Contribution Margin

AAA

DEFINITION of 'Contribution Margin'

A cost accounting concept that allows a company to determine the profitability of individual products.

It is calculated as follows:

Product Revenue - Product Variable Costs
Product Revenue


The phrase "contribution margin" can also refer to a per unit measure of a product's gross operating margin, calculated simply as the product's price minus its total variable costs.

INVESTOPEDIA EXPLAINS 'Contribution Margin'

Consider a situation in which a business manager determines that a particular product has a 35% contribution margin, which is below that of other products in the company's product line. This figure can then be used to determine whether variable costs for that product can be reduced, or if the price of the end product could be increased.

If these options are unattractive, the manager may decide to drop the unprofitable product in order to produce an alternate product with a higher contribution margin.

RELATED TERMS
  1. Variable Cost Ratio

    Variable costs expressed as a percentage of sales. The variable ...
  2. Margin Creep

    Margin creep refers to the behavior of a company that chooses ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  4. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  5. Revenue

    The amount of money that a company actually receives during a ...
  6. Income Statement

    A financial statement that measures a company's financial performance ...
RELATED FAQS
  1. What is the difference between operating margin and contribution margin?

    Operating margin is one of the three main measures of overall profitability for a company that analysts consider, whereas ... Read Full Answer >>
  2. What is the difference between gross profit margin and contribution margin?

    Gross profit margin is an overall measure of the total profit on sales that a company makes after subtracting costs directly ... Read Full Answer >>
  3. How rapidly can expanding sales reduce a firm's earnings?

    In order to operate and make money, a company must spend money. Revenue - the dollar amount of sales - can be seen on a company's ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  3. Economics

    What is Value Added?

    Value added is used to describe instances where a firm takes a product and adds a feature that gives customers a greater sense of value.
  4. Economics

    Understanding Specialization

    Specialization is when a person, business, or region focuses their productive efforts on a smaller subset of a larger system for a competitive advantage.
  5. Economics

    What is the Breakeven Point?

    In general, when gains or revenue earned equals the money spent to earn the gains or revenue, you’ve hit the breakeven point.
  6. Economics

    Bulk Shipping Companies Struggle As Markets Soften

    The "soft" dry bulk shipping market that confronts shipping companies is a result of lower demand from China, and an excessive amount of bulk ships.
  7. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  8. Investing

    Can You Bank on BofA in 2015 (and Beyond)?

    An in-depth look at BofA, one of the most widely-traded stocks on Wall Street.
  9. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  10. Professionals

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center