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## ← Investopedia Video: Contribution Margin

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Showing Revision 17 created 02/19/2019 by Alexandre Clemente.

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

2. it allows a company
to determine the profitability
3. of individual products by
measuring how sales affect profits.
4. In its ratio form, it is calculated
as contribution margin
5. divided by sales revenue.
6. While revenue from a company's product
7. is how much money the company makes from selling that item,
8. a product's variable costs include those expenses
9. that vary depending on the company's production volume.
10. A business owner, Ida might
use contribution margin figures
11. to decide which
products costs,
12. he should reduce or
which price he should increase.
13. For example,
if a pair of jeans sells for \$100,
14. and its variable costs are \$65,
its contribution margin is \$35 or 35%.
15. This means that for each dollar
of sales, profit increases by 35 cents.
16. Ida wants to see a
contribution margin ratio of 50%.
17. He determines
he can achieve this
18. either by reducing
variable cost to \$50
19. by increasing the price
of jeans to \$130,
20. or through some
combination of the two.
21. Another option is to quit
selling jeans entirely,
22. and focus on other products
such as button-down shirts,
contribution margin of at least 50%.
24. Ida might also want to
calculate the contribution margin
25. for all of his
products in sum.
26. If total variable costs re \$750,000,
and total sales are 1.5 million dollars,
27. the total contribution margin
in ratio form will be 50%.