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Finance Formulas / July 19, 2018 / Briana Leonard

Contribution margin is a product’s price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. The total contribution margin generated by an entity represents the total earnings available to pay for fixed expenses and to generate a profit. The contribution margin concept is useful for deciding whether to allow a lower price in special pricing situations. If the contribution margin at a particular price point is excessively low or negative, it would be unwise to continue selling a product at that price. It is also useful for determining the profits that will arise from various sales levels.

The main thing to understand in managerial accounting is the difference between revenues and profits. Not all revenues result in profits for the company. Many products cost more to make than the revenues they generate. Since the expenses are greater than the revenues, these products great a loss—not a profit.

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