The variable margin rate allows you to convert changes in sales into changes in profit so you can evaluate many types of marketing decisions. The calculation is straightforward:
Change in profit = Change in sales x Variable margin rate
So, for example, if you think a promotion will increase sales of your product or service by $100,000 and your variable margin rate is 32 percent, then you would expect your contribution to increase by $32,000. If the fixed cost of the proposed promotion is $10,000, then you may want to go ahead as your net profit will increase $22,000.
You can use this approach to evaluate many marketing decisions such as advertising, sales promotion, and personal selling.
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