Contribution margin is the amount each unit of sales contributes toward covering fixed costs and then generating profit. It equals selling price minus variable cost per unit. The contribution margin ratio expresses this as a percentage of revenue.
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Pro Tip
Use contribution margin to decide which products to prioritise. The product with the highest CM per unit of the limiting resource (machine hours, shelf space) should be produced first.
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Did You Know?
Companies with high contribution margins (e.g. software) can scale rapidly because each additional sale adds almost pure profit once fixed costs are covered.
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