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

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it allows a company 
to determine the profitability

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of individual products by
measuring how sales affect profits.

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In its ratio form, it is calculated 
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
use contribution margin figures

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to decide which 
products costs,

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he should reduce or
which price he should increase.

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

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

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

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

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He determines
he can achieve this

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either by reducing 
variable cost to $50

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by increasing the price
of jeans to $130,

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or through some 
combination of the two.

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Another option is to quit
selling jeans entirely,

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

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

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Ida might also want to
calculate the contribution margin

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for all of his
products in sum.

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

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

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The business could compare
the contribution margins

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of individual products against
the company's total contribution margin

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

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If dress slacks have a
contribution margin of 60%,

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and it is possible
to sell more of them

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at the same price total
contribution margin will rise.