How Do You Calculate A Contribution Margin?
As someone who’s taught business, including accounting, economics, and finance, I’ll show you exactly how to calculate what we call the contribution margin. And don’t worry because I’ll walk you through each and every step! ** What is contribution margin? ** Before we learn how to calculate it, let’s define it first. In business, we often use the term “margin” to mean profit. So contribution margin is nothing more than a way to see if our operation (business) is profitable. So why not just say profit instead of contribution margin? That’s an excellent question! And the answer is because there are various “profits” that one can focus on. For instance, there’s gross profit, operating profit, contribution margin, etc. So contribution margin is just one of the many profit measures. And each one focuses on a different area of our operations. ** Which profit does contribution margin measure? ** Now that you understand what contribution margin is, let’s briefly discuss why it’s important and
