The contribution margin is a calculation companies use to decide the profitability of specific products.
- The contribution margin addresses the portion of a product's sales revenue that isn't spent by variable costs, thus adds to covering the company's fixed costs.
- Low contribution margins are available in labor-escalated companies with not many fixed expenses, while capital-concentrated, industrial companies have higher fixed costs and accordingly, higher contribution margins.
- The concept of contribution margin is one of the fundamental keys in break-even analysis.
What Is the Difference Between Contribution Margin and Profit Margin?
Profit margin is the amount of revenue that remaining parts after the direct production costs are deducted. Contribution margin is a measure of the profitability of every individual product that a business sells.
What Is a Good Contribution Margin?
The best contribution margin is 100%, so the nearer the contribution margin is to 100%, the better. The higher the number, the better a company is at covering its overhead costs with money close by.
How Do You Calculate Contribution Margin?
Contribution margin is calculated as Revenue - Variable Costs. The contribution margin ratio is calculated as (Revenue - Variable Costs)/Revenue.