How do I calculate the Minimum Labor Cost, Contribution Margin $, and Contribution Margin %

Determining Margin Potential

Finding the maximum amount of profit you can generate from one unit of a product is called Margin Potential. This is useful for a company when making a decision about whether to go into production or not. In its simplest form, you can calculate Margin Potential as:

Margin Potential = Maximum Price - Minimum Unit Costs

Price

Use the information table below to find the maximum price that customers deem acceptable. You can find this in the Customer Buying Criteria for each segment.

Minimum Material Cost

Calculate the minimum Material Cost per segment using the following equation and table below:

Minimum Material Cost = [(Lowest Acceptable MTBF * 0.30) / 1000] + Trailing Edge Position Cost

Minimum Labor Cost

Calculate the minimum Labor Cost for each segment. Assume a base labor cost of $11.20 ($11.20 is a rough estimate of labor cost used solely to illustrate the Margin Potential Concept). Minimum Labor Cost = [$11.20 - (1.12 * Automation Ratings Below)] + 1.12

Customer Segment Information
Segments	Trailing Edge Material Cost	Leading Edge Material Cost	Lowest Acceptable MTBF	Maximum Price	Automation Level (out of 10)
Traditional	$3.80	$7.80	14,000	$30.00	8.0
Low End	$1.00	$5.00	12,000	$25.00	10.0
High End	$6.00	$10.00	20,000	$40.00	5.0
Performance	$4.50	$8.50	22,000	$35.00	6.0
Size	$4.50	$8.50	16,000	$35.00	6.0

Product	Name	Maximum Price	Minimum Material Cost	Minimum Labor Cost	Contribution Margin $	Contribution Margin %
Traditional	Cake	30	8	?	?	?
Low end	cedar	25	4.6	?	?	?