Barbie Dolls and Accessories
Why might Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls?
Contribution margin is the profit per unit of output; it is acquired by subtracting the unit variable cost from the unit cost of the product. Low contribution margin is experienced in products that are labour intensive while high contribution margin is for capital intensive products). In the above case, Barbie dolls have a lower profit as compared to the accessories of the dolls.
There are two ways of increasing a contribution margin: increasing the price or decreasing the variable cost. However if decreasing the variable cost is not possible, especially if the company is working on economies of scale, and increasing price will decrease sales then the company will try to make up for the lost profits in other sectors. This explains why Mattel set s lower contribution margin for the doll and a higher one for the accessories.
The contribution margin of the dolls is set lower by decreasing the price. This increases the sale of the dolls, however since all the dolls require accessories, it also increases the sale of accessories and the high contribution margin of the accessories makes up for the lower contribution margin of the dolls. This is a strategy, it ensures that the sales remain high and the profit margin does not decrease. At the end of the sale of the products only the total contribution margin will matter.
Total contribution margin= total revenue – total variable costs
The only reason as to why the stores are asking for sizable discounts is so that they can increase sale of the products and increase the profits they earn. The stores experience some cost even if they are seen as if they only put stuff on shelves and sell. One of the cost is inventory cost. Labour cost is also experienced as it requires labour to arrange, polish and pack the product. These costs can only be covered if the commodities are fast moving. Shelf space is also another issue: products without lucrative discounts do not move out of the shelves and can hold it for longer than anticipated.
Placing discount on a product is determined by the following factors:
- The cost incurred in the production, distribution and marketing of the product. This is basically the marginal cost of production. When the marginal cost is equal to the price no discount can be allowed however when the marginal cost is greater than the cost then there can be some discount allowed.
- Illiquidity of the unregistered stock – this mostly focuses on how easy the stock moves off the shelves.
- Changes in the structure and composition of ownership of the business
The legal process is first for the family to have the product patented for legal ownership, then enter into a contract with the stores that the more they sell the higher the discounts to be awarded. An increase in the sale will be analyzed in terms of volume.
The stores should be allowed to quote their own prices and then offer the discount on their own earning to increase the sale of their products. This is because when it comes to sale of products in a monopolistic market structure discounts, prices and packaging makes all difference. However strategy should be to real the consumers in when the product is still new and once a clientele base has been established use the initial price that was recommended.