Accepting Proposals with Positive Contribution Margins

A bird in the hand is worth two in the bush, as the common expressions goes, but is that true in all cases. It is common in small and medium-sized businesses to accept proposals from the sales force that offer positive contribution margin, regardless of other operational aspects. In effect, these orders cover variable costs and are at production / sales levels above break-even. That is, fixed costs are covered. However, it is possible to create problems by accepting all orders are above break-even, without thinking about the big picture. For example, the pricing strategy (such as a market penetration strategy) may set the quoted price far above the level of positive contribution. In this case, sales management and company management will want to be judicious with respect to the price they accept in the case of volume discounts. Why? It is possible that large quantity orders at higher prices (and therefore higher contribution margins) may be in the sales pipeline that will be far more profitable for the company. It is possible that excess capacity could be used fulfilling orders with lower profitability. Simply accepting orders priced above break-even does not maximize profitability without some careful sales management.