Legal Definitions - contribution margin

Definition:Contribution margin is the amount of money left over from a product's selling price after deducting its cost of production. It represents the funds available for profit and payment of fixed costs.

Example: Let's say a company sells a product for $50, and it costs $30 to produce. The contribution margin would be $20 ($50 - $30). This means that for every unit sold, the company has $20 available to cover its fixed costs and make a profit.

Another example could be a restaurant that sells a burger for $10, and it costs $5 to make. The contribution margin would be $5 ($10 - $5). This means that for every burger sold, the restaurant has $5 available to cover its fixed costs and make a profit.

The contribution margin is an important metric for businesses because it helps them understand how much money they have available to cover their fixed costs and make a profit. By analyzing the contribution margin, businesses can make informed decisions about pricing, production, and profitability.