How to Compare Matrix Volume & Margin
A decision matrix can help business owners and managers evaluate the various factors that go into making strategic choices. The management team must first choose a set of criteria to consider during the decision-making process and then evaluate each option based on those criteria. Decision matrices are particularly helpful when teams must choose one option out of many, or when there are several different criteria for a team to bear in mind. For companies that sell products, evaluating and comparing various volume and margin choices are important steps when making strategic decisions.
Other People Are Reading
Instructions
-
-
1
Calculate your fixed and variable costs that you can assign to the project under consideration. Fixed costs include items like payments for rent, purchases of machinery, and construction costs: no matter how few or many items you sell, those costs will remain constant. Variable costs apply to each unit produced and include labor wages, manufacturing materials and utilities, among others. Then, pick an arbitrary sales target.
-
2
Create a decision matrix that sets a particular target for margin per item, and another target for total sales volume. Decide which is more important for your firm: for example, margin will be more important if the bottom line is the main concern for this project, whereas if you're looking to make a huge leap in market share with this project, you might sacrifice margin a bit to boost market presence with higher sales at a cheaper cost.
-
-
3
Calculate needed volume and margin totals to meet the different goals you've set. For example, if you want to sell televisions for $650 while profiting $100 per television that you sell, and your fixed costs are $400,000, and variable costs are $150 per television, you have to figure out your needed volume total. Subtract your variable costs from your price, leaving $550. Fixed costs would need to be at maximum $400 per set, which means you would need to sell at least 1,000 sets to divide your fixed costs enough to make your margin goal.
-
1
