Learn about Contribution Margin and how it impacts your business's profitability. Discover what defines a good or bad Contribution Margin and explore effective strategies to improve it. Enhance your financial insights and optimize your business's bottom line with this comprehensive guide.
What is Contribution Margin
Contribution Margin represents the amount of money left over from sales after deducting variable costs associated with producing and selling those products. This metric is crucial for understanding the profitability of individual products, as well as the overall health of the business. Failing to monitor the contribution margin can lead to offering products that eat into profits, rather than boosting them.
First, we’ll calculate the Net Revenue (gross revenue minus discounts & refunds): Since there are no discounts or refunds, the Net Revenue equals the gross revenue.
Next, we’ll calculate the total Variable Costs:
Now, we can plug the values into the Contribution Margin formula:
In this example, the Contribution Margin is €18. This means that for each product sold, the brand has €18 left over after covering all variable costs associated with that product. This remaining amount can be used to cover fixed costs and contribute to the brand’s overall profitability