How to calculate contribution margin that includes step variable cost?
As an example:
Ticket price per person: $50
Fixed cost: $60,000
Variable: $15 per person for first 10,000 customers, $10 per person for 10,001 to 15,000, $5 per person for 15,001 to 20,000
Thanks
To calculate the contribution margin that includes step variable costs, you'll need to determine the number of customers in each price range and the associated variable cost for each range. Here's how you can do it step by step:
1. Determine the total number of customers:
In this example, we have three price ranges:
- The first range includes the first 10,000 customers.
- The second range includes customers 10,001 to 15,000.
- The third range includes customers 15,001 to 20,000.
2. Calculate the number of customers in each price range:
- For the first range, the number of customers is 10,000.
- For the second range, the number of customers is 15,000 minus 10,000 which equals 5,000.
- For the third range, the number of customers is 20,000 minus 15,000 which equals 5,000.
3. Calculate the variable cost for each price range:
- For the first range (10,000 customers), the variable cost per person is $15. Hence, the total variable cost for this range is 10,000 customers multiplied by $15, which equals $150,000.
- For the second range (5,000 customers), the variable cost per person is $10. Thus, the total variable cost for this range is 5,000 customers multiplied by $10, which equals $50,000.
- For the third range (5,000 customers), the variable cost per person is $5. Therefore, the total variable cost for this range is 5,000 customers multiplied by $5, which equals $25,000.
4. Calculate the total variable cost by summing up the variable costs for each range:
$150,000 + $50,000 + $25,000 = $225,000.
5. Calculate the contribution margin:
The contribution margin is calculated by subtracting the total variable cost from the revenue. In this case, the revenue is the ticket price per person multiplied by the total number of customers.
The revenue is $50 (ticket price per person) multiplied by the sum of the customers in each price range (10,000 customers + 5,000 customers + 5,000 customers).
Revenue = $50 * (10,000 + 5,000 + 5,000) = $50 * 20,000 = $1,000,000.
Finally, calculate the contribution margin by subtracting the total variable cost ($225,000) from the revenue ($1,000,000):
Contribution Margin = Revenue - Total Variable Cost
Contribution Margin = $1,000,000 - $225,000 = $775,000.
Therefore, the contribution margin that includes step variable costs in this example is $775,000.