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Contribution Margin
Definition
Contribution margin is the selling price per unit minus the variable cost per unit, representing how much each sale contributes to covering fixed costs.
Explanation
Contribution margin is crucial for break-even analysis and pricing decisions. It shows how much revenue from each sale is available to cover fixed costs and generate profit. Higher contribution margin means fewer sales needed to break even.
Contribution margin ratio = Contribution Margin / Selling Price. Products with higher contribution margins should be prioritized in sales efforts.
Example
A $50 product with $30 variable cost has a $20 contribution margin (40% ratio). Each sale contributes $20 toward fixed costs and profit.