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Managerial Accounting Discussion Board Unit 3

Managerial Accounting Discussion Board Unit 3

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16 views2 pages

Managerial Accounting Discussion Board Unit 3

Managerial Accounting Discussion Board Unit 3

Uploaded by

amanykoffipatrick
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Managerial Accounting discussion Board Unit 3

Introduction:
The contribution margin is the money generated after deducting the variable costs from the
total revenue. It helps determine the portion of sales available to cover the company's fixed
costs (The Investopedia Team et Al., 2024).
The manufacturing company I chose last week is NESTLE. For a little recap, NESTLE is a
multinational manufacturing company in the food and beverage sector, with revenue
accounting for $103.984 billion for 2023 (NESTLE, n.d.). In this assignment, we will discuss
and explain how we would determine the company’s contribution margin and contribution
margin percent.
Firstly, to calculate the contribution margin and contribution margin percent of NESTLE, we
need to identify and bring forth specific variables such as:
 Total sale revenue: NESTLE’s total revenue from selling its products.
 Variable cost: In this case, NESTLE incurred variable costs such as direct material
and direct labor costs that can vary with changes in volume.
- Example of direct materials: milk, cocoa, sugar, and packaging
- Example of direct labors: Wages and benefits for workers directly involved in
manufacturing.
 Contribution margin: As mentioned earlier, it’s the amount generated after the
deduction of variable costs from total revenue. Or in other words, it’s computed as the
selling price, minus the variable cost (Walther, L. M. & Skousen, C.J. 2009).
So, with these variables, assuming NESTLE has these relevant financial data:
 Sales revenue: $2,000,000
 Direct materials costs: $750,000
 Direct labor costs: $350,000
We will have as contribution margin:
Contribution Margin = Sales Revenue - Variable Costs
Contribution Margin = $2,000,000 - ($750,000 + $350,000)
Contribution Margin = $2,000,000 - $1,100,000
Contribution Margin = $900,000
In this situation, NESTLE has a contribution margin of $900,000. This number indicates that
NESTLE has this amount available to cover its fixed costs. If its fixed costs are lesser than the
contribution margin, then NESTLE will have a positive operating income. However,
NESTLE will have a negative operating income in case the contribution margin is lesser than
its fixed costs.
Moreover, we will have as contribution margin percentage:
Contribution Margin Percent = (Contribution Margin / Sales Revenue) * 100
Contribution Margin Percent = ($900,000 / $2,000,000) * 100
Contribution Margin Percent = 45%
The contribution margin percent of 40% indicates that for every dollar of sales revenue,
Nestlé retains $0.40 after covering variable costs. This provides insight into the efficiency of
Nestlé's operations and its ability to generate profit from each unit sold.
Conclusion
These results suggest that NESTLE has a healthy contribution margin, indicating that its sales
revenue exceeds its variable costs by a significant margin. This signifies a strong sales and
cost structure, which is crucial for maintaining profitability and competitiveness in the global
market.

References
NESTLE, (n.d.). Step inside the world’s largest food and beverage company.
https://www.nestle.com/about
The Investopedia Team and al., (2024). Contribution Margin: Definition, Overview, and How
To Calculate. https://www.investopedia.com/terms/c/contributionmargin.asp
Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting.
https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-
and-cost-accounting.pdf

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