Contribution Margin
Posted on April 30, 2009 - Filed Under Finance
?The base case projected P&L statement in Table 5.4 introduces the concept
of contribution margin, which is defined as the difference between per unit revenue and per unit variable cost (the variable cost rate). In this illustration, the contribution margin is $100.00 ? $28.18 = $71.82. What is the inherent meaning of this contribution margin value of $71.82? The contribution margin has the look and feel of profit because it is calculated as revenue minus cost. However, because none of the fixed costs of providing service have been included in the cost amount used in the contribution margin, it is not profit. Rather, the contribution margin is the dollar amount per visit that first must be used to cover Atlanta Clinic’s fixed costs. Only after fixed costs are fully covered does the contribution margin contribute to profit.
With a contribution margin of $71.82 on each of the clinic’s 75,000 visits, the projected base case total contribution margin for 2005 is $71.82 × 75,000 = $5,386,500, which is sufficient to cover the clinic’s fixed costs of $4,967,462 and then provide a $5,386,500 ? $4967,462 = $419,038 profit. After fixed costs have been covered, any additional visits contribute to the clinic’s profit at a rate of $71.82 per visit. Readers will discover that the contribution margin concept is used again and again as our discussion of CVP analysis is extended.
Taken From : HEALTHCARE FINANCE
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