CONTRIBUTION MARGIN

Contribution Margin is a term that can be interpreted and used in many ways, but the standard definition is this: When you make a product or deliver a service and deduct the variable cost of delivering that product, the leftover revenue is the contribution margin.

Think about how company income statements usually work: You start with revenue, subtract cost of goods sold (COGS) to get gross profit, subtract operating expenses to get operating profit, and then subtract taxes, interest, and everything else to get net profit. 

 

If you do the calculation differently, taking out the variable costs (more on how to do that below), you’d get the contribution margin. Contribution margin shows you the aggregate amount of revenue available after variable costs to cover fixed expenses and provide profit to the company, you might think of this as the portion of sales that helps to offset fixed costs.

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