Contribution Margin

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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.

BREAKING DOWN '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.

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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 >>
  4. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  5. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
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