Automation, a special order, an ad campaign — decide on contribution margin
◈ 10 cardsEvaluate a swap of variable for fixed cost by comparing break-even and income at the expected volume and finding the indifference volume, and decide a special order or a fixed spend on incremental contribution margin.
Buy the machine?
An automated snowmaking system would cut Northlake Nordic Centre Inc.'s variable cost by 3.00 a skier-day (less grooming fuel and labour) — from 9 to 6 — and add 63,000 a season of lease and amortization, taking fixed costs from 315,000 to 378,000. Two cost structures, same price:
| Current | Automated | |
|---|---|---|
| CM per skier-day | 21 | 24 |
| Fixed costs | 315,000 | 378,000 |
| Break-even | 15,000 | 378,000 ÷ 24 = 15,750 |
| OI at 20,000 skier-days | 105,000 | 24 × 20,000 − 378,000 = 102,000 |
At the expected 20,000 skier-days the machine loses 3,000 a season, and it raises break-even. But its line is steeper — every skier-day now contributes 24 — so somewhere above 20,000 it overtakes. The indifference volume is where the two profit equations are equal:
Below 21,000 skier-days the current structure earns more; above it, automation does — at 25,000, automated income is 24 × 25,000 − 378,000 = 222,000 against 210,000. So the answer is a condition, not a yes: automate only if the owner expects more than 21,000 skier-days. The trade also changes the risk. Higher fixed costs mean a higher break-even and bigger swings — a 10 % fall in volume costs the automated Northlake more than the current one — which is a reason to decline if snow is unreliable.
A special order
A school board offers 1,500 midweek skier-days at $18 — below the $30 list. Full cost per skier-day at 20,000 is 9 + 315,000 ÷ 20,000 = 24.75, and an owner who compares 18 with 24.75 refuses. That is the per-unit trap of L9.1 again: the 315,000 is paid whether the school comes or not. The order's effect is its incremental contribution margin:
Accept — on two conditions that must be stated: the midweek capacity is idle (no regular skier is turned away), and the $18 does not leak into regular pricing (no season-pass holder learns of it and demands the same). Without either, the incremental contribution is not the whole story.
A campaign
A 12,000 radio campaign is expected to bring 800 more skier-days. Compare the fixed spend with the contribution it buys:
Go ahead. The wrong comparison is 12,000 against the revenue (800 × 30 = 24,000 — too optimistic) or against the variable cost (800 × 9 — meaningless). The campaign needs 12,000 ÷ 21 = 572 skier-days to pay for itself; 800 is comfortably above that.
The rule
Every "should we" in this course is decided the same way: the change in contribution margin less the change in fixed costs. Revenue alone overstates; full cost per unit double-counts fixed costs that do not change; and the answer always carries its condition — the volume, the idle capacity, the no-leak assumption.