Many companies calculate product profitability by subtracting a standard cost from the price and calling it a margin. But this calculated margin does not tell you how much money you are making. It tells you almost nothing about profit because the standard cost is made up from a lot of tenuous allocations.

So what’s a better way to look at this? We have had some success with calculating “contribution per minute.” This method gives you real information about how much money your products bring into the business in comparison with other products. It also works well for figuring out customer profitability.

What is contribution per minute?

Here’s the equation:
Contribution/Minute = (Financial Contribution / No. of Minutes through the Bottleneck Operation)

A simple example: If you have a product that sells for $1,000, minus the material cost of $400, and the cycle time through the bottleneck (or constraint) operation is 10 minutes, then the contribution/minute is = ($1,000 – $400)/10 = $60

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