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section as I am still not 100% confident with what I am submitting so any feedback on where
to improve is more than welcome.
Selling Price
$109.42
$120.90
$96.70
To identify the contribution margin, we can use the following formula depicted in Chapter 6
of the study guide (insert reference).
Contribution Margin = sales variable costs.
Using the information in the above table and the contribution margin formula, we can
identify the contribution margins for Caltex Australias various products as follows;
Unleaded fuel
Contribution Margin = $109.42 $75
= $34.42
Premium Unleaded Fuel
Contribution Margin = $120.90 - $80
= $40.90
Diesel Fuel
Contribution Margin = $96.70- $60
= $36.70
Discuss why the contribution margins for each of your firms three products might differ
or be similar.
The above hypothetical examples demonstrate how contribution margins can differ from one
another. One of the main reasons why contribution margins will differ is due to the variable
costs. Variable costs are not set costs, they vary with activity and will differ depending on a
number of factors which may include sales volumes, raw material availability etc.
Why might your firm produce a range of products with different contribution margins?
Why not only produce the product/service with the highest contribution margin?
To remain competitive in the industry, Caltex Australia is required to produce a range of fuels
(unleaded, premium unleaded & diesel) to sell to their customers. Cars are manufactured to
only run on one type of fuel i.e. unleaded petrol and the owner simply cannot decide they
want to put a different type of fuel i.e. diesel fuel into their car without serious consequences.
Whilst most cars were previously manufactured to take unleaded fuel only, more and more
car manufacturers are now offering their vehicles with an option of fuel type, seeing more
vehicles manufactured to require diesel fuel and even hybrid models requiring voltage power
for batteries as well as fuel. Caltex Australia should produce a range of products, regardless
of the contribution margins, to ensure they are able to service their customer base and supply
the array of fuel types that are required by their customers.
Caltex Australia could produce only the product with the highest contribution margin
however, this author believes that they would not be competitive in the market and would
lose customers if they were to only produce one fuel type i.e. diesel fuel only.
Identify one or more resource constraints your firm may face, and also perhaps market
constraints you feel may impinge on your firm.
Only 40% of fuel supplied by Caltex Australia is refined in Australia, the rest is refined
overseas and shipped to Australian shores (Caltex Australia reference). If there were any
interruption to the supply from overseas i.e. weather conditions or trade agreements, then this
could impact the demand and sales of the product. Further, fuel is transported around the
country via trucks and then the fuel is pumped into underground tanks ready for supply to the
general public through service stations (Caltex Australia reference), should any issues occur
with the trucks, this could also impede supply. Should the demand exceed the supply, Caltex
Australia will find this to have a rather negative affect on their firm. Further, fuel is traded in
US dollars, as they US dollar fluctuates, so will the price of the fuel. Whilst most fuel
suppliers will be in similar positions as Caltex i.e. also trading in US dollars, they must
remain competitive on price, especially since the time of the sale and purchase of fuel for
their competitors may occur at different times affecting again, the purchase price.
In what ways might these constraints be relevant when deciding whether or not (and
how much) of the three products or services of your firm that you have identified, your
firm should produce and sell?
References