Contribution margin is revenue minus variable costs per unit. It is a commonly used financial metric that is used to evaluate the profitability of sales deals and to perform break-even analysis.
CalculationContribution margin represents the amount that a sale contributes to fixed costs. Variable costs include cost of goods sold and any variable business or marketing costs such as customer acquisition costs. It is calculated as:Contribution margin = revenue per unit - variable costs per unit
ExampleA solar panel company signs a contract to install panels at a commercial location for $3 million. The panels cost $1 million USD, installation costs $1.2 million and the firm incurred $200,000 in administrative and selling expenses related to the deal for total variable costs of 2.4 million.Contribution margin = 3 million - 2.4 million = $600,000The $600,000 isn't a profit but it contributes to fixed costs such as research and development and administrative expenses.
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