example An of three variable costs could be paper goods, food, and sales tax. Three fixed costs
could be franchise fee, rent and equipment and furniture. Examples of mixed costs might be a
franchise fee or online advertizing if they include a fee and commission.
The restaurant would be willing to sell a larger drink for a few cents more than a small one
because the contribution margin for a cup of soda is extremely high. In other words the
change in variable costs of the soda is probably only a fraction of a cent higher. That means any
extra money paid by the customer is close to 100% profit minus any fixed costs which are
usually dont change between a big cup and a small one.
The same reasoning applies to selling a value meal. Consider a burger, fries and a coke. The
two items with the highest contribution margin are the fries and coke. Companies to try create a
sales mix by selling more products that have higher profit margins. A value meal is aimed at
doing just that. A person comes into a store willing to pay $3.50 for a burger but not $7.50 for
the burger fries and soda ($2.00 each). Providing a value meal of say $5.50 would give the
customer an incentive to buy the coke and fries which have a higher contribution margin than the
burger. Even though the store would normally make $1.90 profit on a cup of $2 soda and maybe
$1.50 on an order of $2 fries and the value meal only gives you $2 for both together. The $2
from the coke and fries will give the store an extra $1.40 profit while the burger might only give
a total of $.75-$1.00. By creating a value meal the customer will spend a little bit more money
than usual but the company will realize a much higher profit percentage.
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