(ACCOUNTING & FINANCE) - What is a Contribution Margin? Contribution margin, or dollar contribution per unit, is the selling price per unit minus the variable cost per unit. “Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs. This concept is one of the key building blocks of break-even analysis. Decomposing Sales as Contribution plus Variable Costs. In the Cost-Volume-Profit Analysis model, costs are linear in volume. In cost-volume-profit analysis, a form of management accounting, contribution margin—the marginal profit per unit sale—is a useful quantity in carrying out various calculations, and can be used as a measure of operating leverage. Typically, low contribution margins are prevalent in the labor-intensive tertiary sector while high contribution margins are prevalent in the capital-intensive industrial sector. Contribution arises in Cost-Volume-Profit Analysis, where it simplifies calculation of net income and, especially, break-even analysis. Given the contribution margin, a manager can easily compute breakeven and target income sales, and make better decisions about whether to add or subtract a product line, about how to price a product or service, and about how to structure sales commissions or bonuses. Contribution margin analysis is a measure of operating leverage; it measures how growth in sales translates to growth in profits. Learn more at en.wikipedia.org/wiki/Contribution_margin... If you need help figuring your contribution margins, contact Ujamaa Solutions LLC. #ujamaa
Posted on: Wed, 12 Nov 2014 13:08:45 +0000
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