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Investopedia Video: Contribution Margin

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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.