Contribution Margins

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My Guru, Professor John Shank said that the use of contribution margins to select products is “a snare, a trap, and a delusion” because a firm will never drop a product that has a positive contribution margin for fear of losing even a small amount of profit. Explain the meaning of this argument with an example of an imaginary Fast Moving Consumer Goods (FMCG) company with imaginary numbers.

Word limit: 400-500 words(!)

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  • Satish Panicker

    >Contribution Margin (CM) allows a company to determine the profitability of individual products and is calculated BY subtracting the total variable costs from the Product price. OR CM / unit = Sales price / unit – VC per unit. Resources are limited and the Co. will always emphasize prodcuts with largest total profit contribution per unit of the limiting factors. For eg in my company we sell several gases and Liquid Argon give low CM amongst the product but we have to keep this product going because that allows us to get a foothold and get more business. MOreover we sell this product using our ISO tanks for which we fetch rent in USD so it is not always the contribution margin to select product but a WHOLE BROAD PICTURE. We sell product with low margins just to recover our VC so that the customer is retained in our list so showing this customer we get further sales….Satish Panicker

  • KARUNA GURBAXANI (SPJAIN EMBA-10) EWD10022

    >Cost volume profit analysis (CVP) examines the behavior of total revenue, total costs and operating income. It is also known as marginal costing. E.g. its all about plant capitalization, sales volume and profit maximization. We use CVP analysis to at least know the break-even point (i.e. no profit no loss point of intersection on the x and the y axis.) Features of CVP analysis are how operating income changes with changes in output level, selling price, variable cost or fixed cost. Contribution margin is the difference between total revenue and total variable cost.

    Every product has product life cycle which includes the introduction stage, growth and then maturity stage and towards the end it moves towards the decline stage. If companies forecast a negative graph they try to overtake the last stage by starting a diversified division of products or else adding features and re-launching the existing one.

    To give up on an existing product which is well known in the market in just a misconception, companies re-structure the idea of proposing it towards its cm, thus attacking new cm markets as well. Every business is here to make profits e.g. HLL (Hindustan lever ltd) they started as a small venture business and now are one among the top companies of India with various brands and streams of product lines. They have the fastest moving FMCG goods in India such as chick shampoo, sachets which serve to the rich and the poor.

    Most of the companies attain their break even point ( BEP=fixed costs/contribution/unit) and then look into other set of products in the line, products are mainly cost objects which could also be in a form of service, a new set of specialized consultants, a brand etc

    Hence, this argument can be stated that every company works towards profits, we as managers will need to decide which product is the cash cow and which product is a dog

  • antonio fernandes EMBA10

    >A cost accoutant opinion and an Economist view can most often never be the same. While it may seem easy to work out a cost sheet an arrive at a figure of desired sales or desired profit margin, it cannot guarantee you can attain that result. Quite to the contrary a firm with cost + 10% mark up can even end up it financials with a 20% gain. So was the CA wrong? No, future costs and impacts cannot be measured 100%. There are various other economical factors which can affect your OI/L.
    When we speak of contribution margins again, it is not just a cost impact, but economic and business risks. By losing on one you can actually make up of it in the next; some times even more.Many supermarkets today exploit this concept by pricing few fast moving items less and pricing others high.This can be for the same product line or different line altogether. One of the reasons most of the FMCG Giants like P&G, Nestle etc have more than 100 different product lines under their umbrella. sale of the less priced items can by itself speak of high profits if the item has price elasticity.
    We can take the following FMCG example:
    Toothpaste and tooth Brush from P&G
    Ex.1
    Oral B Toothpaste – Price Dhs.13.50
    Units sold 13000
    Profit – 25500 or 10%
    Ex.2
    Oral B Toothbrush – Price Dhs.3.40
    Units sold 23500
    Profit – 30900 or 10%

    A competitive price on toothpaste will directly have a siginificant impact on purchase of Oral B Toothbrush. A small decrease in price of one item can increase the sales of the other related product. Market capitilisation could be also another strategy why FMCG companies would always prefer to continue a product line even though there is a small margin.

  • Russell Khambatta

    >Real examples that highlight this case in the U.A.E. Market are EPPCO and Cinema Multiplexes.

