2016-12-01 00:00:00 Finance and Accounting English The contribution margin gives business owners an idea of how profitable an individual product is. Find out what it is and how it can be... https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2017/10/08213823/Two-women-review-contribution-margin-activity-in-accounting-office.jpg What Is Contribution Margin?

What Is Contribution Margin?

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The contribution margin of a product is calculated by subtracting the total variable costs, including labour expenses and material expenses, from the product price.

For example, the price of product A is $150. The business has to pay $10 for the materials and $15 for the labour to manufacture each unit of product A. The business also incurs an additional $25 in variable costs to sell this product. The contribution margin of product A is $150 – $10 – $15 – $25 = $100.

The contribution margin allows businesses to calculate how much each individual product contributes to the profit of the business. Businesses can use this information to distinguish their best sellers from their laggers, and adjust their pricing strategies accordingly.

References & Resources

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.

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