1. PROMISE Contribution Margin Analysis July, 2011

2. The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS  Key Financial Management Concept / Tool  Higher Company Profitability  Better Pricing Decisions  Improved Strategic Thinking  Foundation for Business / Financial Modeling  Simpler !!  Teachable !! Contribution Margin Analysis - WHY ?

3.  Acme Manufacturing - Gross Profit: 25% of Revenues - Overhead (SG&A Expenses): $1 MM  What is the Breakeven Revenue Level ? Calculating Breakeven Volume The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

4.  Acme Manufacturing - Variable Contribution Margin: 33% of Revenues - Fixed Overhead (SG&A Expenses): $ 1.2 MM  What is the Breakeven Revenue Level ? Calculating Breakeven Volume The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

5.  Analyze FIXED vs VARIABLE Expenses  Improve CAPACITY UTILIZATION  Increase Total Company PROFITABILITY Contribution Margin Analysis – WHAT ? The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

6.  Increase Total Company PROFITABILITY  Strategic Use of DISCOUNTED PRICING with Select Customers “Any incremental revenue exceeding the Variable Cost of delivering a product or service makes a contribution toward covering total company Fixed Expenses.” Contribution Margin Pricing – WHAT ? The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

7. Contribution Margin Analysis The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS  What are some Fixed Expenses that might be in the Cost of Goods Sold section of your P&L ?  What are some Variable Expenses that might be in the SG&A section of your P&L ?

8.  How can Capacity be defined ? - Plant or Warehouse Throughput - Owner’s Available Time - Customer Service: Maximum Incoming Calls - Salespeople: Maximum Face-to-Face Meetings - Rooms Available  What is a realistic target for Capacity Utilization ? Contribution Margin Analysis The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

9.  Seasonal Retail Sales Discounts  Hotels.com  Airlines  Where else ? Contribution Margin Analysis – WHERE ? The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

10.  Full / Absorption Accounting allocates Fixed Overhead Expenses to Divisions, Products, Jobs, Locations, Sales People, Estimates, Quotes, etc…..usually on the basis of revenues.  Based on Prior Period Results.  Misleading Assessments of Unit Profitability  Lost Business and Lower Total Company Profit Comparison to Full / Absorption Accounting The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

11.  Angelo imports light bulbs - Needs Domestic Supplier  Supreme manufactures light bulbs - Has Excess Capacity Supreme Angelo Variable Raw Material $ 0.05 N/A Variable Labor 0.10 N/A Allocated Fixed Overhead 0.08 N/A Total Cost $ 0.23 $ 0.24 Regular Selling Price 0.30 0.30 Gross Profit 23% 20% Discount Price to Angelo 0.22 N/A Contribution Margin 32% 27%  $ 15 MM 5 year Supply Agreement adds $4.8 MM to Supreme Profits Classic Example - Contribution Margin Pricing The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

12. Critical Requirement - Excess Capacity Key Question - Can we add volume using Contribution Margin Pricing without needing to increase Fixed Expenses ? Strategic Question for Supreme - Would pricing at $0.13 ever make sense ? - How about $0.09 ? Can Direct Labor ever be considered Fixed ? Capacity Utilization The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

13. Contribution Margin Pricing (CMP) The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS Max Capacity Utilization Use of CMP Min

14. Contribution Margin Pricing (CMP) The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS Max Capacity Utilization Use of CMP Min

15. Contribution Margin Pricing (CMP) The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS Fixed Expenses Revenues Max Profit CMP

16. Situation - Acme Manufacturing generated $1 MM in revenues last year, selling 500 units at $2000 each, resulting in a Gross Profit of 40%. However, Acme showed zero net profit as SG&A expenses were $400,000.  Coyote Distributing is interested in buying 100 units at $1500 each, well below Acme’s regular selling price.  Should Acme accept the purchase offer ? Contribution Margin Pricing - Example The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

17.  What were your revenues in 2010 ?  What were your fixed expenses in 2010 ?  What were your variable expenses in 2010 ?  What was your Contribution Margin % ?  What was your Breakeven Revenue ?  What is the Revenue Level Needed to Generate an Extra $100,000 in Company Net Income ?  What is your current Capacity Utilization ?  What opportunities do you have to employ Contribution Margin Pricing ? Contribution Margin Analysis The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS

18. Applications  Selling to a New Customer  Selling More to a Current Customer  Selling to a Competitor  Smoothing Seasonal Sales Variations  Quoting & Estimating  Increasing Capacity Utilization  Short Term / Long Term Pricing  Buying From a Current or New Supplier Contribution Margin Analysis The Next Level is Closer Than You Think Renaissance E XECUTIVE F ORUMS