Contribution Margin
Contribution margin measures how much revenue from sales contributes to covering fixed costs and generating profit after variable costs have been deducted. It is calculated by subtracting all variable costs (like materials and labor) from sales revenue. For example, if a product sells for $100 and its variable costs are $60, the contribution margin is $40. This amount helps businesses understand how much money is available to pay fixed costs, such as rent and salaries, and ultimately contributes to profit. A higher contribution margin indicates better profitability potential.
Additional Insights
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Contribution margin represents the amount of money left from sales revenue after covering variable costs, such as materials and labor. It indicates how much each unit sold contributes to covering fixed costs (like rent and salaries) and generating profit. For example, if a product sells for $50 and its variable costs are $30, the contribution margin is $20. This means each sale helps contribute $20 towards covering fixed expenses and profits. Understanding contribution margin helps businesses make informed decisions about pricing, production, and sales strategies.