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Methodology

Product Profitability Diagnostic methodology

Separate contribution, avoidable profit and fully allocated profit for one product.
Duc Nguyen X.By Duc Nguyen X.· Founder, Margin101Last reviewed: View update historyMethodology

Educational only: Business decision support, not accounting, tax or legal advice.

Privacy: Calculations run locally; Margin101 does not receive your commercial inputs.

Update policy: Reviewed when formulas or official dependencies change.

Scope: Market-neutral small-business planning using your own assumptions.

1. Formulas and units

Contribution Ex Tax
contributionExTax = product revenue − variable costs

Where

productRevenueExTax
Product revenue (currency units/planning period, ex tax)Source: Business record
productVariableCostsExTax
Product variable costs (currency units/planning period, ex tax)Source: Business record
contributionExTax
Contribution Ex Tax (currency units, ex tax)Source: Calculated output
Avoidable Profit Ex Tax
avoidableProfitExTax = contribution − avoidable fixed costs

Where

productAvoidableFixedCostsExTax
Avoidable fixed costs (currency units/planning period, ex tax)Source: Business record
contributionExTax
Contribution Ex Tax (currency units, ex tax)Source: Calculated output
avoidableProfitExTax
Avoidable Profit Ex Tax (currency units, ex tax)Source: Calculated output
Fully Allocated Profit Ex Tax
fullyAllocatedProfitExTax = avoidable profit − allocated shared costs

Where

allocatedSharedCostsExTax
Allocated shared costs (currency units/planning period, ex tax)Source: User assumption
avoidableProfitExTax
Avoidable Profit Ex Tax (currency units, ex tax)Source: Calculated output
fullyAllocatedProfitExTax
Fully Allocated Profit Ex Tax (currency units, ex tax)Source: Calculated output
Contribution Margin
contributionMargin = contribution / product revenue

Where

productRevenueExTax
Product revenue (currency units/planning period, ex tax)Source: Business record
contributionExTax
Contribution Ex Tax (currency units, ex tax)Source: Calculated output
contributionMargin
Contribution Margin (decimal rate)Source: Calculated output
Fully Allocated Margin
fullyAllocatedMargin = fully allocated profit / product revenue

Where

productRevenueExTax
Product revenue (currency units/planning period, ex tax)Source: Business record
fullyAllocatedProfitExTax
Fully Allocated Profit Ex Tax (currency units, ex tax)Source: Calculated output
fullyAllocatedMargin
Fully Allocated Margin (decimal rate)Source: Calculated output

Money inputs and outputs use the currency selected in the scenario without changing the canonical methodology. Rates, margins, utilisation and buffers are entered as percentages and converted to decimal values for calculation.

2. Worked example

Input assumptions

The worked rows below come directly from the registered engine and visible default fixture.

Calculation and outputs

Example

The worked rows below come directly from the registered engine and visible default fixture.

Contribution Ex Tax
130,000 currency units
Avoidable Profit Ex Tax
80,000 currency units
Fully Allocated Profit Ex Tax
55,000 currency units
Contribution Margin
52%
Fully Allocated Margin
22%

The exact engine-derived outputs are shown in the labelled rows below.

Interpretation

Fully allocated product profit keeps contribution, avoidable fixed costs and shared allocations visible as separate decision layers.

3. Validation and boundary checks

  • All inputs must be finite and within the visible boundaries.
  • Costs, revenue and contribution use one consistent ex-tax basis and planning period.
  • Whole-unit thresholds round upward only where the named engine formula requires it.

4. Assumptions and source classification

  • All prices, costs, demand limits and capacity values are user-supplied records or explicit scenarios.
  • Allocated costs remain visible and separate from avoidable costs.
  • The global workflow infers no market benchmark, policy threshold or future demand.

This diagnostic has no current policy-data dependency. Its commercial assumptions are user supplied. Registered family-level regression suites exercise the shared business-logic engine and worked-result reconciliation.

5. Limitations

  • The model does not forecast demand, implementation timing, service quality or strategic fit.
  • It does not replace accounting, tax, legal or financial advice.

This is educational decision support, not tax, accounting, legal or financial advice. Check the treatment of your actual transactions under the rules that apply to your business and seek qualified advice where appropriate.

6. Update and evidence policy

Registered family-level suites test formula invariants and example reconciliation; the release ledger records that coverage without claiming a separate oracle for every line of public copy. Optional market-context sources are reviewed through their registered dependency and become visible only in that selected context. Commercial inputs remain user-supplied because they vary by business and contract.

Change history

  1. : Initial public release of the planner and methodology after pre-launch calculation, content, source and interaction review.

Related reading

Guides to interpret the decision and its assumptions.

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