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Contribution margin is the difference[br]between sales revenue and variable cost.

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it allows a company [br]to determine the profitability

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of individual products by[br]measuring how sales affect profits.

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In its ratio form, it is calculated [br]as contribution margin

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divided by sales revenue.

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While revenue from a company's product

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is how much money the company makes from selling that item,

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a product's variable costs include those expenses

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that vary depending on the company's production volume.

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A business owner, Ida might[br]use contribution margin figures

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to decide which [br]products costs,

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he should reduce or[br]which price he should increase.

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For example, [br]if a pair of jeans sells for $100,

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and its variable costs are $65,[br]its contribution margin is $35 or 35%.

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This means that for each dollar [br]of sales, profit increases by 35 cents.

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Ida wants to see a [br]contribution margin ratio of 50%.

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He determines[br]he can achieve this

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either by reducing [br]variable cost to $50

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by increasing the price[br]of jeans to $130,

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or through some [br]combination of the two.

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Another option is to quit[br]selling jeans entirely,

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and focus on other products[br]such as button-down shirts,

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which already have a [br]contribution margin of at least 50%.

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Ida might also want to[br]calculate the contribution margin

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for all of his[br]products in sum.

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If total variable costs re $750,000,[br]and total sales are 1.5 million dollars,

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the total contribution margin[br]in ratio form will be 50%.

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The business could compare[br]the contribution margins

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of individual products against[br]the company's total contribution margin

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to determine which products to sell[br]more of, or which to sell less off.

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If dress slacks have a[br]contribution margin of 60%,

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and it is possible[br]to sell more of them

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at the same price total[br]contribution margin will rise.