Contribution Margin Improvement for Service Companies

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Contribution Margin Improvement for Service Companies Background The status of a company's contribution margin is exceedingly important for the functioning of that particular business. Not only does the contribution margin allow managers and workers to understand where the company stands financially, but it is further essential in decision-making within the company and the company's reporting. Essentially, the contribution margin within a company is the difference between the selling price minus all variable costs, or the marginal profit per unit sale that a company sees (Tsui, 2011, p.1). In terms of service companies, no technical "product line" is taken into account in calculating the contribution margin, rather the services that are provided by a company and the costs that are associated with the rendering of these services to consumers is factored in. In such cases, the variable costs that are subtracted from the "product" are not the costs of production of a physical product, but the costs that are associated with the distribution of a service from a company's base to the consumer. In this case, when a manager understands where the contribution margin falls within his or her respective company, he or she can more accurately decide where to price company services, structure commissions and offer bonuses within the company workforce (BOTK, 2011, p.1). Methods for Improving the Contribution Margin In understanding the basic function of the contribution margin

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