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COST CONTROL: CONTRIBUTION MARGIN

This guide gives an overview of cost control and includes a link to a YouTube channel that is very helpful for saving money

INTRODUCTION

Organizations and businesses use contribution margin to make pricing decisions. Contribution margin gives a company or business a measure of profitability of a product line. These measures and decisions are vital for a business or company to maximize profits.

CONTRIBUTION MARGIN

What is contribution margin?

Contribution margin is a measure of the ability of a company to cover variable costs with revenue. In addition, the amount leftover is the contribution margin, which can be used to cover fixed costs or is profit.

CONTRIBUTION MARGIN FORMULAS

 

A SIMPLE CONTRIBUTION MARGIN EXAMPLE

In this simple example, we can see that we are subtracting the variable expenses from the sales to calculate the contribution margin.

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WHAT DOES CONTRIBUTION MARGIN LOOK LIKE ON A GRAPH?

The break-even point is where a business makes enough money to cover their expenses. After that point, the business begins to create contribution margin. This can be used to pay other expenses or as profit.

A DETAILED CONTRIBUTION MARGIN

Compare this example to the simpler one on the left. In the first part of the example, we can see that we totaled the variable expenses and subtracted the total from the sales. The only difference between this example and the simpler one is that is contains more details.

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