AI Teaching Lab

Diagnose: What does an extra order contribute?

Harbour Dispatch is a fictional order-fulfilment business. It charges €50 per completed order, spends €30 on variable processing for each one, and carries €12,000 of fixed cost a month. Before anything else, keep three numbers apart: revenue, contribution and operating profit.

A new order is not €50 of profit. The €30 variable cost comes off first. What remains goes toward fixed costs, and once those are covered it becomes operating profit.

Study question: Before fixed costs, what does one additional €50 order contribute after its €30 variable cost?

Understand: Follow each euro from revenue to profit

Contribution per order = selling price − variable cost per order. Total contribution = contribution per order × completed orders. Operating profit = total contribution − fixed cost.

At the baseline, 800 orders bring in €40,000 of revenue against €24,000 of variable cost. The €16,000 of contribution covers the €12,000 fixed cost and leaves €4,000 of operating profit. Subtract fixed cost once, not once per order.

When contribution per order is positive, break-even is fixed cost divided by contribution per order. Orders come in whole units, so round up: €12,000 ÷ €20 = 600 orders.

The arithmetic assumes one homogeneous service, a constant price and unit variable cost, and fixed cost that holds within the relevant range. All orders are completed in the period. It leaves out taxes, financing, inventory movements and the timing of cash collection, and operating profit is not cash flow.

Predict: A 10% price cut does not mean a 10% margin cut

The operations manager proposes cutting the price from €50 to €45. Variable cost stays at €30 per order. Before touching volume, predict what happens to contribution per order.

Watch the denominator. The €5 cut is 10% of the old €50 price, but the old contribution was only €20. A percentage change in price is not the same as a percentage change in contribution.

Study question: With variable cost unchanged, how does contribution per order change when price falls from €50 to €45?

Experiment: Test the operating model

Change the selling price, variable cost, fixed cost and completed orders. Every figure is recalculated by the accounting engine; nothing here is generated. Move one input at a time, then use the presets to compare the baseline with the discount proposal.

Try a €30 price against €30 variable cost: extra volume adds no contribution, so the fixed cost can never be covered. Then try €25: every additional order adds €5 to the loss. More volume does not rescue a negative contribution.

Set fixed cost to zero as a separate check. With positive contribution, zero orders breaks even and any volume is profitable. With zero contribution, every quantity breaks even. With negative contribution, only zero orders breaks even.

Capacity is 1,200 orders a month. Above that, the numbers are the formula extrapolating, not a forecast, because expanding capacity would change costs. Currency inputs are rounded to cents, half-cent ties rounded away from zero.

Study question: At a €25 price, €30 variable cost and positive fixed cost, what does each extra order do?

Decide: Would you accept the discount proposal?

Compare two plans. Keep the price at €50 and complete 800 orders, or cut to €45 and complete a forecast 950 orders. Either way, variable cost is €30 per order, fixed cost is €12,000, and capacity is 1,200 orders.

Write a short memo: profit under each plan; the minimum whole-order volume at €45 that matches the baseline profit; your recommendation under the 950-order forecast; and one demand, capacity or cost assumption that would change it.

The three numerical answers are checked against the accounting engine. The memo itself is not auto-graded, so judge it against the rubric and the self-review checks. Nothing is sent to a server.

Summarize: Explain the decision, not just the chart

Contribution is what is left after variable costs. Profit is what is left after fixed costs as well. Break-even means zero profit; it is not the volume needed to match an already profitable baseline.

The discount earns less contribution on every order, old ones included. Under the 950-order forecast it raises activity but lowers operating profit. That conclusion rests on the demand forecast and the cost and capacity assumptions; it is not a general verdict on discounting.

A good memo names the alternatives, compares like-for-like totals, separates forecasts from facts, and flags the assumption that would flip the answer. In a real business you would look at capacity, service quality and demand response before acting.

Check understanding: Transfer the reasoning to a new decision

Reconstruct the baseline break-even from the cost structure, then pick the most defensible way to compare operating plans. Finishing records progress in this browser only; it is not a course grade or a certificate.

Study question: Which statement is the most defensible operating-decision rule?