Danielle Bradley’s tips for ASS#2 Step 7 (Contribution Margin)
On a high from restating LPC’s financial statements and moving numbers into the friend zone I was excited to see what other calculations I could manage. So after watching last week’s lecture I decided to calculate the contribution margin for 3 of LPC’s services (which is a component of step 7).
I found this section quite simplistic thanks to both Maria’s outline in the recorded lecture as well as the information displayed in the study guide.
I was however a little disappointed that the task of determining the contribution margin itself was completed so quickly. *Yes I’ve somehow been converted to a calculation addict after my many years of being terrified of equations*
Once I had finished writing up the contribution margins I went ahead and outlined the rest of step 7. I thought I would post my method here for any others that may require assistance to ensure they don’t miss any components of this step. This method is something I do for nearly all my assignments as there is nothing worse than losing marks for simply forgetting one minor detail.
Now that I have my step 7 laid out all I need to do is to go through and fill it all in with the wealth of information I am bound to find from LPC’s website, discussions with my peers and of course my own personal thoughts
The three services LPC provide which will be utilised for this step are:
Navigation – includes pilotage, marine, harbor control, navigation aids and dredged channel.
Berth hire – hire is on a 24hour basis from time of berthing a vessel
Container door taping – security seal for shipping containers
After further research into these 3 services I discovered the price charged per service is often based on the GRT or gross registered tonnage of each vessel. Therefore for the services with a price based on GRT, I have chosen a vessel of 5000GRT in order to have a comparable price base. Consequently, the price per service is as follows:
Navigation = $0.63 per GRT = $3,150
Berth hire = $0.163 per GRT = $815
Container door taping per container = $130
The variable cost percentage for services provided I feel vary greatly between the services I have chosen (EXPLAIN WHY).
The variable cost percentage I have attributed to the three services are:
Navigation = 80%
Berth hire = 40%
Container door taping = $90%
The variable cost of each service:
Navigation = 80% x $3150 = $2520
Berth hire = 40% x $815 = $326
Container door taping = $90% x $130 = $117
Contribution margin = SP (sales price) – VC (variable cost)
Navigation = $3150 – $2520 = $630
Berth hire = $815 – $326 = $489
Container door taping = $130 – $117 = $13
State why I chose those services
State why I chose a different variable price percentages for the services
Discuss why the contribution margin might be similar or different for the 3 services
- Why might LPC produce a range of services with different contribution margins?
- Why not produce only the service with the highest contribution margin?
Identify or guess 1 or more resource constraints LPC may face in their capacity to provide the services I’ve listed, and perhaps any market constraints I feel may impinge on LPC
In what ways might the above constraints be relevant when deciding whether (and how much) of the 3 services LPC should sell.
As you can see, this is the bare bones of my step 7 so to speak. This means when I go to complete this step I know what I need to be looking for, discussing and outlining in my text.
Another handy hint is to use the same language or words from the assignment question in the body of your text so the marker knows what you are relating to.
Well now back I go to do my KCQ’s for chapters 7 & 8 before all these calculations consume my life