    EPPCO:
    EPPCO in the U.A.E is a purely gasoline distribution channel. Unlike other players in the market, such as Emarat or ADNOC, who are fully owned subsidiaries of oil refining companies. Therefore, EPPCO has to purchase its stock from the refineries, while Emarat gets stock directly from the principals. This obviously, puts EPPCO at a cost disadvantage.
    On the other hand, the retail price of Gasoline is controlled by the government. Due to lower costs, Emarat and ADNOC are able to sustain a healthy profit margin, but due to its higher costs EPPCO has to sell Gasoline and Diesel at a next to nil profit.
    Instead of trying to lower costs in other ways, EPPCO has adopted another strategy: that of product diversification. They concentrate in a large way, on the Star Marts that are located in all their fuelling stations using them to offer a wide range of facilities such as cafeterias, accessories shelves, flowers, gifts, etc. Arguing that these are items that many commuters would pick up once they stop for fuel, EPPCO has tried to make the stocking of the Star Mart as comprehensive as possible.
    The costing model adopted here is that the revenue generated from the sale of fuel is used to cover the fixed costs of the fuelling station and the Star Mart. Hence profits from fuel sales make a 100% contribution to Fixed Costs. The margins from Star Mart revenue therefore make a 100% contribution to profits.
    The fuelling station is what draws customers to the location and while they are waiting for the cars to be fuelled, the customer are enticed to visit the Star Mart for daily needs, snacks, etc.

    A similar case in point is the Cinema Multiplexes. Very often they operate circa 50% ticket sales. To encourage movie goers, ticket prices are maintained at a point where the revenue generated just about covers the large fixed costs this type of business entails. However, once a movie goer has purchased a ticket, she / he will also need snacks, which are sold at a premium from counters wholly owned and operated by the operator of the Cinema. Additionally, to further protect the snacks business, bringing food and drinks from outside is not allowed in the Cinemas.

    Hence we see that even if contribution margins are low, if volume is high, complementing it with a higher profitability product makes better business sense, rather than simply concentrating on cutting costs.
    - Russell Khambatta
    EMBA10

  • Sajeed Ahmed (E10038)

    >Selling price per unit is always greater than the VC per unit allocated. So we will always get a positive contribution. As companies do markup pricing. But it doesn’t mean that we are going to have profits after the first unit is sold. As profits doesn’t only based on selling price and VC. It also depends on the fixed cost. So to find out the profit every company has to do detailed CVP analysis to calculate the BEP in terms of units and revenues. Then only we can say that whether the company will make profits or not. So the contribution margin is just a trap or illusion that company might have to decide whether the product is profitable or not until and unless they do the complete CVP analysis. They have to consider all fixed and variable costs, product mix, competition in the market, substitute products etc.

    For example let’s take Keep Clean FMCG Company. It manufactures and distributes a wide range of products. For the time being I am only considering two of their products. One White Toothpaste and the other Dirty Washing powder. So to find the profitability of White toothpaste and Dirty washing powder it has to do a thorough CVP analysis.

    Let’s say the total VC per unit of White is $10 and they are selling it for $15. The difference $5 is not their profit. It’s only the contribution margin which helps in to acquire the fixed cost which is $100000 for Keep Clean. So first they have to calculate the BEP in terms oh units and revenues. So the BEP in terms of units is ($100000/$5) which is 20000 units. So until they sell 20000 units of White they are not in the loss making zone. Again the warehouse, the office which they have taken in rent etc all are not used only for White. The same resources are used to produce other product lines. For example say washing powder Dirty. The VC of Dirty is $20 and selling price is $30 with the contribution $10. So the BEP in units for dirty will be 10000 units. But now we have to consider the weighted contribution margin of these two products as they both are using some of the common resources. So if we consider the plan of Keep White is to sell the two products in the ratio 3:2 then the wt contribution margin will be (3*15 + 2*30)/(2+3)= $21. So the BEP with the weightage will be (100000/21) =4762 units. So the BEP of White will be 60% of 4762 which is 2857 ns BEP of Dirty will be 40% of 4762 which is 1905.

    So only looking at the contribution margin we can’t directly jump to the conclusion whether the product is profitable or not. We have to consider all the aspects that are effecting the pricing strategy of the product and also the BEP. Otherwise merely looking at the contribution margin to make a decision will be a trap for a company.

