Contribution Margin: What It Is, How to Calculate It, and Why You Need It

Fixed Cost vs. Variable Cost

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1. Say, your business manufactures 100 units of umbrellas incurring a total variable cost of $500.
2. Contribution margin analysis also helps companies measure their operating leverage.
3. It can change over time as the sales price and variable costs fluctuate.
4. You must consider your wider portfolio of products and how this will impact customers.
5. Thus, the level of production along with the contribution margin are essential factors in developing your business.

What Is the Contribution Margin Ratio?