Finance
Contribution Margin
Revenue minus variable costs, the dollars each sale contributes toward covering fixed costs and profit.
Contribution margin focuses on variable costs only (those that scale with each sale: materials, sales commissions, hourly labor). It ignores fixed costs (rent, salaries, software).
The most useful metric for pricing decisions and break-even analysis: how many units must you sell at the current contribution margin to cover fixed costs?
Different from gross margin (which uses COGS, a mix of variable and fixed). Contribution margin is purer for decision-making; gross margin is what shows on the P&L.
Common pitfalls
- Treating all labor as variable when much of it is fixed (salaried staff that produce regardless of volume)
- Ignoring step-fixed costs, costs that jump in chunks (one more salesperson, one more facility)
- Using contribution margin for tax-reporting decisions; that's gross margin's job
Related service
See fractional CFO servicesRelated terms
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