Originally Posted by Owen Stanley
Just out of interest, what would the Profit from Revenue figure be if GD cut QF Pilot's wages to those of
VB pilots?
C'mon mate, work it out and lets us know? Give us the benefit of your vast knowledge and intelligence. Could the answer make a fool of you?
Well let me answer that with a question.
If contribution margin is basically the difference between sales revenue and variable costs - what do you think the problem is with QANTAS? Are the costs too high or is the price too low?
Do you think GD should be trying to cut costs or sales revenue?
Here is what Professor John Shank said about it:
In 1989, John Shank (now Professor Emeritus at Dartmouth University) participated in the same panel discussion as Bob Kaplan. Professor Shank’s comments included the following:
I now believe at the broadest possible level that my [former] support for the contribution margin concept was misplaced and short-sighted. … I have been looking for some big successes from contribution margin analysis for 25 years, and I have come up empty. … In fact, it almost seems to be axiomatic, and let me call it Shank’s Axiom.
• If the problem is small enough so that contribution margin analysis is relevant then it can’t have a very big impact on a company.
• And if the possible impact in a decision setting is major, if it can really affect a company in a major way, then it’s silly to consider most of the factors to be fixed.
… Not only can I find no notable big successes from contribution margin concepts in the real world, I can point to many examples of what I consider to be notable failures from the application of the contribution margin mind-set. … I believe that more than one entire industry has competed itself to the brink of insolvency using contribution-based pricing.
- Journal of Management Accounting Research, 1990 (Fall), p. 17
Professor Shank refers to the trucking and airline industries in the years following their deregulation as two examples to illustrate his point. If an airplane is about to leave the gate with empty seats, the marginal cost of adding additional passengers to fill those seats is almost zero (a small increase in fuel consumption, and a few bags of pretzels, perhaps). Hence, an airline applying contribution margin analysis will make every effort to try to fill the plane to capacity, including offering deeply-discounted, last-minute fares. However, it is an open question as to whether the numerous bankruptcies and near-bankruptcies that have occurred in the airline industry in the years following deregulation resulted from a “contribution margin mind-set,” as Professor Shank suggests, or rather from the underlying economic characteristics of the industry. Given overcapacity in the industry, the fact that airlines have high fixed costs and low variable costs, and the fact that airlines have difficulty differentiating the services that they offer from their competitors, it is not clear that any one airline would have improved its situation using a full costing approach to pricing.