ShmoopTube

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and finance Allah shmoop weighted average contribution margin in multi

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product companies Well you want a company that makes salad

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dressings When you started out you had one product a

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meat flavored salad dressing for people who want to be

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

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the guilt At that point it was relatively easy to

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attribute costs and margins He only had one product to

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worry about Eventually though you expanded You launched a second

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product a salad dressing that tastes like meat from endangered

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species black rhino twist and giant panda barbecue Mostly Well

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

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animals were actually harmed in the making of this video

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Okay so figuring out contribution margin becomes more complicated Here

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You use a weighted average contribution margin to let you

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know which product has the higher margin or contribution to

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your profits In any company you have two basic types

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of expenses There are expenses that relate directly to your

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

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as cog zor costs of goods sold There are also

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

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the cost of running the company as a whole Regular

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people would call these expenses overhead But just like rappers

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and private detectives and old movies accountants have you know

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their own lingo They call these expenses S G N

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A or sales general and administrative expenses Imagine for a

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

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product You want to figure out how many bottles of

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cell addressing you had to sell to reach break even

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the cause for the salad dressings A buck fifty per

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bottle that covers chemicals that make the meat flavor in

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the herbs and spices and the things like the plastic

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for the bottle and the printing of the labels and

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all That stuff also covers the direct labor that goes

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

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the overhead stuff you have to cover as well The

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

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all that stuff All that overhead is DNA in accounting

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slang and it adds up to three million bucks a

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month You Sela Sela dressing for three dollars a bottle

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to retailers so your gross profit or gross contribution per

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bottle of dressing is a buck fifty right It cost

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

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for three dollars And you got a buck fifty leftover

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Well that buck fifty is known as contribution and its

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margin here is fifty percent the amount each bottle contributes

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Either too well paying the overhead costs or the bottom

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

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So you want to know how many bottles you need

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to sell to cover that three million dollars a month

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Take three million divided by the buck fifty and that

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gets you two million bottles Once you sell two million

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

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then start to all fall to the bottom line Okay

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simple enough But how about when you move on to

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multiple products Those unattached overhead costs then get spread over

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additional products so the math gets a lot more complicated

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when you try to assign the amounts of overhead So

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

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taking multiple products and splitting the overhead across him The

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weighted average comes in well because you need to split

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the overhead fairly You do so by looking at the

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contribution margin for each product and putting it in context

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for the sales mix So you launch your second product

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You know that salad dressing that tastes like meat from

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endangered animals Endangered species flavor sells for four dollars two

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customers but cost to twenty five to make So the

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

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flavor so you only sell half the volume of the

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original flavor If you sell two million bottles of original

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

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sell only one million bottles of the endangered species New

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

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bottle for the original or three million dollars total Meanwhile

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one million bottles of the new flavor will get you

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one point seven five million right They sold three million

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total bottles of dressing two million of the original self

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and one million in the new stuff and you got

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four Seventy five or four point seven five million to

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apply to the overhead and or to the bottom line

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Well four point seven five million divided by three million

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bottles gives you a weighted average of approximately a dollar

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fifty eight per bottle So how many total bottles and

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then need to be He sold the break even including

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both the old stuff and the new stuff Well you

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still have the three million dollars in overhead The overhead

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

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eight there so you get three million divided by the

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dollar Fifty eight gives you about one point eight nine

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

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

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sell about six hundred thirty three thousand bottles of the

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new stuff and about one point two six six million

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

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to hit to make up your overhead cough some more

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than that number and you start working on product three

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A salad dressing that tastes like already extinct animals You

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

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taste But that's very different video

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