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Contribution margin definition

Description

Contribution margin allows the company to evaluate the profitability of individual products. In other words, this ratio determines how much each sale contributes to fixed expenditures. Data to calculate this ratio is collected from the income statement and additional management accounting statement (if such is used).

Contribution margin is mostly used by company’s management while making a decision whether to launch a new product or not.

Norms and limitations

There are no common norms and limitations for this ratio.

Formula

Variable costs are costs that shift depending on a company's production volume. Variable cost increases as production grows up and decreases as production falls.

Production net sales (revenues) can be described as sales, deducting returns and discount for customers.