Question

	2016	2017	2018
Sales	$            135,987	$                  177,866	$               232,887
Variable expenses
Cost of sales	88,265	111,934	139,156
Fulfillment	14,095	20,199	27,222
Marketing	7,233	10,069	13,814
Technology and content	8,042.50	11,310	14,418.50
Total variable expenses	117,636	153,512	194,610
Contribution margin	$              18,351	$                     24,354	$                 38,277
Fixed expenses
Fulfillment	3,524	5,050	6,805
Technology and content	8,042.50	11,310	14,418.50
General and admin	2,432	3,674	4,336
Other	167	214	296
Total fixed expenses	14,165	20,248	25,856
Operating income	$                 4,186	$                       4,106	$                 12,421
CM Ratio	0.13495	0.13692	0.16436
Breakeven Dollar Sales	$ 104,967.8579	$       147,878.1625	$    157,314.2805
Margin of Safety (Dollars)	$              31,019	$                     29,988	$                 75,573
Safety margin % of sales	22.810%	16.86%	32.45%

based on the information above - Discuss the trend in the contribution margin (dollars), and likely reasons for this trend. What is the trend in the contribution margin ratio, and what are likely reasons for the changes in this ratio? What insight does this ratio provide for analyzing the trend in the dollar magnitude of the contribution margin from question 2? analyze the margin of safety?

Answer 1

From the above information, we can see that contribution margin is increased in the year 2018. It was almost in line 2017 but there is a sharp increase in the year 2018. The increase in contribution margin is due to increase in sales and decrease in variable expenses. Variable expenses as a % of sales is decreased to 83% Vs 86% in 2017.

The increase in contribution margin indicates that the Company has enough margin to cover fixed expenses. After covering up fixed expenses, its operating profit can go up. From the above question we can see that Company's operating profit has increased by 202% in 2018. Fixed expenses have not increased to same level and margin is high.

Margin of safety indicates that the sales are above fixed expenses of the Company. With increase in sales and lower variable cost, margin of safety has also increased. Margin of safety has increased by almost in 100% in the year 2018.