InTents December/January 2020 - 52

business | tips and techniques

Figure 1: Contribution margin

Figure 2: Break-even point

Sales

Variable
Costs

$

$

Contribution
Break-Even Point

Contribution

Units

Loss

Profit

Fixed Costs

Units

Figure 1: Contribution margin represents the portion of sales revenue that is not consumed
by variable costs. Figure 2: Break-even point represents the volume of business required to
cover all costs but make zero in profit.

Contribution margin (CM), or dollar
contribution per unit, is the selling price
per unit minus the variable cost per unit.
"Contribution" represents the portion of
sales revenue that is not consumed by
variable costs and therefore contributes
to the coverage of ϐixed costs. Basically,
contribution margin is the money that is
left over, to cover ϐixed costs and yield a
proϐit, after deducting variable costs from
revenue. This concept is one of the key
building blocks of break-even analysis.
(See Figure 1.)
Break-even point (BEP) represents
the sales amount-in either unit
(quantity) or revenue (sales) terms-
that is required to cover total costs; that
is, both ϐixed and variable costs to the
company. Basically, BEP is the volume of
business required to cover all costs but
make zero in proϐit. (See Figure 2.)
Why are these concepts important to
job costing and decision-making with
regard to your tent rental company?
Knowing your average contribution
margin and break-even point will allow
you to determine if a particular job will
contribute to your overall proϐitability and
how aggressive you need to be on pricing
to be competitive yet proϐitable.
52 intents

dec 2019-jan 2020

Other condsiderations
In addition to proϐitability from cost
analysis, there are other factors to
keep in mind when you are considering
whether to take on a job. Here are a few:
* Opportunity costs.
* Learning curves and increasing
efϐiciency.
* Cash ϐlow. Will you require a
deposit and payment in full before
proceeding with the project?
* Customer relationships. If the
project under consideration is with
an established customer, do you
risk losing the customer if you don't
accept the project? If the project
is with a new customer, does the
customer represent an opportunity
for increased sales growth?
* Installation schedule. Does the
project have time restrictions on
the setup and tear down, or is the
schedule ϐlexible?
* Weather. Are there weather constraints to consider with regard to
the event date?
* Season. Will the installation happen in your high season or slow
season? In the slow season, should
you consider taking on a job with a
lower contribution margin because
it will contribute to cash ϐlow? In
the busy season, will you have to
factor in the cost of overtime pay?
* Timeline. For example, is this project being bid on so far in advance
that you don't yet know about the
jobs that will come in from regular
customers during the same period?
In part 2, we'll apply these concepts to
two job costing methods.
Alexandre Renaud is international sales manager
for Fiesta Tents Ltd., Saint-Laurent, Quebec,
Canada. Barbara Scull, CPA, is president of The
Alleen Company, Cincinnati, Ohio. Renaud and
Scull led an educational session at Tent Expo
2019 on job costing for tent rental companies.



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