Question

What is the contribution margin if the sales price per unit is $15,000, variable cost per unit is $10,000, and fixed costs are $2,000?

Answer 1

$5000 is the contribution margin. The contribution margin is the portion of a product's sales revenue that is not consumed by variable costs and is used to pay the firm's fixed expenses. The concept of contribution margin is a key component of break-even analysis.

Labor-intensive businesses with few fixed expenses tend to have low contribution margins, whereas capital-intensive, industrial businesses have more fixed costs and, thus, higher contribution margins.

It offers a means of demonstrating the potential for profit of a specific product being offered by a business and displays the percentage of sales that goes toward paying the business' fixed costs. Profit is the amount that remains after fixed expenses have been paid.

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