| contribution margin The price at which a firm sells its product less the variable cost of producing the product. A company with a large contribution margin is likely to experience substantial profit increases during an economic upswing. |
What Does Contribution Margin Mean?
A cost accounting method that allows a company to determine the profitability of individual products. It is calculated as follows: The phrase “contribution margin” also refers to a per unit measure of a product's gross operating margin; it is 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 happens to be less than that of other products in the company's product line. This figure can help determine whether variable costs for that product can be reduced or the price of the end product can be increased. If both options are unattractive, the manager can drop the unprofitable product and produce an alternative product with a higher contribution margin.
Related Terms:
• Accrual Accounting
• Income Statement
• Margin
• Operating Margin
• Revenue
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