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Contribution margin is a company’s or product’s line revenue minus variable expenses. Your contribution margins can be a factor in deciding which products or services to invest in and which to discontinue.
Your company’s contribution margin isn’t on your financial statement, but you can calculate it once you separate your fixed and variable expenses. It can be difficult as variable expenses can include expenses from your cost of goods sold (COGS) and operating expenses (OPEX). They’re variable in the sense that they depend on how many units you sell, not whether they might change from one month to the next.
For example, depending on your business, utilities may be a fixed expense if increasing or decreasing production doesn’t impact your utility bills. However, raw materials, online advertising, and sales commissions could all be variable expenses.
A positive contribution margin means you’re making more money than you spend per unit you sell. You still need to make enough to cover your fixed expenses before you earn a profit. If you have a negative contribution margin, you’re losing money on each unit you sell. You may want to stop the sales altogether or look for a way to increase the contribution margin.
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