Focusing on Lost Contribution Margin helps Business
How focusing on Lost Contribution Margin helps the Business?
When it comes to business management, Lost Contribution Margin plays a crucial role in decision-making. Lost Contribution Margin is a contribution margin earned by a company from a product or particular division or market segment that would be lost if the company decides to discontinue or stop investing.
Lost Contribution Margin tends to be an contribution margin that already exists in a firm and earns a particular income for the firm which may be lost in case of shutting down or modifying the particular division.
Basics of Lost Contribution Margin
Firstly, let us understand the basics of contribution margin. The margin resulting while subtracting the variable costs from the revenue is identified as Contribution Margin. In most cases, the revenue earned in the format of the business and the expanded variable costs are compared during the evaluation of Contribution Margin. The loss of a business activity or the operating income is evaluated by subtracting the fixed expenses pertaining to the revenue-generating business activity from the contribution margin.
This is how the lost contribution margin evaluates the difference in loss or income by discontinuing or modifying a business activity.
For instance, a business manager of a company makes a decision to discontinue a produce and thereby cutting-short the marketing and operation of that particular product division only after understanding and evaluating the lost contribution margin of the decision. If that particular product division generates $50,000 in revenue and $30000 in variable costs, the corresponding lost contribution margin would be $20,000 while that particular business activity division is shut down or discontinued.
In case the new business activity planned to commence in that particular business division and the contribution margin of that new business is higher than the lost contribution margin of the discontinuation of the existing business division, the business manager will proceed with the shutting down process. However, the contribution margin of the proposed new business is lesser than the lost contribution margin generated because of the discontinuation of the existing business; the business manager may reconsider the decision of shutting down or closing the operation. When it comes to the above example of $20,000 lost contribution margin, the business manager will have to weigh on the contribution margin of the new business activity proposed to decide on the discontinuation of the division. If the contribution margin is greater than $20,000, he’ll proceed with the decision if it is lesser than that, he may have to reconsider his decision to discontinue the existing business division.
In case the lost contribution margin is -$50,000 the business manager can proceed with the discontinuation of the business division to avoid the loss endured by that particular division. Thus, in addition to evaluating the profit and revenue increase Continuation of the
This is how the lost contribution breakdown will provide a deep insight while making decision-making for the business managers.
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