The contribution margin is a calculation commonly used by companies in cost-volume-profit analysis to determine the additional profit earned per sales unit of a product. Companies can express the contribution margin as a dollar figure or as a percentage of sales price. By determining the actual contribution margin of a product and comparing this figure to internal profit projections and industry standards, a company can determine if products meet the company's contribution margin requirements.
1. Determine the revenue for a specific product. For example, assume the revenue for a product is $20.
2. Determine the total variable costs for the product. Variable costs are those costs that vary with the the number of units produced. Examples of variable costs can include labor, raw materials and sales commissions. For example, assume the total variable costs for the product are $15.
3. Subtract the variable costs from the revenue earned for the product. Continuing the same example, $20 - $15 = $5. This figure represents the contribution margin for the product.
4. Divide the contribution margin by the revenue earned for the product. Continuing the same example, $5 / $20 = 25 percent. This figure represents the contribution margin ratio.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
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