Calculating Contribution Margin for Profitability
What is the definition of contribution margin?
Contribution margin is defined as the total sales revenue of a company minus its total variable costs.
How is contribution margin calculated?
Contribution Margin = Total Sales Revenue - Total Variable Costs
Contribution Margin Calculation
Contribution margin is an important financial metric that measures the profitability of a company. It is calculated by subtracting the total variable costs from the total sales revenue. In this case, given the average variable cost of $3.30 and average variable rate of 35, the contribution margin is $5.08.
The contribution margin formula is: Contribution Margin = Total Sales Revenue - Total Variable Costs. The total variable costs are calculated by multiplying the average variable cost by the average variable rate.
In this scenario, the total variable costs would be $3.30 x 35, which equals $115.50. Using this information, we can determine that the contribution margin is $5.08.
Contribution margin helps companies understand how much profit they are generating from each unit of product or service they produce. It can be a valuable tool in analyzing profitability and making informed business decisions.