    Sajeed Ahmed
    Telecom Engineer
    SPJCM

  • M.Subramanian

    >- Yes small droplets of water make a heavy rain which in turn makes the Ocean (!).
    - In the same way small value of profit bring down the huge fixed costs and leads the company in profit in long term.
    - But it has to be carefully seen, how much efforts are needed to create this small profit , if the company doesn’t have problem in resources this principle will be acceptable.
    - Suppose if the company is having limitations in Resources then the company’s strategy to be reviewed in order to use these resources in a better manner to yield a high profit.
    - Again, the risk is if it makes high profit, then the competitors will be in the market very soon to share the profit. i.e., they will introduce new products which will take considerable market share and thereby reducing the profit.
    - Again if the product is remains long time in the market, then the quite no. of people may like this product and they will become the followers of the products. Definitely the company may not want to loose these followers in order to keep the brand reputation.

    Example:

    A great FMCG Company Imaginary Company (EMMES Limited ) is having the different product range like Always beauty soap, Fair and Beauty etc.. which will give high return. In the sametime, the same company is giving some Naillovely , Nail care products which is giving only low contribution.

    Always Beauty Soap:

    Sales Value = Rs. 15 & Variable cost = Rs. 5/- then the contribution margin is 10

    Naillovely:

    Sales Value = Rs. 5 & Variable cost = Rs. 4/- then the contribution margin is 1

    In both the above cases, the company will not leave the Nail lovely product eventhough its contribution margin is very low.

    If the Management decided to leave this product because of low contribution, then the consumers whoever using this product will go to other brands in turn the customers will get a chances of go to the different product range. It is not good for a company which is dealing with multi products for the reasons which are mentioned above.

    M.Subramanian

    Emba -10
    SP Jain Center of Management
    Dubai

  • Sajeed Ahmed (E10038)

    >Selling price per unit is always greater than the VC per unit allocated. So we will always get a positive contribution. As companies do markup pricing. But it doesn’t mean that we are going to have profits after the first unit is sold. As profits doesn’t only based on selling price and VC. It also depends on the fixed cost. So to find out the profit every company has to do detailed CVP analysis to calculate the BEP in terms of units and revenues. Then only we can say that whether the company will make profits or not. So the contribution margin is just a trap or illusion that company might have to decide whether the product is profitable or not until and unless they do the complete CVP analysis. They have to consider all fixed and variable costs, product mix, competition in the market, substitute products etc.

    For example let’s take Keep Clean FMCG Company. It manufactures and distributes a wide range of products. For the time being I am only considering two of their products. One White Toothpaste and the other Dirty Washing powder. So to find the profitability of White toothpaste and Dirty washing powder it has to do a thorough CVP analysis.

    Let’s say the total VC per unit of White is $10 and they are selling it for $15. The difference $5 is not their profit. It’s only the contribution margin which helps in to acquire the fixed cost which is $100000 for Keep Clean. So first they have to calculate the BEP in terms oh units and revenues. So the BEP in terms of units is ($100000/$5) which is 20000 units. So until they sell 20000 units of White they are not in the loss making zone. Again the warehouse, the office which they have taken in rent etc all are not used only for White. The same resources are used to produce other product lines. For example say washing powder Dirty. The VC of Dirty is $20 and selling price is $30 with the contribution $10. So the BEP in units for dirty will be 10000 units. But now we have to consider the weighted contribution margin of these two products as they both are using some of the common resources. So if we consider the plan of Keep White is to sell the two products in the ratio 3:2 then the wt contribution margin will be (3*5 + 2*10)/(2+3)= $7. So the BEP with the weightage will be (100000/7) =14286 units. So the BEP of White will be 60% of 14286 which is 8572 and BEP of Dirty will be 40% of 14286 which is 5714.

    So only looking at the contribution margin we can’t directly jump to the conclusion whether the product is profitable or not. We have to consider all the aspects that are effecting the pricing strategy of the product and also the BEP. Otherwise merely looking at the contribution margin to make a decision will be a trap for a company.

    Sajeed Ahmed
    Telecom Engineer
    SPJCM

  • Amit Shahani

    >It is very true that a company would prefer minimum profit instead of no profit
    As it’s always said less profit is better than no profit but in today’s world firms prefer to utilize its resources to the fullest maximum output. The old times went when firms used to believe in the concept of let the firm run even if profits are minimum, today the scenario has changed and people look forward. Keeping in mind the profits they prefer to utilize the resources used for a less profit making unit in production or research n development of another line of activity which could yield more profits for the company.

