0
DAYS
0
HOURS
0
MINS
0
SECS
Over 4.5 million customers use QuickBooks.
Sign up for a free trial!
2021-01-19 15:46:05Small Business AccountingEnglishThe contribution margin helps a business understand the relationship between a product’s revenue and its expenses. Let’s take a look at...https://quickbooks.intuit.com/au/resources/au_qrc/uploads/2021/01/what-is-contribution-margin-featured-qrc-au.jpghttps://quickbooks.intuit.com/au/resources/small-business-accounting/what-is-the-contribution-margin/What Is the contribution margin? | QuickBooks Australia

What is the contribution margin?

1 min read

The contribution margin represents a financial calculation that deals with a company’s ability to have enough revenue to cover the variable cost of a product.

Calculating Variable Costs

Some variable costs that go into a product include materials, labour, and utilities.

For example, you set the price of a product at $150. You pay $10 for the materials and $15 for the labour to manufacture each unit of this particular product. You also incur an additional $25 in variable costs to sell this product due to the fees you use for sales and the utilities needed to make the product in your facility. Your total variable costs come to $50.

Calculating the Contribution Margin

To calculate the contribution margin for this particular product, start with the price and then subtract the variable costs. The contribution margin for this product is $150 minus the $50 in variable costs for a total of $100. Use the contribution margin for all of your products to compare which products do well and which ones you may need to tweak.

The contribution margin lets you calculate how much each individual product contributes to the profit margin of your business. Use this information to distinguish your best-selling products from ones that don’t do very well. Analysing your contribution margins for product lines lets you adjust your sales price, plan for the future, and figure out how to price items throughout the year.

Rate This Article
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Help Your Business Thrive

Sign up for our newsletter

Thanks for signing up!

Check your inbox for a confirmation email.*

*Check your spam folder if you don’t see a confirmation email.

Related Articles

What is break-even analysis? How to calculate the break-even point and gain financial insights

Running a small business can be a costly endeavour, and with cost…

Read more

Six KPIs for sustainable growth your business can’t ignore

Accurately measuring metrics that correlate with growth and profitability are essential to…

Read more

Variable cost: what it is and how to calculate it

Understanding the different expenses your business needs to account for is essential…

Read more