A goal of successful business is to choose a course of action that will produce profitable results. In training departments, for example, directives to increase the bottom line can come as suggestions to eliminate certain programs, raise prices, reduce expenditures, or reduce quality and service components. Focusing solely on bottom line, however, might steer us in the wrong direction. The ability to calculate training's impact through contribution margin analysis can help us prove our programs' worth when faced with questions of viability.

Contribution margin is the excess of a product's selling price over its variable costs, or in our case, training's price over the variable costs associated with providing the program. While contribution margin has historically been used as a production environment tool, the same principles apply to training.

Fixed costs are not included in the contribution margin because they remain the same regardless of the length of training delivery. Using contribution margin analysis can shift an organizational focus to operational capacity utilization and can ultimately increase company efficiency. Therefore, training can be examined for how well it utilizes its resources rather than simply its responsibility to the bottom line.

Here are some guidelines for showing the contribution margin of training:

Identify the basic costs. Given the definition of contribution margin, the main point is to control variable costs. However, we must first classify training costs as fixed or variable. Fixed costs may include wages and fees of the provider. Variable costs may include training development (such as supplies, equipment, facilities, travel, and per diems), instructional material production and preparation, outsourced vendor costs (review and cost of purchase), and wage and benefit costs of the participants (which varies according to length of the training program).

 

Consider positive and negative contribution to organizational profitability as costs. In addition to the employee wages of trainers and participants, keep in mind that employees' time might be worth more than their compensation because they are expected to contribute to organizational profitability. So you'll need to consider the cost of disruption to productivity during training time. This is considered a variable cost because it increases with time away from the job and length of the training. Included in this lost contribution should also be the possibility of utilizing inexperienced personnel for productivity replacements. This may result in additional opportunity costs.

 

Consider opportunity costs. If training goes forward, the positive value of training is the opportunity cost of choosing long-term profitability and production goals. On the other hand, if training is cut, the positive value of the training is the opportunity cost of choosing short-term profitability and production goals. Choosing short-term or long-term profitability could affect the contribution calculation that training makes to the organization. More clearly defining these costs would result in the calculation of individual participant contribution to profit and the result of having inexperienced personnel replacing the trainee on the job and the benefits of the training.

For example, the process of calculating opportunity cost for having training is:

number of trainees x their average combined individual daily output x their combined contribution to profit percentage.

Add together the individual totals for each employee to provide a total contribution to profit. The contribution to profit percentage is determined like this:

organization's dollar profit projections total number of employees x 100 percent

Also, the total costs of errors made by inexperienced personnel would be subtracted from the total contribution to profit in order to obtain the total opportunity costs for choosing training. Ultimately, the cost of having training or not having training would be compared.

 

Contribution margin is an important concept, and one worth investigating to make sure you're best utilizing your training resources.

References

Carol A. Decker (1996). Determining the Cost Effectiveness of Training (A Self-Contained Instructional Module). Retrieved January 19, 2010, from ERIC.

Robert Spaller. (2006). "Leveraging contribution margin to gain a competitive advantage,"Journal of Performance Management,19(2), 45-57. Retrieved January 15, 2010, from ABI/INFORM Global.

ASTD Field Editor Carol Decker is an associate professor of business administration at Tennessee Wesleyan College in Athens, Tennessee; 1.423.746.5270; cdecker@twcnet.edu.

Hollie Floberg is an instructor of business administration at Tennessee Wesleyan College in Athens, Tennessee; 1.423.746.5319; hfloberg@twcnet.edu.

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