    Example – FMCG (Fast Movable Consumer Good) – P&G reduced their production capacity on single blade razors and moved as per market demand in introducing Mach III product with three blades razor feature which ran through out the market so well and increased sales, as well as profit for P&G thereby increasing the market share of the compnay. Research & development, market surveys do pay one day or the other.

    P & G Razor Example – FMCG ( Fast Moving Consumable Good)

    Single Blade Razors Mach III Razors
    Units Price Cost Profit Units Price Cost Profit
    10 8 5 30 10 22 7 150
    20 8 5 60 20 22 7 300
    30 8 4 120 30 22 6 480
    40 8 4 160 40 22 6 640
    50 8 4 200 50 22 5 850

    Seeing the sales of Mach III in the market it could be easily said that Mach III was more in demand and people were ready to pay the price for it. P&G then utilized their resources more efficiently by asking their single blade razor staff to go into more production of some innovative idea keeping in mind the three blade factor and to improve on that Mach III product forgoing the minimum profit earned by the single blade razors.
    Then P&G came up with different Mach III razors with different colors to segment the market on basis of demographic segmentation. They made products based on age of the person. A red color razor for the youngsters, a grey color for the more elderly people and blue for the middle aged group. This is a clear example of a modern firm those who believe in maximizing profit and resource instead of bare minimum profits.

    Amit Shahani.
    EMBA Batch 10.

  • Varghese Mathew varghese1982@hotmail.com

    >Contribution margin is the difference between total revenue and total variable cost. This difference can be expressed as a percentage of total revenue. A company’s contribution margin can be expressed as the percentage of each sale that remains after the variable costs are subtracted.
    Fast Moving Consumer Goods (FMCG), are products that have a quick turnover and relatively low cost. Though the absolute profit made on FMCG products is relatively small, they generally sell in large numbers and so the cumulative profit on such products can be large.

    Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, teeth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs,batteries, paper products and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products and drinks.

    From the investors’ perspective, Fast Moving Consumer Goods (FMCG) sector is the source of high and stable return, and there has been enormous growth in market size over the last decade. A consumer good is fast moving when it is purchased frequently with little planning or shopping effort. FMCG are low priced and widely distributed. Toiletries, detergents and beverages are examples for FMCG.

    Among FMCG, cosmetics and toiletry has the highest profitability, and this sector happens to have highest selling costs and advertising expenses. The growth of this sector, it appears, is highly dependent on brand promotion.

    For example, suppose a product is generating a positive contribution margin. If the product is dropped, the remaining products would have to cover fixed costs that are not directly traceable to it.

    Wipro Consumer care and Lighting (WCCLG) is the FMCG arm of Wipro Limited which continuously introduces innovative products and adds value to existing brands, each of which is the promise of good health and value for money. Its brands include Santoor, Wipro Shikakai, Wipro Active and Wipro Baby Soft. It is also a leader in institutional lighting in specified segments like software, pharma and retail.

    Santoor is the flagship brand in the Wipro Consumer Care & Lighting stable and the 2nd largest brand of soap in India in the popular segment of the category.

    The brand enjoys two decades of trust since its launch in 1986 and has grown to be counted amongst the top brands in India in the intensively competitive market.
    Millions of women across the country have discovered the secret of younger looking skin with Santoor. It is a truly unique soap that combines the goodness of natural ingredients – Sandal, Turmeric and natural Skin Softeners.

    Amongst the first brands in the Country to launch an offering with the twin ingredient benefits of Sandal and Turmeric, Santoor has over the years moved from a purely natural ingredient based appeal, to one of the most preferred beauty soaps of the day. Today, Santoor is one of the fastest growing soap brands in India.
    Santoor currently enjoys 31 per cent in Andhra Pradesh market and is aiming to increase to 50 per cent. About 1.5 crore Santoor soaps are sold each month in the State itself taking a significant share out of the Rs.546 crores of annual soap market in Andhra Pradesh. A brute share, when you consider that Lux has a 14.5 per cent share and Lifebuoy 13 per cent, two of HUL’s biggest brands in toilet soaps. Santoor has 11-12 per cent share in markets such as Karnataka and Maharashtra.

