Contribution Margin

Loading the player...

What is '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.

RELATED TERMS
  1. Variable Cost Ratio

    Variable costs expressed as a percentage of sales. The variable ...
  2. Marginal Revenue Product - MRP

    The change in revenue that results from the addition of one extra ...
  3. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  4. Adjusted Gross Margin

    A calculation used to determine the profitability of a product, ...
  5. Marginal Cost Of Production

    The change in total cost that comes from making or producing ...
  6. Marginal Social Cost - MSC

    The total cost to society as a whole for producing one further ...
Related Articles
  1. Fundamental Analysis

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  2. Entrepreneurship

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  3. Term

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  4. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  5. Investing

    Variable Costs

    Variable costs go up when a company produces more goods or services, and go down when it produces fewer goods or services. This is compared to fixed costs, which do not change in proportion to ...
  6. Stock Analysis

    Today's Major Services Sector Movers

    On a good day for the market, the Nasdaq is up 2.4%, the S&P 500 has risen 1.9% and the Dow has moved up 1.7%. The Services sector (IYC) is up 1.7%, underperforming the market overall. The ...
  7. Investing

    What's Behind the Decline in Productivity Numbers? 

    There are several theories and hypotheses about low productivity numbers in the American economy. This article examines some of them.
  8. Economics

    Understanding Product Differentiation

    Product differentiation is a marketing tool companies use to distinguish their products or services from the competition’s.
  9. Investing

    What's Marginal Revenue?

    In microeconomics, marginal revenue is the additional revenue generated by increasing sales revenue by one unit. Another way of saying this is that the marginal revenue is the revenue generated ...
  10. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
RELATED FAQS
  1. What is the difference between gross profit margin and contribution margin?

    Learn the difference between gross profit margin, an overall profitability metric analysts use, and contribution margin, ... Read Answer >>
  2. How is the marginal cost of production used to find an optimum production level?

    Understand more about production cost calculations, and specifically how the marginal cost of production is used to determine ... Read Answer >>
  3. How do fixed and variable costs each affect the marginal cost of production?

    Learn about the marginal cost of production, how to calculate the marginal cost, and how fixed costs and variable costs affect ... Read Answer >>
  4. How is marginal revenue related to the marginal cost of production?

    Learn about the marginal cost of production and marginal revenue and how the two measures are related when determining the ... Read Answer >>
  5. How can you calculate diminishing marginal returns in Excel?

    Learn more about production costs and applying the law of diminishing marginal returns using Excel. Find out more about how ... Read Answer >>
  6. What is the difference between gross profit margin and operating profit margin?

    Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center