contribution margin

(noun)

cost-volume-profit analysis, a form of management accounting; the marginal profit per unit sale

Related Terms

Examples of contribution margin in the following topics:

  • Break-Even Analysis

    • The quantity (P - V) is of interest in its own right, and is called the Unit Contribution Margin (C).
    • It is the marginal profit per unit, or alternatively the portion of each sale that contributes to Fixed Costs.
    • Thus the break-even point can be more simply computed as the point where Total Contribution = Total Fixed Cost:

  • Marketing Performance Metrics

    • As companies seek to run leaner and more efficient businesses, more marketing professionals are tasked to demonstrate how marketing generates revenue and contributes to companies' business goals.
    • The purpose of metrics such as ROMI is to measure the degree to which marketing spending contributes to profits.
    • ROMI, a relatively new metric, is marketing contribution attributable to marketing (net of marketing spending), divided by the marketing "invested" or risked.
    • [Incremental Revenue Attributable to Marketing * Contribution Margin (%) - Marketing Spending] / Marketing Spending ($)
    • Short-term ROMI measures revenue such as market share, contribution margin or other desired outputs for every marketing dollar spent.

  • Marginal Analysis

    • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
    • Pricing decisions tend to heavily involve analysis regarding marginal contributions to revenues and costs.
    • In the marginal analysis of pricing decisions, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced.
    • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
    • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.

  • Conclude with Action Plan

    • Financial Forecast-assumptions, budgets, use of funds, monthly pro-forma, contribution margin analysis, break even analysis, prediction of future scenarios with corresponding action plan

  • Profit

    • An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).
    • Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.
    • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
    • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.
    • Recall formulas for calculating profit maximizing output quantity and marginal profit

  • Transfer Pricing

    • From marginal price determination theory, the optimum level of output is that where marginal cost equals marginal revenue.
    • But marginal cost of production can be separated from the firm's total marginal costs.
    • This is referred to as the Net Marginal Revenue in production (NMR) and is calculated as the marginal revenue from the firm minus the marginal costs of distribution.
    • It can be shown algebraically that the intersection of the firm's marginal cost curve and marginal revenue curve (point A) must occur at the same quantity as the intersection of the production division's marginal cost curve with the net marginal revenue from production (point C).
    • From marginal price determination theory, the optimum level of output is where marginal cost equals marginal revenue.

  • Contributing Factors to the Impact of the Visual Image

  • Profit-Maximization Pricing

    • A firm may also take the perspective of marginal revenue and marginal cost, which is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.

  • Company Capabilities

    • Capability management uses the organization's customer value proposition to set goals for capabilities based on value contribution.
    • Some capabilities directly contribute to the customer value proposition and have a high impact on company financials.
    • Value contribution is assured when performance is among the best in peer organizations at acceptable cost.
    • Value contribution is assured when performed above industry parity at competitive cost.
    • Value contribution is assured when performed at industry parity performance below competitors' cost.

  • Value and Relative Value

    • This increase in utility is called marginal utility, and this is all known as the marginal theory of value.
    • And here again it is marginal utility that comes in.
    • How much work will it take, and what margins are possible?