Investopedia Video: Contribution Margin
-
0:05 - 0:10Contribution margin is the difference
between sales revenue and variable cost. -
0:10 - 0:13it allows a company
to determine the profitability -
0:13 - 0:17of individual products by
measuring how sales affect profits. -
0:17 - 0:21In its ratio form, it is calculated
as contribution margin -
0:21 - 0:24divided by sales revenue.
-
0:24 - 0:26While revenue from a company's product
-
0:26 - 0:29is how much money the company makes from selling that item,
-
0:29 - 0:32a product's variable costs include those expenses
-
0:32 - 0:36that vary depending on the company's production volume.
-
0:36 - 0:39A business owner, Ida might
use contribution margin figures -
0:39 - 0:42to decide which
products costs, -
0:42 - 0:45he should reduce or
which price he should increase. -
0:45 - 0:49For example,
if a pair of jeans sells for $100, -
0:49 - 0:56and its variable costs are $65,
its contribution margin is $35 or 35%. -
0:56 - 1:01This means that for each dollar
of sales, profit increases by 35 cents. -
1:01 - 1:05Ida wants to see a
contribution margin ratio of 50%. -
1:05 - 1:07He determines
he can achieve this -
1:07 - 1:10either by reducing
variable cost to $50 -
1:10 - 1:13by increasing the price
of jeans to $130, -
1:13 - 1:16or through some
combination of the two. -
1:16 - 1:19Another option is to quit
selling jeans entirely, -
1:19 - 1:22and focus on other products
such as button-down shirts, -
1:22 - 1:26which already have a
contribution margin of at least 50%. -
1:26 - 1:29Ida might also want to
calculate the contribution margin -
1:29 - 1:31for all of his
products in sum. -
1:31 - 1:38If total variable costs re $750,000,
and total sales are 1.5 million dollars, -
1:38 - 1:42the total contribution margin
in ratio form will be 50%. -
1:42 - 1:45The business could compare
the contribution margins -
1:45 - 1:50of individual products against
the company's total contribution margin -
1:50 - 1:54to determine which products to sell
more of, or which to sell less off. -
1:54 - 1:58If dress slacks have a
contribution margin of 60%, -
1:58 - 2:00and it is possible
to sell more of them -
2:00 - 2:05at the same price total
contribution margin will rise.
- Title:
- Investopedia Video: Contribution Margin
- Description:
-
Contribution margin is the difference between sales revenue and variable cost. It allows a company to determine the profitability of individual products by measuring how sales affect profits. In its ratio form, it is calculated as Contribution Margin ÷ Sales Revenue.
While revenue from a company's product is how much money the company makes from selling that item, a product's variable costs include those expenses that vary depending on the company's production volume.
- Video Language:
- English
- Duration:
- 02:08
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin | ||
Alexandre Clemente edited English subtitles for Investopedia Video: Contribution Margin |