To understand how profitable a business is, many leaders look at profit margin, which measures the total amount by which revenue from sales exceeds costs. But if you want to understand how a specific product contributes to the company’s profit, you need to look at contribution margin, which is the leftover revenue when you deduct the variable cost of delivering a product from the cost of making it. To calculate this figure, you start by looking at a traditional income statement and recategorizing all costs as fixed or variable. This is not as straightforward as it sounds, because it’s not always clear which costs fall into each category. And this is where most managers get tripped up. But going through this exercise will give you valuable information. Analyzing the contribution margin helps managers make several types of decisions, from whether to add or subtract a product line to how to price a product or service to how to structure sales commissions. But never look at contribution margin in a vacuum. Before making any major business decision, you should look at other profit measures as well.
When you run a company, it’s obviously important to understand how profitable the business is. Many leaders look at profit margin, which measures the total amount by which revenue from sales exceeds costs. But if you want to understand how a specific product contributes to the company’s profit, you need to look at contribution margin. Recommended textbooks for you Principles of Accounting Volume 2 Publisher:OpenStax College Managerial Accounting: The Cornerstone of Busines... Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger Publisher:Cengage Learning Essentials of Business Analytics (MindTap Course ... Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson Publisher:Cengage Learning Cornerstones of Cost Management (Cornerstones Ser... Author:Don R. Hansen, Maryanne M. Mowen Publisher:Cengage Learning Survey of Accounting (Accounting I) Publisher:Cengage Learning Financial & Managerial Accounting Author:Carl Warren, James M. Reeve, Jonathan Duchac Publisher:Cengage Learning Principles of Accounting Volume 2 ISBN:9781947172609 Author:OpenStax Publisher:OpenStax College Managerial Accounting: The Cornerstone of Busines... ISBN:9781337115773 Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger Publisher:Cengage Learning Essentials of Business Analytics (MindTap Course ... ISBN:9781305627734 Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson Publisher:Cengage Learning Cornerstones of Cost Management (Cornerstones Ser... ISBN:9781305970663 Author:Don R. Hansen, Maryanne M. Mowen Publisher:Cengage Learning Survey of Accounting (Accounting I) ISBN:9781305961883 Author:Carl Warren Publisher:Cengage Learning Financial & Managerial Accounting ISBN:9781285866307 Author:Carl Warren, James M. Reeve, Jonathan Duchac Publisher:Cengage Learning |