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
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