  • LIMNAZ.MUSTHAFA – limnaz_musthafa@yahoo.com

    >Contribution margin measures the changes in operating income as a result of changes in number of units sold. It is basically the difference total revenue and the total variable cost, which contributes to recovering the fixed cost. Once the fixed costs are recovered the remaining is margin to operating income. Contribution margin per unit is a tool for measuring the operating income and the contribution margin. It is the difference between the selling price and variable cost per unit. In this statement the Professor john shank is trying to say that the contribution margin alone should not be considered as a factor for the success of a product, like he already mentioned that most of the company’s will not drop a product that has a positive contribution margin. Moreover there is the contribution margin percentage which is contribution margin per unit divided by the selling price. Whether to include or drop a product that yields a positive contribution margin depends on the type of product. It is also not advice-able to keep a product yielding positive margin as there are costs associated with like the advertising costs, which will increase as a result of it.

    Fast moving consumer goods are those having a quick shelf turnover and it doesn’t require much of time , thought, and financial investment to purchase. It basically refers to wide range of frequently purchased consumer products like soaps, tooth paste, toiletries, shaving products and other nondurable goods like bulbs, batteries, plastic products. Therefore we have to understand that the margin on FMCG product is low. Some of the best examples of FMCG are coco-cola and pepsi.

    The Procter and gamble (P&G) is a brand behemoth. It is the world number one maker of household products and it has a variety of brands under its roof. More than 20 of P&G’s brands are billion-dollar sellers, including Actonel, Always/Whisper, Braun, Bounty, Charmin, Crest, Downy/Lenor, Folgers, Gillette, Pampers, Pantene, Pringles, Tide, and Wella, among others. Here we Can take the example of Pantene. It is a brand of hair care products of P&G. The best known brand is Pantene Pro-V the conditioning shampoo. It is a flagship brand of P&G.

    Throughout years , Pantene has consistently received awards and recognition from top beauty and skin magazines. Moreover it should be remembered that if a product has a positive contribution margin, and if it is dropped the rest of the products would have to cover the fixed costs which is not directly traceable to it. Pantene shampoo has come up with many brands like antidandruff conditioner, high volume for thick hair, smooth and shiny for silky hair and so on. Comparing the other brands of shampoos, pantene has a good brand image among the consumers. Even in India there is a good number of consumers for it especially women, who would prefer to have dandruff free and silky hair. Cosmetics and toiletry has the highest profitability among the FMCG. The growth of this sector is primarily through advertisements , brand promotions.

    Accounting for 34.5 percent of the total market for hair-care products, shampoo is the largest segment and was worth $678 million in 2006, despite heavy discounting and the many ‘buy one, get one free’ offers so often seen in this category. Shampoos include brands, private label, anti-dandruff, medicated, and 2-in-1 shampoo/conditioner combination . Of these brands pantene was among the first to offer customers with lot of offers and promotions and was the second largest selling shampoo brand in 2006. Pantene currently has 35% market share in the Indian market as compared to the other brands, it is trying to reach the 50% market share.

  • Anonymous

    >The use of contribution margin as a decision making tool for discontinuing a product can be misleading.
    One thing that we have to keep in mind is that , contribution margin takes into account only two factors,
    the selling price and variable costs. The fixed costs are not taken into consideration, larger the fixed cost
    larger has to be the margin so that the fixed costs can be covered with in the short period of time.

    Lets take company an FMCG company ABC, producing 2 brands of toothpaste, 2 brands of soft drinks and a brand of shampoo.
    Lets further assume that the contribution margin are 30% toothpaste , 25% soft drink and 10% shampoo. Now 10% contribution margin is tempting for ABC to continue with the shampoo brand. But we have to look at this in several perspectives.Some products/services require high contribution margin, for example if you consider an oil refinery if the margin not significant they may not be able to high [the ROI is to less]. Some other products by nature needs high contribution margins because of other pressures, for example if you that take drug industry, its vital to have aa high contribution margin to recover the RnD efforts which has gone into manufacturing the drug [within a short time, the drug may either be replaced or competetors may come up with a similar product]. So the desirable contribution margin is a function of the nature of the product.

