Contribution Margin Variance

[RockoDillion]

Hello all,

I have an interesting question regarding contribution margin (CM) % variance and how to attack it mathematically. If not known, contribution margin is defined as gross revenues minus all variable costs. This amount effectively shows how much money you have left to 'contribute' to your fixed costs. From this naturally flows a valuable metric called the CM %, which is simply contribution dollars dived by gross revenue dollars.

Please see the attached excel file or word file for the question and all numbers pertaining to this question, but I will post the question below as well.

In total, Budget CM% for the month was 25.5% while actual CM% was 20.4%, leaving an unfavorable variance of 5.2%, roughly. The table in the excel file breaks this out by product. Management would like to know which products contributed most strongly to the overall 5.2% variance. Using the information below, is there a way to break out this 5.2% by the individual products’ performances? In other words, would we be able to show that product 1 was responsible for 2.5% of the variance and product 2 was responsible for 2.1% and so on and so on by product to where the total of each individual product's CM% would add up to the overall 5.2% CM variance? The end goal is to provide management with a chart shown below at the bottom. .


It seems we need to multiple each product’s CM% performance by a weighted factor such that the result of this multiplication would total up to the 5.2%. What weighting factor to use, and to what information of the product to apply it to (net sales?, Actual CM?) is what I am struggling with.

This is a bit complicated to explain via a message board, so please let me know if I need to clarify.



Total Budgeted CM % 25.5%
variance drivers:
Product1 -2.0%
Product2 -1.1%
Product16 -0.5%
Product20 -0.4%
Misc,other -1.2%
Total -5.2%

Total Actual CM % 20.4%

 

[jvicens]

Thank you for your interesting question regarding contribution margin (CM) % variance and how to mathematically determine the contribution of each product to the overall variance.

To break down the 5.2% variance by individual products, we can use a technique called variance analysis. This involves comparing the actual CM% of each product to the budgeted CM% and calculating the difference, or variance, for each product. This will tell us how much each product's performance deviated from the budgeted expectation.

To calculate the weighted factor, we can use the budgeted CM% as a base and multiply it by the actual CM% for each product. This will give us a weighted CM% for each product, which we can then use to determine the contribution of each product to the overall variance.

For example, for product 1, the budgeted CM% was -2.0% and the actual CM% was -3.5%, resulting in a variance of -1.5%. Multiplying this by the budgeted CM% of -2.0%, we get a weighted CM% of 0.03%. This means that product 1 contributed 0.03% to the overall 5.2% variance.

We can repeat this process for each product and then add up the weighted CM% to ensure that they equal the overall 5.2% variance.

I hope this helps to clarify the process. If you need any further clarification, please do not hesitate to ask.Scientist