Contribution margin

Definition

Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. It is used to cover fixed expenses and contribute to profits.

5 Must Know Facts For Your Next Test

1. Contribution margin per unit equals the selling price per unit minus the variable cost per unit.
2. The contribution margin ratio is calculated by dividing the contribution margin by total sales revenue and is expressed as a percentage.
3. Total contribution margin is the sum of the contribution margins of all units sold.
4. A higher contribution margin indicates a more profitable product or service, assuming fixed costs remain constant.
5. Understanding contribution margin helps in making decisions about pricing, product lines, and optimizing production.

Review Questions

• How do you calculate the contribution margin per unit?
• Why is the contribution margin ratio important for managerial decision-making?
• What does a higher total contribution margin indicate about a company's products?

Related terms

Fixed Costs: Costs that do not change with the level of production or sales.

Variable Costs: Costs that vary directly with the level of production or sales volume.

Break-even Point: The level of sales at which total revenues equal total costs, resulting in zero profit.