3.1 Krakatau Steel’s Contribution Margin, Cost Structure and Sales

 

Contribution margin is a representation of generated incremental resources or money for each sold product/unit after deduction of variable costs of the company which is the Krakatau Steel Inc in this case. Computation of contribution margin can be done by subtraction of the selling price per unit with the variable cost per unit. This measure is also known as dollar contribution per unit. The measure is an indication of how the overall profit is contributed by a particular product. It also exhibits sales portion helping Krakatau steel to cover the fixed costs and potential of profit offered by steel products of the company. After the fixed costs are covered, the remaining revenues will generate the profit. (Team, 2021). By definition, the way to calculate the contribution margin is by using the following formula,

Contribution Margin (CM) = Sales Revenue – Variable Costs ………………………….. (1)

And in percentage terms, the CM ration can be defined as,

CM ratio = (Sales revenue - Variable Costs)/ Sales Revenue………………………….. (2)

Based on the above two formulas, in the calculation of contribution margin of Krakatau Steel Inc, the specific variables sales revenue and variable costs. The sales revenue is simply determined by multiplication of the total units of sales with the average price per unit (Campbell, 2021) of steel product in the case of Krakatau Steel Inc.      

Variable costs decrease and increase based on the levels of production and sales. On a variable costing of income statement, the template of this costs are labeled explicitly on the income statement. In usual, variable costs of any company in general income statement template can be determined by two general terms under sales revenue – cost of goods sold and variable SG&A (Selling, General and Administrative) expenses (Garcia, 2019). Based on financial information data of Krakatau Steel Inc available at (Karim & Tardi, 2021), the variable costs of Krakatau steel in June 2021 consisted of costs of revenues of 926.303 thousand USD, selling expenses of 20.369 thousand USD, general and administrative expenses of 45.185 thousand USD.   If we simplify the calculation to make it hypothetically simple. The net revenue becomes the sales revenue which has the value of 1055.277 thousand USD and other incomes from other sales are approximately neglected. Then the Krakatau steel’s Contribution margin and it’s percentage can be determined by the following calculation:  

CM      = sales revenue – variable costs

= 1055.277 – (926.303 + 20.369+45.185) = 63.42 thousand USD = n [(price/unit) –variable cost/unit] 

CM Ratio = n units x 100% x (sales revenue/unit – variable costs/unit)/(sales revenue/unit) = 6.00 %

Since it’s difficult to fine the total units of sold steel, if we let n be the the total sold units of steel, then the Contribution margin and it’s percentage of a unit of steel is CM / 1 unit = 63.42 / n thousand USD and it’s percentage is 6/n % .

Krakatau Steel’s income statement (Karim & Tardi, 2021)

The discussion ends up with the relationships between the Krakatau steel’s costs structures and sales. Cost structures can be defined as the sum of the variable and fixed costs (anonymous, 2020 ). Therefore, based on the above results, we can conclude that the n units of sold steel product is much greater than the previous years making the sales of Krakatau steel is greater than the cost structure making it able to generate a good profit for the period.

 

References

Team, T. I. (2021, September 13). Understanding contribution margins. Investopedia. Retrieved September 21, 2021, from https://www.investopedia.com/terms/c/contributionmargin.asp.

Garcia, M. (2019, August 27). How to determine variable costs from financial statements. Bizfluent. Retrieved September 21, 2021, from https://bizfluent.com/how-12009134-determine-variable-costs-financial-statements.html.

Campbell, P. (2021). Sales revenue formula: Calculate & Grow total revenue. Sales Revenue Formula: Calculate & Grow Total Revenue. Retrieved September 21, 2021, from https://www.priceintelligently.com/blog/revenue-formula.

Karim, S., & Tardi. (2021). Financial Reports / Statements of PT. Krakatau Steel. www.krakatausteel.com. Retrieved September 16, 2021, from https://www.krakatausteel.com/public/pdf/Financial%20Report%20KRAS%20June%202021.pdf.

Anonimous. (2020, March 23). Cost structure. Corporate Finance Institute. Retrieved September 22, 2021, from https://corporatefinanceinstitute.com/resources/knowledge/finance/cost-structure/.