Definition
Contribution margin shows how much each sale contributes to covering fixed costs and generating profit. It's crucial for break-even analysis and pricing decisions. Products with higher contribution margins are generally more profitable to emphasize.
Formula
Contribution Margin = Revenue - Variable Costs; CM Ratio = CM / Revenue
Example
A product sells for $100 with $60 variable cost. Contribution margin is $40 per unit (40% ratio). This $40 covers fixed costs first, then becomes profit.
FAQ
What is Contribution Margin?
Revenue minus variable costs, available to cover fixed costs and profit.
How do you calculate Contribution Margin?
A common formula for Contribution Margin is: Contribution Margin = Revenue - Variable Costs; CM Ratio = CM / Revenue
Why is Contribution Margin important?
Contribution Margin helps investors evaluate profitability and make more informed decisions.