What Is Contribution Margin?


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The contribution margin is a way to calculate the profitability of the individual product and the contribution to profit that the individual product makes. Simply, we can say, it is the per unit gross profit. The contribution margin is calculates as:
Contribution margin = price per unit – variable cost per unit.
Many times it s expressed as a percentage of price and calculated like this:
Contribution margin = (price per unit – variable cost per unit) / price per unit
This percentage tells us like for example that the product earns a gross profit of 20 5 of the price. It is an easy way to set goals based on the contribution margin and also an easy way to compare the margins of various products in the company’s product line.

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