The contribution margin calculation basis
In order to calculate the contribution margin in arable farming, it is important to consider some fundamental aspects first. Most notably, that the crops produced on farms have different uses. Although they are primarily produced for commercial purposes, they may also have an internal purpose on the farm, for example in livestock farming, where this is very often the case. This results in marketable and non-marketable outputs, with the latter requiring specific evaluation. As a matter of course, the precise structure of each enterprise should be determined for calculation purposes. Individual outputs must be evaluated and variable costs must be classified and recorded. The contribution margin is then a result of the difference between individual outputs and variable costs. Sales revenues, non-marketable outputs, direct payments and withdrawals in kind are all classed as individual outputs. Variable costs include seed, fertiliser, plant protection products, insurance and machinery, among others.
To calculate the contribution margin in livestock farming, the type of animals kept and the feed used are important. Roughages are not suitable for long-distance transportation due to their unfavourable ratio of nutrient content to volume. As such, they are often produced internally, for example on cattle farms. The resulting farm type is described as a land-dependent livestock farm. Non-land-dependent livestock farms such as pig and poultry farms, on the other hand, use commercial feeds. In order to calculate feed costs for contribution margin calculation purposes, the market price is taken into account for commercial feed. This way, whether the farm produces fodder itself or buys it in is unimportant. However, it is important to know whether you’re using the purchase price (including delivery) or the farmgate price for the calculation. Non-marketable, home-made fodder is generally incorporated into the calculation as an associated marginal cost of production. In addition, the variable costs are also subtracted from the individual outputs. The costs can all be broken down by a Herd Management software programme. The costs may include items such as stock replacements, feed, veterinary care, insemination, general husbandry and machinery. It is equally important to know whether the farm uses its own offspring for production. This line item must also be evaluated for the contribution margin calculation in order to compare individual enterprises or businesses against one another and to develop a targeted business strategy.