    In the case of a Shampoo we will have to consider the stats before deciding the viabiliy of continuing with it.We may have to consider the industry wide margin and compare with the internal research numbers as well.Another factor which is often overlooked is the indirect costs associated. The advertising and marketing expenses and other administrative expenses need to be considered. ABC analysis may be useful in identifying the costs associated and map it to the corresponding product.

    The company’s startegy also plays a key role. Sometimes projecting a unique brand and bringing your product under the umbrella can increase the brand visibility and brand recall. If you have a product which doesnt align with the startegy you may have to take steps to position your brands carefully.

    In short ABC will have to consider the effort, time , cost and other factors [like brand strategy] to effectivily decide whether to continue with the Shampoo brand. Yes contribution margin does help, but only marginally considering the other factors involved in the business.Its “a snare, a trap, and a delusion” and ths scary !!!

    +/ashly
    Ashly Mathew Varghese [rollno :EI007]
    EMBA 10

  • Abdul Khan – abdul_k_khan@hotmail.com

    >Contribution Margins

    A B
    SP 200 200
    VC 175 190
    CM 25 10
    FC 15 15

    In the above example as you view those two products have similar selling prices, but the contribution margin varies i.e. Product A – 25 and Product B – 10. By just looking at the contribution margin the company may decide to continue the production of Product of B as its having contribution as 10, but the fact is that contribution margin ignores the fixed cost and in the above case Product B is not able to cover the fixed cost and in fact its falling 5 short. Over above contribution margin ignores the market trends, demand of the product and hence it could be trap by just looking at the contribution margin. Assuming that the demand of the product is outdated and the demand of the product is fast sliding down, the company may come into trap by producing it by just looking at its contribution margin.

  • Ribu V. Thomas (EMBA10)

    >FMCG
    Fast Moving Consumer Goods (FMCG) are products that have a quick shelf turnover, and relatively low cost. Consumers generally put less thought into the purchase of FMCG than they do for other products. FMCG products are those that get replaced within a year. FMCG products generally sold in large numbers and the absolute profit made on FMCG products is comparatively small. However the huge number of goods sold is what makes the difference. Hence profit in FMCG goods always translates to number of goods sold.

    The FMCG product category generally includes a wide range of frequently purchased consumer products including cosmetics, toiletries, soaps, cosmetics, teeth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products and drinks, although these are often categorized separately

    Parachute: Managing India’s leading coconut oil brand
    Marico Industries, a well-known Indian Fast Moving Consumer Goods (FMCG) company, offered unique and ethnic Indian products. Marico was famous for its ‘Parachute’ and ‘Saffola’ brands. In a survey carried out by ‘Brand Equity’ of The Economic Times in early 2003, for India’s 100 most trusted brands, Marico’s ‘Parachute’ ranked 29th (among Indian brands it ranked 8th) and ‘Saffola’ 75th. Marico’s brands had shown resilience against competition and maintained their market shares over the years.

    Parachute is one of the largest FMCG brands in India and it is the flagship brand of Marico. Marico had maintained a steady sales and profit growth over the years with a consistent Return On Capital Employed (ROCE) of over 30%. Marico ranked 16th in terms of ROCE in a survey of 500 companies conducted by ‘Businessworld’, India in 2003 while it ranked fourth among FMCG companies.

    Marico Position Parachute as a purity brand. Parachute pioneered the idea of selling the coconut oil in plastic. The primary target audience of ‘Parachute’ is women of all ages in both urban and rural population of India. Its communication is on the platform of ‘caring’ with mother daughter theme.

    Parachute is premium edible grade oil, a market leader in its category. Synonymous with pure coconut oil in the market, Parachute is positioned on the platform of purity. In fact over time it has become the gold standard for purity. From a loosely available commodity to a path-breaking brand, Parachute pioneered the switch from coconut oil sold in tins to plastic. Parachute is also available in pouch packs, to service the rural sectors, increasing penetration.

    Marico followed innovation as a major strategy in building Parachute brand. For example 20 ml Parachute for MRP of Rs.5 enables loose oil users/buyers to upgrade to Parachute.
    Flip Top Cap for Parachute bottles to enhance the safety and protect the purity of Parachute.
    Another Innovation is Parachute Mini – a bottle shaped small pack being sold at an MRP of Rs.1
    Another is jar pack of Parachute to facilitate usage especially during winters.
    The strategy followed by the company and the quality of the product offers a customized product in all seasons, to grab the price conscious customers and to provide value for money.

