What Is Contribution Margin


One of the most misunderstood terms in the stock market is contribution margin. Don’t let the term scare you because it really isn’t all that complicated. Basically contribution margin is the figure by which your company s sales revenue exceeds your operational factor expenses. In other words, when you sell a product or service and deduct the operational cost related to delivering that product to your customers, the profit that you are left with is your contribution margin.

There are many factors that go into determining what this percentage is and what is the level at which it should be. The two most important factors are your average sales revenue per unit (ASU) and your average cost per unit (CCU). ASU and CAC are both considered average sales price per unit and cost per unit, respectively. The contribution margin ratio then is equal to the ratio of your ASU divided by your CAC.

There are many formulas used to determine the contribution to be made by your corporation’s shareholders as regards to its fixed costs and its net sales revenue variable. Most large corporations use the single-line single-aspect formula. This formula involves two parts: a line item (or line item entry) and a sub-item. Line item refers to the cost item being reported on the company’s income statement. Sub-item refers to the operating overhead costs such as rent, electric, kitchen and fixtures, which are reported individually.

Your company’s revenue is measured on a regular basis by gross profit. This means that your margin represents the difference between the gross profit figure and the selling price or book value of your inventory. Your margin represents your company in retained earnings before taxes.

Determining the profitability of your corporation involves calculating the gross profit percentage of revenue earned on a regular basis against the total number of units sold in a period of time. To calculate this equation you need a multiple regression analysis of the profitability of your corporation as compared to similar companies in your industry. The multiple regression equation determines the value of your profits at various points in time and then it computes the average annual profitability as compared to the industry average.

One of the major uses of what is the profit margin is calculating the effect of the interest rate change on your company s retained earnings. Most banking institutions use this method to adjust the interest rate settings on their commercial loans. In order for you to understand what this means you need to know how the banking industry uses what is profit margin as well as the equation used to calculate it.

What is contribution margin can also be used as part of the calculation of the LIFO versus FIFO balance sheet ratios? You need to know what is the contribution margin as well as the way that it is calculated is to compare the operating profit, current assets, current liabilities, retained earnings and net worth between a period of one month to the same period of one year. In order for the comparison to make sense you need to know how the corporation has been doing since the last period of time in order to get into the correct position between one month to the next. The way that this is done is by calculating the difference between revenues collected from customers and expenses incurred. This difference is the difference between the revenues and expenses divided between a period of one year to the next.

It should be noted that what is profit and what is the loss is different things. You will see that what is profit is a measure of the gross profit margin that has been calculated. What is a loss is a measurement of the total amount of money that is spent in production, before taxes and before interest and before depreciation is taken into account. You should also know that what is profit and what is loss is also different things. You will see that what is profit is a measure of the fixed costs that have been incurred and what is loss is a measurement of the variable costs that have been incurred.