Comments on: Keep it Simple http://theleanthinker.com/2008/04/24/keep-it-simple/ Thoughts and insights from the shop floor. Fri, 29 Aug 2008 02:07:02 +0000 http://wordpress.org/?v=2.6 By: Mark http://theleanthinker.com/2008/04/24/keep-it-simple/#comment-4400 Mark Tue, 06 May 2008 17:59:35 +0000 http://theleanthinker.com/?p=127#comment-4400 Actually my key point is that calculating the contribution margin of one product over another is fraught with difficulty. When allocated fixed costs are very high; when costs which are actually fixed are calculated as "variable;" then the margin calculation becomes highly sensitive to the allocation scheme used. It becomes even more complicated when sales of one product are partially related with sales of the other in some way. While it would be nice if everything were as cut and dried as the accounting textbooks make it out to be, there are actually very few absolutes beyond "How much more money did we take in than we spent?" Actually my key point is that calculating the contribution margin of one product over another is fraught with difficulty.

When allocated fixed costs are very high; when costs which are actually fixed are calculated as “variable;” then the margin calculation becomes highly sensitive to the allocation scheme used.

It becomes even more complicated when sales of one product are partially related with sales of the other in some way.

While it would be nice if everything were as cut and dried as the accounting textbooks make it out to be, there are actually very few absolutes beyond “How much more money did we take in than we spent?”

]]> By: Karthik Chandramouli http://theleanthinker.com/2008/04/24/keep-it-simple/#comment-4398 Karthik Chandramouli Tue, 06 May 2008 16:33:55 +0000 http://theleanthinker.com/?p=127#comment-4398 The logic of "contribution margin" (i.e., profit after variable cost) is that we can understand what is the relative value to produce or sell one more unit of product A vs. product B. So, while I like your approach to explain the concept of a breakeven point (which, I agree, is poorly understood even by many Finance practitioners), the more useful analysis is to understand the contribution margin of various products or product families. The logic of “contribution margin” (i.e., profit after variable cost) is that we can understand what is the relative value to produce or sell one more unit of product A vs. product B.

So, while I like your approach to explain the concept of a breakeven point (which, I agree, is poorly understood even by many Finance practitioners), the more useful analysis is to understand the contribution margin of various products or product families.

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