A good contribution margin is all relative, depending on the nature of the company, its expense structure, and whether the company is competitive with its business peers. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike the best small business accounting software for 2021 License . Products with a low or negative contribution margin should likely be discontinued, but there are circumstances where analysis beyond this metric should be reviewed further. The Revenue is the sales made from all coffees sold in March which is $10,000.
- Preference is given to products that provide a high contribution margin.
- For example, it can help a company determine whether savings in variable costs, such as reducing labor costs by using a new machine, justify the increase in fixed costs.
- If they sold 250 shirts, again assuming an individual variable cost per shirt of $10, then the total variable costs would $2,500 (250 × $10).
- Variable costs tend to represent expenses such as materials, shipping, and marketing, Companies can reduce these costs by identifying alternatives, such as using cheaper materials or alternative shipping providers.
- Dobson Books Company sells textbook sets to primary and high schools.
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Understanding Contribution Margin
Why are contribution margins and contribution margin ratios important to you?
