Cost, Volume, Profit Analysis
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Cost, Volume, Profit Analysis
Fixed costs in the daycare will include salaries of staff such as security guards, teachers and counselors, insurance, taxes, promotions and rent while variable costs include electricity and water, maids to assist teachers, toys, and educational items, overheads like stationery, activities and events. Electricity and water bills tend to vary from one month to another based on consumption. The number of maids to assist teachers will also vary depending on the number of children in the daycare. A number of activities and events will be held during the entire year and their costs will vary depending on the activity and event.
The contribution margin is simply a product’s price less all associated variable costs resulting to incremental profit earned on each unit. In a service firm, it is the revenue obtained from providing services minus all variable expenses incurred from the provision of the services. It is calculated as:
Contribution margin = revenue – variable costs (Gallo, 2017)
It is helpful in determining prices in special situations. For instance, during holidays we expect an increase in the number of children at the facility. We can lower the price to attract more children to our facility to earn more revenue. However, we will make additional advertising expenses to make the facility known to more people.
Reference
Gallo, A. (2017, October 13). Contribution Margin. Retrieved from Harvard Business Review:
https://hbr.org/2017/10/contribution-margin-what-it-is-how-to-calculate-it-and-why-you-need-it
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