Question

Cans plc is developing a new form of 'crinkly can' for soft drinks. The crinkly can has grooves in the side which match the size of the fingers of a hand. The company's research and development department employs 50 people full-time and accounts for 2 per cent of the company's costs. The design manager thinks that it may be important in future to develop special designs for particular commercial customers, even if this involves relatively small production runs and a higher price to the customer for each can. He said 'Our profit margins are not yet satisfactory. I would like to maintain our existing level of sales of the standard can at the standard price, but also take advantage of our design skills and sell additional cans of the new style cans in smaller batches but at a higher price.'

Answer 1

Answer:

Step 1

Contribution Margin is simply the leftover amount after direct sales costs that a company has to pay off its fixed costs. It is necessary to calculate contribution margin because it shows how much contribution a product is making in the profits of the company.

So basically, the Contribution margin is the leftover revenue that helps a company to report its profit and cover its fixed cost.

Calculate it by deducting or subtracting the VC (Variable Costs) from the revenues of the company.

A company must maintain a good contribution margin because a low margin will result in losses but a good margin will help in generating good profits.

But contribution margin does not help in comparing the industries of homogeneous nature because of different situations. A company with a higher-margin may also have higher FC (Fixed Cost) a...