    Parachute also came out with oil in different flavors or smell like Parachute Advanced refined hair oil and Parachute Jasmine and targeting young and appearance conscious consumer. Parachute also came with different products for different target market. Parachute After shower Hair Cream for Young men those who focus upon stylish look, non sticky and nourishing aspect. Parachute Sampoorna for Women customers focusing on providing strong hair.
    Positioning of the Parachute has always been on purity, the communication has evolved over time to appeal to different consumer sets. By changing its pack shape to one that is sleek, modern and aesthetic, Parachute has kept up with the demands of modern, young India and proved its endeavor to always remain relevant. Parachute has thus ensured that it enjoys tremendous equity and trust with every passing generation. Parachute is the first brands to utilize mass communication, Parachute started with the `caring’ platform of the ‘mother – daughter’ theme to underline the message that this was a brand handed down from and to generations. Today, a completely new look, logo and the new aesthetic shape have helped attract the youngsters. With every new change and innovation, the one thing that remains constant is the genuine, warm and inspiring character of Parachute, which has won the trust of millions of Indians. .The quality of the product has contributed to its lasting success.

  • Ann

    >Contribution margin refers to the additional profit/ revenue which the firm gets after deducting the fixed cost. No firm will drop a product which provides a positive contribution margin as any profit is good as long as the revenue differential is more than the cost differential. For example incase of milk products, the cost of making butter may be Dhs 4 and the Selling price is Dhs4.5. The company will not stop this product since that are gettin .50 profit which is the contribution margin and any profit is good for the firm.
    ANN BABU RAJAN
    SP JAIN , BATCH 10

  • poo

    >Consider a FMCG company e.g. Multilever PLC selling Shampoos like A, B, C and D. assume that production for all 4 products take place in a single factory. The fixed rent and cleaning charges for this factory is Rs. 20,000.We assume that there exists sufficient demand for all 4 Shampoo products, so that everything that is produced can be sold.
    The sales price per unit for A,B,C,D are 40,50,60 & 70 respectively. The variable cost for A,B,C & D are 30,44,52 & 68. In this case contribution margin for D will be A-B=2 and total contribution CxD=2000if we look at the above, clearly it makes sense to produce and sell product D because it has a positive contribution margin and also a profitable product

    However, we are ignoring the allocation of fixed costs completely. If we allocate the fixed cost based on certain criteria say floor area, the operating profit for D is the lowest amongst all. Multilever can consider replacing product D with a better product based on this total cost analysis.
    Hence, the above comment can be a valid argument.
    EWD 10028 EMBA 10 POOJA KAPOOR

  • poo

    >Let us consider a FMCG company e.g. Multilever PLC selling Shampoos. Assuming that it has 4 shampoo products A, B, C and D with sales price as 40,50,60 and 70 respectively and all are produced in a single factory. The fixed rent and cleaning charges for this factory is Rs. 20,000. The variable cost for all 4 is 30,44,52 & 68 respectively. We assume that there exists sufficient demand so that everything that is produced can be sold. if we look at analysis, clearly it makes sense to produce and sell product D because it has a positive contribution margin. In other words, product D is a profitable product.However, we are ignoring the allocation of fixed costs completely.If we allocate it based on certain criteria (say floor area and we are assuming all products use the same quantum of floor area in the factory i.e. each use 25%), Since operating profit is lowest for D, The conclusion we would now draw is that its not a profitable product. Clearly, Multilever can consider replacing product D with a better product based on this total cost analysis.Hence, the comment “use of contribution margins to select products is “a snare, a trap, and a delusion” ” can be a valid argument.
    POOJA KAPOOR-EMBA 10, EWD10028

  • Priscilla Khambatta

    >Contribution Margin

    As a general rule, for short-run pricing decisions the selling price of a product must at least cover variable and incremental fixed cost providing a positive contribution margin. Many believe that losses will disappear as the company scales. However, while absolute losses can ultimately be erased through volume when a positive contribution margin exists, a negative contribution margin only worsens the economic picture as the company grows.
    So positive contribution represents the amount of money available to cover fixed costs and the excess available is net income.
    Also it indicates when a contribution margin is positive then the firm has some unused capacity and can use it for more products or diversify the business.

