04:01

then need to be He sold the break even including

04:02

both the old stuff and the new stuff Well you

04:04

still have the three million dollars in overhead The overhead

04:06

didn't change weighted average contribution margin of a buck fifty

04:09

eight there so you get three million divided by the

04:11

dollar Fifty eight gives you about one point eight nine

04:13

nine million bottles total to break even And if you're

04:16

two to one product mix hold well then you'Ll likely

04:18

sell about six hundred thirty three thousand bottles of the

04:21

new stuff and about one point two six six million

04:24

of the old stuff And that's the target you need

04:25

to hit to make up your overhead cough some more

04:29

than that number and you start working on product three

04:31

A salad dressing that tastes like already extinct animals You

04:34

know mammoths and dodos and there's really no accounting for

04:38

taste But that's very different video

Up Next

GED Social Studies 1.1 Civics and Government
39794 Views

GED Social Studies 1.1 Civics and Government

Related Videos

Fake News
11938 Views

How do you tell fake news from real news?

Finance: What is Bankruptcy?
260 Views

What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...

Finance: What is a Dividend?
1777 Views

What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...

Finance: How Are Risks and Rewards Related?
589 Views

How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...