    A very good example that comes to mind is IKEA Dubai. IKEA store caters to furnishings and household items and is a huge store, which takes minimum 3 hours for the customers to just walk down the store. They have been doing well and showing profits. Keeping all this in mind they decided to diversify and add more to their business and capture a larger crowd. They have opened up a small café just at the entrance of IKEA, which serves fantastic coffee and sandwiches and special Friday breakfast at nominal prices. So when customers are coming in or leaving the shop they first stop at the café to freshen up and grab some coffee and sandwiches. Or people sometimes go their to just have the IKEA breakfast on Friday’s which is so fresh and at affordable prices. So although IKEA’s fixed costs have increased nominally they have utilised their extra capacity with the space outside their shop to make more business and diversify it, thus adding into more revenue although the variable costs have gone up. As long as the contribution margin is positive IKEA can afford to have the café even if the café is not showing much profit. However, it helps in increasing the number of customers visiting the shop and thus leading to more purchases and business to IKEA.
    -Priscilla Khambatta
    EMBA10 SPJCM, Dubai.
    priscilla.khambatta@spjain.org

  • deepak bhatia – deepak.bhatia@spjain.org EWD10014

    >The company will never drop out a product that has a positive contribution margin because the company makes a profit by those FMCG products where they are consumed on every day basis. As mentioned that FMCG are those goods which are consumed every day basis and the minimal profit derived from these products is larger because the volume purchased by the retailers are huge because of the consumption is also on a higher side.

    There is also a possibility that a company may discontinue that FMCG product because its variable costs maybe high like I will give you an example:

    If your have a FMCG product, say bread and your company sells bread each for Rs.50, and the cost of making the bread is Rs.30 per piece, but your variable costs like buying the plastic for wrapping the bread is 15 and manpower to make the bread is Rs.15. When added together it comes to Rs.30

    Then, your Contribution Margin is:

    Rs.50 minus – selling price
    Rs.30 minus – cost
    Rs.30 – variable costs (plastic and manpower)
    This equals Rs.-10, which is a loss

    Over here that company will discontinue that FMCG product and try to concentrate on its other products where its contribution margin is positive.

    In most cases where the variable costs are lower then the company will never drop those products. Most of the time the contribution margin on FMCG are low and cannot be dropped from the list of the company which produces them.

    The companies which have a negative contribution margin in a FMCG should try to bring this margin in relatively positive terms and calculations by decreasing the variable costs.
    The company has to be very careful when selecting a FMCG, its should know what is the selling price, costs and specially the variable costs the product has.

    Where there is even a small portion of profit margin the company should not disregard it provided its variable costs are low and can bearable in order to make profits.

    Deepak Bhatia – deepak.bhatia@spjain.org
    (Roll Nbr. EWD10014)

  • deepak bhatia

    >The company will never drop out a product that has a positive contribution margin because the company makes a profit by those FMCG products where they are consumed on every day basis. As mentioned that FMCG are those goods which are consumed every day basis and the minimal profit derived from these products is larger because the volume purchased by the retailers are huge because of the consumption is also on a higher side.

    There is also a possibility that a company may discontinue that FMCG product because its variable costs maybe high like I will give you an example:

    If your have a FMCG product, say bread and your company sells bread each for Rs.50, and the cost of making the bread is Rs.30 per piece, but your variable costs like buying the plastic for wrapping the bread is 15 and manpower to make the bread is Rs.15. When added together it comes to Rs.30

    Then, your Contribution Margin is:

    Rs.50 minus – selling price
    Rs.30 minus – cost
    Rs.30 – variable costs (plastic and manpower)
    This equals Rs.-10, which is a loss

    Over here that company will discontinue that FMCG product and try to concentrate on its other products where its contribution margin is positive.

    In most cases where the variable costs are lower then the company will never drop those products. Most of the time the contribution margin on FMCG are low and cannot be dropped from the list of the company which produces them.

    The companies which have a negative contribution margin in a FMCG should try to bring this margin in relatively positive terms and calculations by decreasing the variable costs.
    The company has to be very careful when selecting a FMCG, its should know what is the selling price, costs and specially the variable costs the product has.

    Where there is even a small portion of profit margin the company should not disregard it provided its variable costs are low and can bearable in order to make profits.

    Deepak Bhatia – deepak.bhatia@spjain.org
    (Roll Nbr. EWD10014)